Transcript Slide 1

60th AMEU CONVENTION
TOWARDS SUSTAINABLE REDs
PRESENTED BY
DR WILLIE DE BEER,
COO: EDI HOLDINGS
17 OCTOBER 2007
Presentation Content
Introduction
Global EDI Reform Drivers
South Africa: EDI Context
Business Model
RED Sustainability
Brief Summary
RED Value Proposition
Global EDI Reform Assessment
Progress Towards Sustainable REDs
Conclusion
17 October 2007
Slide 2
Global EDI Reform Drivers
In the global context, restructuring and the EDI have become synonymous
South Africa is not unique with respect to the EDI reform challenges
Globally there are many restructuring case studies to learn from; inclusive of many success
stories
Reform is informed by a number of drivers, such as:
Customer service expectations
Customer choice
Socio economic drivers
Increasing need for access to affordable energy sources
Economic growth requirements
Asset management challenges
Efficiency improvement requirements
Investment/funding requirements
Improved regulation
Industry sustainability
Employment sustainability
17 October 2007
Slide 3
South Africa: EDI Context
The ESI is dominated by Eskom
The EDI in South Africa is confronted with:
Significant inconsistency from a customer service and product offering perspective
Free Basic Electricity
Access to electricity
High level of fragmentation and inefficiencies
Inadequate maintenance, refurbishment and investment in network capacity
Increase in security of supply and reliability challenges
Distribution component of ESI value chain suspect
Demand Side Management (DSM)
Challenges to attract, train and retain resources
Two important differences with respect to EDI restructuring in South Africa:
It takes place in a voluntary environment
There are no privatisation motives
Current asset owners will be the future RED shareholders
17 October 2007
Slide 4
NERSA Report: EDI Maintenance
Perspective
Distributor
Reliability
Control
Maintenance
Networks
Skills
Funding
Eskom Region
G
VG
VG-E
G-VG
VG-E
G
Eskom Region
G
VG
VG-E
G-VG
VG-E
G
Metro 1
G
VG
VG-E
VG
G
G
Metro 2
G
VG
G
G-VG
G
NI
Metro 3
G
G-VG
G-VG
G-VG
G
G
Metro 4
G-VG
NI
I
NI
G
G
Metro 5
NI
NI
G
G-VG
NI
NI
Municipality 1
NI
NI
G
NI
NI
NI
Municipality 2
NI
NI
NI
NI
G
NI
Municipality 3
NI
NI
NI
NI
NI
NI
Municipality 4
NI
NI
NI
NI
NI
NI
E=Excellent;
VG=Very Good;
G=Good;
NI=Needs Improvement
Source: NERSA Independent Technical Audit
17 October 2007
Slide 5
EDI: Maintenance and Refurbishment Requirement
2.6
2.1
R billion
1.6
1.1
0.6
0.1
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Required
1.8
2
2
2.2
2.3
2.5
Current
0.4
0.5
0.6
0.63
0.66
0.7
17 October 2007
Slide 6
Business Model: RED Sustainability
REVENUE
OPERATING & CAPITAL EXPENDITURE
RED FINANCIAL
SUSTAINABILITY
CREATING SHAREHOLDER
AND CUSTOMER VALUE
EFFIENCY AND CONTINIOUS
BUSINESS IMPROVEMENT
17 October 2007
Slide 7
Business Model: Brief Summary
Distinct wires and retail focus
Pursue appropriate best practices
Benchmarking
Promote RED sustainability
Balance between revenue realisation and continuous business efficiency improvement
Close to the customer
Centralisation vs decentralisation
Effective shareholder and stakeholder management
Focus on, interalia:
Technical losses
Non-technical losses
Effective asset management
Staff development and skills retention
Service Provider to Service Authority (Municipalities)
SDA as contemplated in MSA 2000 Section 81
Integrated inter RED network management approach:
Managing distribution grid integrity
Enhance customer interface opportunities
17 October 2007
Slide 8
EDI Interim State
EDI Holdings Direct & Oversee
EDI Restructuring
REDs x 6
Wires
Retail
17 October 2007
Shared
Services
Industry
Association
Slide 9
RED Value Proposition: Brief Summary
Current Asset Owners
Shareholding in a sustainable business
Derive revenue from a sustainable business
Protection of credit rating
Assets managed in a prudent manner
Customers
Consistency in customer service practices and service offerings
Improved service delivery
Transparent tariffs
Predictable pricing signals
Well regulated industry
Staff
Skills development opportunities
Employment in a sustainable industry
17 October 2007
Slide 10
Staff: Indicative Age Profile
40
35
30
25
% 20
15
10
5
0
0-30
31-40
41-50
51-65
Age Group
17 October 2007
Slide 11
Global EDI Reform Assessment
Restructuring is easily blamed when things go wrong
Reality is, that “sins of the past” and implementation “mistakes”, are the main contributors to
“failures”- it is not the concept which creates in the failure
Restructuring is not an “overnight quick fix” solution
Requires time
Significant capital and other resource investment
The longer the restructuring is delayed the more difficult it becomes to realise the restructuring
benefits
Significant capital investment requirements can present return on investment challenges
There is no conclusive evidence suggesting a performance difference between private and public
electricity companies
The global trend suggests a well defined wires and retail businesses
A sound regulatory regime is critical to ensure effective business operations
Continuous cost cutting is not a sustainable business philosophy
Correct leadership selection is critical
There are more than enough successful restructuring case studies, providing comfort, to learn from
17 October 2007
Slide 12
Reform Assessment: Customer Supply
Interruptions
Customer Supply Interruptions
Events
90
85
With Storms
80
Without Storms
75
20
05
/2
00
6
20
03
/2
00
4
20
04
/2
00
5
20
01
/2
00
2
20
02
/2
00
3
70
Year
Source data: Ofgem
17 October 2007
Slide 13
Reform Assessment: Distribution Losses as
Percentage of Units Distributed
Distribution Losses as Percentage of Units Distributed
Eastern
East Midlands
8
London
7
Manweb
6
Midlands
5
Northern
4
3
Seeboard
2
Swalec
Year
04
20
03
/2
0
03
20
02
/2
0
02
20
01
/2
0
01
/2
0
20
00
/2
0
99
19
19
98
/1
9
00
Southern
99
Percentage
10
9
Sweb
Yorkshire
Scottish Power
Hydro-Electric
Source data: Ofgem
17 October 2007
Slide 14
Losses: Reduction Potential
Potential Reduction of Losses
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
NORM
24
23
22
21
20
19
18
17
% Loss
16
15
14
13
12
11
10
9
8
7
6
5
Base year
Year 1
Year 2
Year 3
Year 4
Year 5
Period
17 October 2007
Slide 15
RED FOUR: Losses Improvement Potential
20
18
16
14
12
% LOSS 10
8
6
4
2
0
losses
norm
17 October 2007
Entity A
Entity B
Entity C
Entity D
5.09
12.58
28.1
16.25
7
7
7
7
Slide 16
Progress Towards Sustainable REDs
2003 to 2004
o
o
o
o
o
EDI Holdings established
Eskom Distribution ringfenced
within Eskom Holdings
Boundaries for the six REDs
defined
Eskom and SALGA signed the
accession to the co-operative
agreement
EDI Holdings developed
various tools to reduce cost
and to facilitate the
restructuring process
2005 to 2006
o
o
o
o
o
o
o
17 October 2007
Eskom Distribution (7 Regions)
aligned with the boundaries of the
six REDs
RED project governance structures
implemented
Transitional Labour Relation
Structure (TLRS) established
Metros and numerous municipalities
started the MSA Sect 78 process
and business ringfencing
NERSA approved (April 2006)
through the MYPD R1.2bn over a 3
year period to assist in funding
some of the EDI restructuring costs
25th October 2006 Cabinet
reconfirmed support to the creation
of six wall to wall REDs as Public
Entities
RED 1 was established (June
2005)as a Municipal Entity wholly
owned by the City of Cape Town
2007 to Date
o
o
o
o
o
o
o
o
o
Municipal electricity business
asset transfer enabling mechanism
approved by National Treasury
Eskom Distribution 95%
ringfenced
Boundary energy metering
installed as per the six RED
footprint
78 Municipalities (ITD) signed the
accession to the co-operative
agreement
Six Regional Engagement Forums
(REF) established to enhance
participation in the RED
establishment process
RTLRS roll out in progress
City of Cape Town took a
resolution to liquidate RED 1
Extensive progress towards a
REDs system solution
MFPF Act promulgated
Slide 17
Conclusion
The EDI in its current format will not be able to underpin the projected economic growth or
provide customers with a reliable electricity supply
There is a need to define the market rules and to establish the market
The critical reform success factors must be addressed
It is essential that South Africa continuous with the EDI restructuring journey
The restructured EDI must be positioned in such a way that it will be able to effectively respond
to any future market structure
Based on the global experience and having considered the proposed RED model for South
Africa; all indications are that the EDI restructuring in South Africa could go down in history as
an example of a successful transformation business case
17 October 2007
Slide 18
THANK YOU
www.ediholdings.co.za