ELECTRICITY DISTRIBUTION INDUSTRY RESTRUCTURING

Transcription

1 ELECTRICITY DISTRIBUTION INDUSTRY RESTRUCTURING 1. BACKGROUND On the 25 th of October 2006 Cabinet, having considered the results of the modelling exercise, approved the proposal to create six wall-to-wall Regional Electricity Distributors (REDs), which will be established as public entities under the auspices of the EDI Holdings. Cabinet further resolved that ESKOM and municipalities become shareholders in respect of the REDS and that ESKOM s shareholding should reduce over a period of time. After the SALGA NEC meeting of 04 December 2006, a SALGA NEC media statement confirmed that the SALGA NEC supports the initiative to establish six wall-to-wall RED s as this will bring to an end the fragmentation that leads to inefficiencies in the industry as it currently exists. This move will also assist in addressing the network maintenance backlog and promote equal treatment of consumers countrywide through a national electricity pricing system. The RED s will also assist in expediting the national electrification programme to ensure sustainable, affordable electricity supply to low - income consumers, regardless of location. These efforts will ensure universal access to electricity for all South Africans. EDI Restructuring was also discussed at the SALGA National Conference of September 2004, as well as the recently held SALGA National Conference of April 2007 which resolved that SALGA shall: Engage with DME on electrification backlogs. Engage DME in upgrading existing energy generation and distribution infrastructure in terms of 2010 FIFA World Cup. Endorse and support the Cabinet Resolution dated 25 October 2006 on the creation of six wall-to-wall REDs as public entities. Ensure that municipalities are not worse off on revenue with the establishment of REDs. 1

2 At Provincial level ensure that it fully participates and play a leading role in the establishment of REDs Regional Engagements Forums which involves all key stakeholders on EDI Restructuring including municipalities. Encourage all municipalities to commence with the preparatory steps towards the establishment of the REDs such as: o Signing the Accession to EDI Co-operative Agreements o Ring Fencing Process o S78 Process of the Municipal Systems Act o Due Diligence Process Ensure that the ESKOM Electrification Programme is aligned with IDPs of Municipalities. Revisit the establishment of Provincial Energy Forums through the Provincial Municipal Services Working Groups. Pursue DME and ESKOM to conduct an audit on electricity backlogs Engage EDI Holdings to share the lessons learnt from RED HISTORICAL CONTEXT 2.1 Constitutional Imperatives Part B of Schedules 4 and 5 of the Constitution contain the list of matters designated as local government matters or the functional areas of local government competence. Section 156(1)(a) and (b) states that municipalities have executive authority in respect of, and the right to administer, the local government matters listed in Part B of Schedule 4 and Part B of Schedule 5 and also any other matters as may be assigned to municipalities by national and provincial legislation. Electricity Reticulation is listed as a local government matter in Schedule 4B of the Constitution. As such municipalities have the constitutional right and in fact the constitutional duty to administer, which includes the setting of tariffs, electricity reticulation as a local government matter or function. In summary municipalities have the constitutional right to administer the electricity reticulation function in its area as well as the obligation to ensure that this provision of electricity is sustainable to its communities. Currently 187 municipalities and ESKOM distribute electricity to communities in the country. 2.2 Key Challenges There are a number of issues facing South Africa s electricity distribution industry. Some of the key challenges facing the Electricity Distribution Industry include, amongst others, the following:- Current Industry structure is highly inefficient owing to fragmentation and there continues to be an absence of economies of scale in respect of investing in assets, sharing of facilities, services and people development; 2

3 Inadequate maintenance of networks where it is estimated that the maintenance backlog is around R5 billion accumulated over the past 10 years and in terms of the 2003/2004 National Integrated Resource Plan the supply interruptions cost to the economy amounts to between R2.9 billion to R8.6 billion per annum; Inequitable treatment of consumers across the country with significant variants in average tariffs by distributors; Inconsistent electrification performance with access to electricity in the region of 73% nationally; and Slow and inconsistent role-out of free basic electricity with the current roleout being less than 40% of the targeted community. 3. EDI RESTRUCTURING In dealing head on with the key challenges facing the electricity distribution industry government took a conscious decision to restructure the electricity distribution industry with the following benefits in mind:- A consolidated industry with economies of scale, financial viability, facilitation of free basic electricity and electrification and rationalised and competitive tariffs; Universal access to electricity; Improved reliability of supply; Revenue enhancement for municipalities (surpluses guaranteed); and Local economic growth. 3.1 Restructuring Objectives Central to the restructuring of the Electricity Industry is the Energy White Paper of 1998 and the EDI Restructuring Blueprint of 2001 with the following objectives:- (a) Energy White Paper Objectives Ensure electrification targets are met; Provide low cost electricity; Facilitate better price equality; Improve the financial health of the industry; Improve quality of service and supply; Faster and proper coordination of operations and investment capital; and Attract and retain competent employees. (b) EDI Restructuring Blueprint Objectives Achievement of government s electrification programme; 3

4 Universal access to electricity for all South Africans; Sustainable electricity supply to low income consumers, regardless of location, and affordable prices; Future REDs to upgrade other sustained, financially viable basis as independent businesses; Acceptable and sustainable levels of supply security and equality; Future REDs to provide secure employment to their employees, provide skills development and training consistent with high technology and modern distribution businesses; Transition to be done within the context of a comprehensive Human Resources Strategy and an agreed social plan; and Planned and managed transition. 4. CABINET DECISION: 14 September 2005 As part of the EDI Restructuring and to accelerate the establishment of the REDs the Cabinet meeting of the 14th of September 2005 received the report on the EDI restructuring results and resolved as follows:- To create six Metro REDs as municipal entities, after the Local Government Elections; That by no later than 31 March 2006 the modeling exercise should be conducted and recommendations made to Cabinet around the best model to achieve the objectives of restructuring, to optimize service delivery and to determine the final REDs boundaries for selected municipalities, neighbouring Metropolitan municipalities, including whether they should form part of the Metro RED, the National RED, or if feasible a separate RED; Establish a National RED by no later than 30 June 2007 based on the study; and By no later than 30 June 2006 agree on a framework for the transfer of assets, liabilities and staff from Eskom and municipalities. Following the 14 September 2005 Cabinet decision, an extensive model exercise was embarked upon. Significant Stakeholder consultation, which included SALGA, Trade Unions, National Treasury, Department of Provincial and Local Government, Department of Public Enterprises, Department of Minerals and Energy, and public hearings, took place in relation to the modeling findings. The findings of the modeling exercise details the:- Financial viability of the different RED models; Institutional and Governance arrangements of REDs; and How the various models respond to the restructuring policy objective. 4

5 5. CABINET DECISION: 25 October 2006 Having considered the modeling exercise, Cabinet on 25 October 2006 approved:- The creation of 6 wall-to-wall REDs; The REDs to be created as public entities, in terms of the Public Finance Management Act and the Electricity Regulations Act; That DME, through EDI Holdings, will oversee and control the establishment of the REDs; That a roadmap be put in place to move from the current scenario into the future industry structure; That a strategy needs to be developed to deal with the capital investment requirements for the REDs; That EDI restructuring legislation will be introduced; and That the National Electricity pricing will be developed October 2006 Cabinet Decision in Context Element of Cabinet Decision Implications That 6 wall-to-wall REDs be implemented 187 municipalities electricity businesses will be consolidated into 6 REDs, Each RED will be anchored by a Metro, with between 30 to 45 municipalities and an Eskom distribution region; No national RED to be established The REDs be established as Public Entities and be regulated according to the PFMA and the Electricity Regulation Act 50 plus 1% shareholding to be held by National Government. The rest will be held by municipalities; REDs must comply with PFMA Governance provisions and regulated by NERSA; Municipalities will still be the electricity authorities and REDs will be the preferred service providers. Eskom becomes a shareholder in the respective REDs for a transitional period and that they reduce their shareholding over time This signals government s future intention for ESKOM to exit the electricity distribution business That DME, through EDI Holdings, will EDI Holdings will oversee the 5

6 oversee and control the establishment of REDs establishment of REDs 5.2 REDs in Context The REDs will become the new company into which both municipalities and Eskom will transfer their electricity distribution businesses; Shareholding within REDs will be split between Eskom, national government and municipalities; The REDs will be the service providers of choice to the service authorities with:- Municipalities remaining the service authority and the REDs becoming the service provider; The REDs will collect surcharges in accordance with the Municipal Fiscal Powers and Functions Bill on behalf of the municipalities and pay over to them; REDs will pay dividends to shareholders subject to financial performance; The relationship between REDs and municipalities will be governed through the service delivery agreement as contemplated in Section 81 of the Municipal Systems Act and municipalities will be able to use electricity as a credit control mechanism; A streamlined relationship reducing duplication and creating clear accountability; and Better regulation with role clarity between service authorities, service providers and the National Energy Regulator of South Africa (NERSA). 6. How Will the REDs Establishment Be Achieved? 6.1 REDs business model The 6 REDs will be established as public entities. The principal legal instruments which will govern the operation of the RED when established will, inter alia, be the envisaged REDs Establishment Act and the various regulations promulgated pursuant to this Act, the Public Finance Management Act, the Companies Act, the Shareholders agreement, the REDs Memorandum and Articles of Association, Basic Conditions of Employment Act, the Labour Relations Act, the Occupational Health and Safety Act, the National Environmental Management Act, the common Law relating to the Governance of companies and the King II Report on Corporate Governance, the service delivery agreement and the NERSA distribution licence. Furthermore the following will be applicable from a governance perspective:- 6

7 Since the REDs will be public entities, national government through the executive authority, will exercise the role of a majority shareholder in terms of section 63 (2) of the PFMA; Governance issues will be influenced by a REDs memorandum and articles of association; The REDs will be governed by a Board of Directors and an Executive Management Team, headed by a CEO; The service delivery agreement will regulate the provision of electricity reticulation services delivered by a RED on behalf of a municipality and also regulate the level of services to be supplied, the technical standards of such service delivery as well as the consequences in the event that these standards are not met to facilitate standardization and to reduce the complexity in terms of managing a multiple of service delivery agreements, it is envisaged that a generic service delivery agreement will be developed and that it will form part of the EDI Restructuring Bill; RED s shareholding must ensure that once established, REDs continue to implement and adhere to agreed restructuring objectives, and electricity distribution regulations through NERSA. The RED business will entail all business related networks, associated plant and infrastructure operating at voltages of 132 kv and below. The electricity distribution business to be transferred to the 6 REDs from Eskom and municipalities will include (inter alia) all networks, plant, systems, assets, liabilities, customers, staff etc. Staff associated with the electricity distribution business of Eskom distribution and the relevant municipalities will transfer to the relevant RED in terms of section 197 of the Labour Relations Act. The staff to be transferred will be identified through the ringfencing exercise and, inter alia all staff related conditions of service, benefits and liabilities will also be identified during this process. All current Eskom customers, excluding international customers and those industrial customers above 100 Gwh per annum at one consolidated point of supply, and all municipal customers irrespective of size, will transfer to the relevant RED and all customers irrespective of size will make a contribution to the wires and services charges, where applicable. 6.2 Legal Framework for Restructuring Section 78 Process Under current legislation it is required that all municipalities comply with section 78 as contemplated in the Municipal Systems Act. On 5 June 2007, the DPLG published for comment the Local Government Laws Amendment Bill, 2007, which provides for exemptions to be granted to municipalities in respect of chapter 8 and 8A of the Municipal Systems Act. Once this bill is enacted it would mean that it would no longer be necessary for municipalities to comply with section 78 of the Municipal Systems Act. 7

8 Asset Transfer Framework Furthermore the asset transfer of municipalities will have to take place within the prescribed Asset Transfer Framework currently under development by National Treasury. On 5 April 2007, National Treasury published in the Government Gazette an asset transfer exemption to facilitate the transfer of electricity distribution assets from municipalities to the REDs as public entities. This exemption has been granted subject to various conditions. The creation of the REDs must comply with these conditions. The asset transfer of Eskom will have to take place in compliance with the Public Finance Management Act and the Eskom Governance Structure. REDs Establishment Bill As indicated previously the restructuring journey is heavily dependant on policy and legislative enablers. The envisaged RED Establishment Act and supplementary regulations is central to the enablers that will expedite and remove a large percentage of the restraints. Whilst there is common agreement that enabling legislation is necessary and long overdue to guide the restructuring of the Electricity Distribution Industry, indications are that the RED Establishment Bill in its current draft form will only provide for the declaration of 6 electricity distribution and trading regions; the incorporation of an electricity distribution and trading company for each of those regions; set out the principles which will govern the restructuring of the distribution and trading industry; and provide for matters connected therewith. The critical areas as identified above, for local government, will be developed by the Minister of Minerals and Energy through regulations. On 8 August 2007, the RED Establishment Bill was presented to Cabinet. Cabinet resolved that the Minister of Minerals and Energy withdraw the Bill, that further consultation with relevant stakeholders be held and the bill be resubmitted once consensus has been reached on the outstanding issues. 7. Phases of REDs establishment The REDs establishment is envisaged to take place in the following 4 phases over a period of approximately 36 months:- Phase 1: Readiness phase with the focus on the establishment of the critical mass and the activities that need to take place towards attaining a state of readiness. The critical mass refers to the number of candidates which will provide the relevant RED with the essential resources and capacity to execute the business activities. From a readiness perspective it is considered essential that municipalities sign the accession to the cooperative agreement; complete the Section 78 process and ringfence the electricity distribution business. Phase 2: DAY ONE preparations phase with the focus to form the baseline of the RED for DAY ONE. The Day One definition for the 8

9 establishment of the 6 wall-to-wall REDs as public entities outlines the minimum deliverable areas that would need to be reached to successfully establish a day one, and to declare the new formed entity as a RED. The Red Day One definition is defined as follows:- o Legislative compliance; o RED company registered as public entity and in terms of the Companies Act, 1973 (Act no. 61 of 1973); o Minimum number of RED Board of directors appointed; o RED CEO appointed or seconded; o RED Board and RED management take accountability for transferred business operations and transferred business decisions as from date of appointment or business transfer, should the date of appointment and date of business transfer not coincide; o RED to have NERSA distribution license issued for the RED area of jurisdiction of the business; o Electricity distribution businesses, constituted in a critical mass, transferred to the RED; o Service delivery agreement as per the Local Government Municipal Systems Act; o RED to enter into service level agreement, or commercial contracts with ESKOM holdings and the metro or municipal council for shared services; and o RED three year business plan. Phase 3: Consolidation phase with the focus on incorporating the remaining municipalities into the RED. Phase 4: Business Efficiency and Improvement phase with the focus on the realisation of the restructuring benefits through benchmarking, the implementation of business effectiveness and efficiency improvement strategies, process and equipment optimisation, as well as the implementation of best practices. 8. Key Considerations and Implementation Enablers for Local Government Central to the Restructuring of the Electricity Distribution Industry, the following areas are of critical concern to municipalities:- Shareholding in the REDs; Governance arrangements of the REDs; Transfer of electricity undertakings; Compensation for electricity undertakings; Service delivery agreements; Articles of association of REDs; and Municipal revenue stream. 9

10 During technical engagements with the Department of Minerals and Energy and EDI Holdings, it is foreseen that policy and legislative enablers, in the form of the Municipal Asset Transfer Framework and the envisaged RED Establishment Act, will expedite and remove a large percentage of the restraints. It is foreseen that the draft REDs Establishment Bill will be circulated for comment and as such it is recommended that to ensure that SALGA is in a position to make comprehensive comments on the bill and other processes relating to electricity restructuring that process should be embarked upon to develop a SALGA position around, but not limited to, the following key areas:- Shareholding in the REDs (formulae to be used for the allocation of shares to national government, Eskom and municipalities); Governance arrangements of the REDs; Transfer of electricity undertakings; Compensation for electricity undertakings (compensation of municipal assets contributed and the valuation methodology to be used for the valuation of such assets); Service delivery agreements; Articles of association of REDs (capital structure for the REDs); Municipal revenue stream (financial incentives for municipalities to join the REDs and impact on the credit rating of municipalities); Ownership of Key Industrial Customers (whether they should be transferred over to the REDs and the financial implications thereof); and Comparative Analyses of similar experiences elsewhere in the world. 10