NATIONAL RED / 7^th RED SUBMISSIONS AND HEARINGS.

SUBMISSION BY CENTLEC (PTY) LTD. MUNICIPAL ENTITY (ME) OF MANGAUNG. LOCAL MUNICIPALITY (MLM).

PRESENTED IN CAPE TOWN JUNE 2006.

Directors: MB Molemela (Chairperson), AJ Koch (Deputy Chairperson), EV Blekie, Z Majavu, MB Kabi, ME Ralebese TG Lobe (CEO), L Mashiane (CFO)

NATIONAL RED/ 7^th RED SUBMISSIONS AND HEARINGS. SUBMISSION BY CENTLEC (PTY) LTD. MUNICIPAL ENTITY (ME) OF MANGAUNG LOCAL MUNICIPALITY (MLM) IN CAPE TOWN JUNE 2006.

1. INTRODUCTION

CENTLEC would like to thank the Portfolio Committee on Minerals and Energy for inviting CENTLEC as critical stakeholder and an interested party to make a submission on the viability of the establishment of a National REDI 7th RED.

Ours is to plead our case and possibly that of other Category B municipalities Umhlathuze, Buffalo City, Southern Cape etc. for consideration as a transitional mechanism towards the six wall to wall or as an alternative to National RED where feasible. And in the case of CENTLEC a Local RED proved to be viable and working effectively.

2. BACKGROUND

First electricity was switched on in Bloemfontein in 1900 with 14 customers. The supply of electricity under the Bloemfontein Municipality grew to 30 000 customers in 1990. Bloemfontein Electricity embarked on a vigorous electrification plan and from 1990 to 2005 the number of customers grew to 150 000. With the amalgamation and restructuring of Municipalities, Mangaung Local Municipality came into being. Mangaung restructured and established CENTLEC PTY L TO as a ME in 2004 to distribute electricity to Mangaung's six amalgamated municipalities, and fifteen Southern Free State towns by means of Service Level Agreements (SDAs). Prior to CENTLEC's incorporation CENTLEC, then Bloemfontein Electricity (BE), provided services to these Southern Free State Towns enabled by Local ordinance 8 of 1962section 128. It was only through dedication of all councilors, board members, management and .employees that CENTLEC became a world's first class electricity utility.

And this was affirmed by the Business Initiative Directions (BID) and international body that awarded CENTLEC with the International GOLD Quality Award, Paris (2005) during it's 22nd International World Quality Commitment (WQC) Star Award for Excellence and Business Prestige is part of the annual program of B.I.D. BID Awards are designed to recognize the prestige of the outstanding companies, organizations, and businessmen in the business world.

We are humbled to bring to the attention of the portfolio committee that once again CENTLEC will during the 23rd BID International Star Award Celebration be awarded with a Platinum Award, Geneva (2006).

CENTLEC was created to:

· Support the National Government drive for Electricity

· Restructuring Industry's (EDI) restructuring.

· Demonstrate capacity in our area of jurisdiction and beyond

· Pave the road for creation of EDI Holdings toolkit and provide learning for the rest of the Industry.

To date CENTLEC has from humble beginnings, overwhelmed by constrains managed to create a successful alternative Electricity Distribution Model for South Africa especially in the rural/ peri-urban areas.

3. OUR UNDERSTANDING OF CABINET's DECISION (14 September 2005 ).

It is CENTLEC's understanding that: (1) Six Metro REDS were expected to be formed soon after the March 2006 local elections. (2) by no later than 30 March 2006, the final REDs boundaries for selected local municipalities, neighbouring metropolitan municipalities, including whether they form part of the Metro RED, the National RED, or if feasible, a separate RED.

COMMENT: CENTLEC is of the view that Category B municipalities should be allowed to establish LOCAL REDs irrespective of the End-state. Whether the End-state is six wall to wall or six plus national RED a scope exist for enhancing municipal capacity through the formation of LOCAL REDS especially in the Category B municipalities.

CENTLEC's proposition is that the Shareholder/Service Authority and consumers will benefit - partly from LOCAL RED's scale economies, stronger purchasing power; reduced fIXed overheads and elimination of roles and facilities to the benefit of all involved; and lastly proximity which affords LOCAL RED with excellent customised customer services. NB. It must be noted that in the case of CENTLEC and the Southern Free State Town this is not a fairy tale or some academic rhetoric but is in fact a reality-we realised these efficiency gains.

It is our concern that even this public hearings fails to acknowledge that Cabinet's decision suggested accommodation of LOCAL REDs and not ONLY the National RED as it will suggest. In CENTLEC's case, and in terms of EDI Holdings Company criteria-as mandated by cabinet-for a viable LOCAL RED assessment. CENTLEC is financially viable, is managing the technical networks relatively well, and has a good revenue base and reasonable proximity.

4. CUSTOMER SATISFACTION AND/OR CONSIDERATION

An approach of LOCAL REDS can help expedite the realization of global access to energy, equitable services; completion of Free Basic Electricity rollout; and rationalisation of tariffs in a particular region. All of these initiatives could make amalgamation much smoother at a latter stage.

CENTLEC has reached a point where 99,9% of the inhabitants of its licensed area on proclaimed erven have access to electricity services. CENTLEC has also embarked on a process of rationalizing tariffs amongst its area of service and those include Southern Free State Towns. The Areas of the Southern Free State Towns serviced by CENTLEC residents-especially the impecunious-are benefiting from government's policy intervention namely the Free Basic Electricity; contrary to those supplied by Eskom creating a sense of unfair treatment of customers sometimes only separated by a street. This unequal treatment of "neighbours" has a potential of destabilising communities through social unrest.

5. CHALLENGES WITH THE NATIONAL REDS

The key concerns that necessitated a new approach by cabinet decision (14 September 2005) ranged from fiscal and financial risks of transferring Eskom and Municipalities electricity businesses to the REDs including but not limited to (i) Financial impact on municipalities and Eskom (ii) Credit rating impact (iii) Credit control implications (iv) Definition of reticulation to eliminate possibility of constitutional challenge

CENTLEC VIEW:

Whilst CENTLEC acknowledges the challenges raised by cabinet on the initial approach, CENTLEC concerns is on the shortcoming of the new approach in outlining clearly how will the formation of national RED address the concerns raised by cabinet. Further CENTLEC challenge the intent of limiting Electricity Distribution restructuring to below 500V, and the voltage limitation to ultimately define reticulation. The latter has in it the potential to undermine the comprehensive work of the Electricity Restructuring Blue Print approved by cabinet in (2001). The well researched blue print recommends that EDI restructuring will affect the 132KV and below of the electricity sector value chain.

It is CENTLEC's view that limiting reticulation to below 500V will undermine the constitutional right of municipalities reticulate electricity in their areas of jurisdiction. Is it correct for us to say should Eskom had been willing to let go of the Electricity Distribution component of its business we will not be in a position were we have to "redefine" the Distribution business directly or indirectly?

In general municipalities-and ours in particular-are not in support of Eskom due to big brother treatment in past. The fact that electricity reticulation is not a core business of Eskom adds to the concern of not only CENTLEC but the whole industry. It is also true that impact of staff transfer is not yet understood fully i.e. in terms of pension funds, parity on remuneration; tax implications and network control. Of concern is the manner in which the modeling was conducted. For example consultation was not very inclusive and hence to date only one section-viz. Eskom-of the industry have been fully consulted on the modeling of the National RED.

Lastly, CENTLEC is of the view that, there are some policy decision that must precede the decision around the National RED and those relate to whether the National RED will be a ME or a Public Entity (PE) and shareholding/ownership in general. Two, the decision on whether compensation will be effected and if so the principles that will govern that process. Also the asset evaluation method to be adopted is of high importance.

CENTLEC also took note that, the original Sep 05 decision made provision for local RED.

RECOMMENDATIONS

1. Allow for roll-out LOCAL REDS where feasible

2. Financial assistance to be provided for smaller municipalities when it comes to S78 of MSA or alternatively provide an alternative mechanism be it in a form of exemption from other processes.

3. The process of tariff rationalisation to be definite in terms of time frame and empowered by legislative mechanisms e.g. NERSA tariff processes.

4. In order to ensure a unified service delivery in localities, that Eskom hand over the customers and Assets to LOCAL REDS-especially residential and commercial-as was the case in Cape Town. Such a move

would expedite the FBE roll-out and electrification.

5. Conduct a detailed study on the tax implications on surplus revenue by a municipal entity and tax exemption where possible.