To |
Chairperson, Portfolio
Committee on Minerals and Energy |
From |
Chief Executive, Eskom
Holdings |
Subject |
Submission on the
viability of the establishment of a National RED/ 7th RED |
Date |
2006.06.19 |
1.
Introduction
This memo documents Eskom’s submission to the
Portfolio Committee on Minerals and Energy for public hearings on “the
viability of the establishment of a National RED/ 7th RED”.
2.
Summary Submission to the Portfolio Committee
The national RED, complementing metro REDs,
is the most appropriate approach to meet national objectives for electricity
distribution.
We believe that the national RED, using Eskom
Distribution as a base and with a continuation of existing policy support, has
unique capacity to deliver all national restructuring objectives in the
non-metro areas, and notably the Government’s electrification target of
universal access by 2012. The
national RED will supply stability until these objectives have been met.
Furthermore, viability of the national RED is
assured when based on the national infrastructure of Eskom’s non-metro
Distribution business, excluding key industrial customers, and a national
policy environment which maintains existing industry arrangements.
Eskom’s
actions in support of the national RED will be subject to approvals required by
the Public Finance Management Act.
Proposals affecting employees will be subject to the Labour Relations
Act and other legislation.
3.
Background
The Cabinet stated on September 14, 2005
that: “…six metro REDs to be set up as soon as possible after the local
government elections, and that other areas would be covered under separate
local REDs or a national RED. Eskom
will continue to play a critical role particularly in the national RED”.
The purpose of the national RED is to deliver
national restructuring objectives, particularly in rural distribution. A primary role will be to meet the
Government’s electrification target of universal access by 2012 in the
non-metro areas.
The national RED will be the base into which
non-metro municipal distributors can amalgamate on a voluntary basis, where
approved by “section 78” studies, to form a consolidated electricity
distribution industry with Eskom non-metro business and achieve the objectives
of restructuring. The national RED will
interact with municipalities through a standardised agreement.
Eskom supports the Government statement of
September 14, 2005.
Although we agree that the voluntary nature
of EDI restructuring does not preclude the concept of “local REDs”, Eskom
believes that there is little justification for local REDs. Eskom supports national consolidation of the
non-metro industry, to minimise change and to support the aggressive timing
targets announced by Government, with maximum focus on achieving restructuring
objectives.
4.
Blueprint Objectives for EDI Restructuring
Eskom supports and works according to the
stated objectives for EDI Restructuring in the Blueprint:
Source:
Electricity
Distribution Industry, Restructuring Committee (EDIRC) Blueprint Report,
Compiled by the Department of Minerals and Energy
Reform
of the Electricity Distribution Industry (EDI) in South Africa: Strategy and
Blueprint, Introduction and Summary, January 2001
These issues have remained valid. Today there are also additional key national
goals in free basic electricity, infrastructure required to support economic
growth, and enhanced maintenance expenditure to avoid disruption to the
economy. There is an urgent need to address all these issues.
Eskom believes it is time to decide the
direction of the industry based on the capacity of metro REDs and a national
RED to meet the national objectives and goals stated above.
5.
Movement toward 6 metro REDs & the
national RED: formation principles
Eskom
supports the DME proposed formation principles of the national RED:
Metro REDs and a 7th national RED
are appropriate solutions to the key national issues of today. Metro distributors and the national RED will
have critical mass which should be exploited to meet the restructuring
objectives. The national RED, created
from Eskom’s Distribution Division excluding metro area business and key
industrial customers, will be a credible consolidation vehicle for non-metro
municipal distributors. It will have
ready capacity to assist the amalgamation of ringfenced non-metro electricity
distributors into the national RED.
There will also be minimum change to current network configuration, to
avoid costs and disruption of service to customers. The organisation of the national RED in the
non-metro areas will follow the existing electricity network configuration as
defined by Eskom technical service centres and municipal distributors, and
changes will be minimised.
Due to its distributed national operations,
Eskom Distribution is the only logical vehicle to form the base of the
National RED, as a division of Eskom. The Business Model of the
national RED will encourage all municipal distributors to join.
6.
Advantages of a 7th “national RED”
over previous regional model
Metro
electricity distributors, as metro departments or existing entities, can
rapidly provide a consistent service in the major population centres without
delays of “s.78” studies required by the Municipal Systems Act.
In
addition, Eskom believes the 7th “national RED” has the following
advantages over the previous regional 6-RED model:
Use the Eskom national footprint to support the
national RED
1.
Eskom Distribution will support enhanced
economies of scale through its national technology, business processes and
scaleable IT solutions. Notably, the
national RED can support non-electricity municipal services by providing
nationally effective billing, call centre and collection processes, supported
by national technology.
2.
Customers will experience improved customer
service through customer focused value chains initially developed within Eskom.
3.
Scare skills can be concentrated and
sustained in national centres of excellence within the national RED, as
currently occurs in Eskom Distribution.
4.
Eskom can provide its regional and national
Distribution capacity to address the issues of national non-metro distribution
planning and infrastructure development.
5.
There will be earlier progress due to limited
dependence on RED creation and related costs.
6.
A single legal entity will facilitate a base
for equitable national tariffs with minimised cash transfers between legal
entities.
Staff related benefits to the national RED
7.
The national RED provides greater stability
for metro and Eskom industry employees by reducing the interchange of staff
between entities.
8.
Also by minimising the interchange of
municipal and Eskom staff, the industry reduces the impact of harmonization of
different conditions of service, which would threaten higher costs to
consumers. The majority of industry
staff are employed by metro distributors and Eskom. The previous regional model
forced a maximum interchange of staff with likely harmonization issues. The separation of metro REDs from Eskom’s
non-metro business significantly reduces this interchange of staff.
Credible consolidation vehicle for municipal
distributors
9.
By using existing entities, the industry can
immediately address weak rural distribution and avoid delays due to new entity
set-up, reduce overall cost of restructuring, and reduce impact on customers.
10.
The national RED can leverage Eskom’s
experience in “TBVC” and “SGT” distributor incorporations.
11.
The 7th “national RED” provides a
mechanism to equalise the financial impact of restructuring for equitable low
cost supply to rural customers included in a national rate base. Equitable tariffs are created through a
managed subsidy in regulated national tariffs, and low cost is supported by
economies of scale in a national RED.
Support for free basic electricity and universal
access
12.
The 7th “national RED” will
maintain a national capacity with a proven Eskom track record, particularly in
rural electrification, to achieve electrification targets, notably the
President’s commitment of universal access by 2012.
13.
Economies of scale will be supported by
national planning, project management and national electrification
infrastructure development.
14.
National capacity will be available for
delivery of a national electrification infrastructure.
15.
Government and stakeholder interaction on
electrification funding and progress reporting will be facilitated by a single
service provider, as opposed to multiple municipalities.
7.
National RED alignment to national objectives
7.1.
Compliance with Government Requirements
Eskom
recognises Government requirements for restructuring:
1.
Restructuring must be in accordance with the
Constitution, taking into account that responsibility for reticulation is a
municipal function.
2.
Financial state of municipalities currently
performing the electricity function must not be adversely affected.
3.
Aggregate personnel costs must not increase
in a way that undermines the objective of a single/ uniform public service.
4.
No additional funds or taxes (fiscus and/or
local government) without the approval of Cabinet.
5.
Ensure service delivery, especially in rural
areas, and provide the basis for achieving universal access by 2012.
Eskom
believes that there is alignment to these
Government requirements:
Government Requirements |
National RED |
Restructuring
in accordance with the Constitution |
Enhance
municipal responsibility for service delivery
Support
municipal obligation for social & economic development
|
Municipal
finances not adversely affected |
Minimise
financial impact on municipalities
|
Aggregate
personnel costs must not increase |
Separate
consolidation of metro REDs and national RED will avoid staff transfers for
70% of the industry employees in Eskom Distribution and metros, and avoid
adverse consequences as a result of restructuring for these staff. Minimised staff transfers will result in:
Transfers
will be substantially limited to essential direct staff only. |
No additional
funds or taxes to fund restructuring without Cabinet approval |
Reduce
costs since there is no immediate need for National RED to create a new legal
entity, avoiding the financial implications of transferring assets, staff,
business operations and data. Organise
and manage for economies of scale to support benefits realisation. |
Expedited
Delivery |
Metro
REDs do not need to create new legal entities prior to absorbing the Eskom
businesses within metro geographic and jurisdictional boundaries, avoiding
unnecessary delays Eskom
Distribution Division can be used to immediately amalgamate non-metro
municipal distributors - to minimise restructuring effort and timelines Both
Metro’s and Eskom are largely kept bundled in current form, thus allowing
then to immediately deliver on key outputs. |
7.2.
Blueprint Objectives
Eskom
believes that the concept of the national RED is aligned to Blueprint
objectives as follows:
Summary Blueprint Objectives |
National RED |
Low cost
equitable tariffs |
Enhance
economies of scale & skill through maximum industry consolidation ·
facilitated implementation of equitable national
tariffs ·
quality of supply & financial viability Maintain
investor confidence ·
Initial Eskom-based national RED access to
capital markets |
Quality of
Supply |
Enhance service
delivery ·
by transferring Eskom business in metro
boundaries for integrated metro service delivery in metro boundaries ·
by providing national capability for rural
distribution Minimise extent
of national RED creation process ·
to accelerate amalgamation |
Electrification |
Support social
& economic development ·
through strong role in integrated development
planning, electrification & free basic electricity |
Staff career
opportunity |
Through
consolidation, enhance national opportunity for all industry staff |
Financial
Viability |
Minimise financial impact on municipalities ·
by securing municipal income through asset
compensation Maintain
investor confidence ·
through Eskom-based national RED access to
capital markets ·
current suppliers to keep current key industrial
customers Minimise
transfer of staff ·
to limit impact of harmonization of conditions of
service |
8.
Financial Viability
Eskom’s
financial model shows the national RED as viable.
Eskom
has prepared financial modeling of alternative scenarios for the national
RED. Our model for the viability of the
national RED shows the following data:
·
The current base of Eskom Distribution,
excluding metro redistributors
·
Less: transfer of current Eskom customers to
metro REDs
·
Add: assumed gain of all customers from
amalgamation with non-metro municipal distributors.
The
key assumptions are as follows:
Policy
support -
1. The national RED will benefit from wheeling charges to metro REDs from
Transmission at the current regulated tariff.
Existing
industry experience for energy losses and bad debts is maintained -
The
result is a viable national RED as follows:
In this model we have shown the components of
net income which depend on:
·
Normal tariff sales revenue
·
Electrification and rural subsidies between
customer categories
·
Network service charges for direct Eskom key
industrial customers and redistributors
·
Purchases which account for energy losses
·
Bad debts
·
Service charges
On this basis, the national RED has a net
profit before tax of R1,6 billion (8,5% of revenues), which is a manageable
financial situation, even if assumptions cannot be met in the early years of
operation during and immediately after phased amalgamation with municipal
distributors.
The
conclusion is that the national RED is viable.
The following current industry structures should be maintained:
The modeling indicates that with the above
assumptions, a national RED to manage non-metro distribution will be viable.
Failure of the above assumptions would imply:
1.
High Metro RED profits based on retention of
current rural subsidies
2.
High tariffs for rural customers due to loss
of existing subsidies
3.
Failure of objective for equitable tariffs
4.
Incentives contrary to ASGI-SA for rural
development
5.
Financial support from National Treasury.
9.
Benefits to Municipalities
Eskom
believes municipalities will enjoy the following benefits:
10.
Key Government Objectives
Eskom believes the national RED will be a
critical agent to support key Government objectives, including:
1.
Universal Access by 2012 - this national project will be a massive challenge for
the industry with an estimated 3,5 million households without access to
electricity at present, and probable increases to 2012 due to population
growth, migration to cities and consequent splitting of households
2.
Poverty Alleviation - multiple Government
initiatives, including:
·
Free Basic Electricity which requires a
technology solution when combined with prepaid electricity
·
Employment opportunities which can be
supported by the distributed technology of the national RED, and the drive for
local content in procurement for which the national RED will have an
established policy of support
·
Stimulation of economic growth in rural
areas, a proven area in which electricity can play a major role
3.
The Accelerated Shared Growth Initiative for
South Africa (“ASGI-SA”), which is required to support 6% economic growth and
to support Black Economic Empowerment and empowerment for Black Women-Owned
Organisations.
4.
Social upliftment of standard of living
created by the benefits of electricity, notably in rural and informal
settlements
5.
Attraction of foreign direct investment
outside the metro areas through managed quality of supply on a national basis.
As
an example: we note the following information on asset infrastructure
refurbishment:
Eskom - own
data |
Municipalities - Source: EDI Holdings |
Eskom’s
Backlog on Refurbishment - nil Historical
investment by Eskom: ·
5 years 2000 to
2004: R5,0bn |
Municipal
Backlog on Refurbishment - R9,3bn (estimated) |
Planned
investment by Eskom (national RED): ·
5 years 2005/06 to
2010/11: R10,9bn |
Municipal
budgets: R1,9bn – R5,6bn In
2004, the NER determined that only 1/3 of municipalities were making
necessary provisions |
We conclude that the EDI requirements are
better served by a national organisation.
11.
Evolution of the national RED
The national RED should evolve from Eskom
Distribution as a base.
Eskom notes that restructuring in process for
many years - even prior to the Energy White paper of 1998. This prolonged uncertainty has resulted in:
·
Staff (and industry) instability
·
Postponement of investment by industry
·
High restructuring cost and rework following
action to implement previous policies.
Eskom believes an evolving solution is
required: avoid further delay by creating the Metro RED’s and a national RED as
component parts of a pragmatic joint solution that is responsive to an evolving
industry.
This is achieved in Eskom’s proposed
governance and ownership model:
·
Create the national RED as a division of
Eskom
·
Due to its distributed national operations,
Eskom Distribution is the most logical vehicle to form the base of the National
RED
·
Create a stable industry model to realise
restructuring benefits including amalgamation of non-metro municipalities,
infrastructure for ASGI-SA and economic growth, and Universal Access by 2012
·
The ownership and governance model may evolve
to a wholly owned subsidiary of Eskom, or longer term, into a separate entity
with alternative ownership.
Eskom believes the industry needs direction,
not an end state. The amalgamation of
the national RED with municipal distributors is not a short term exercise -
this is demonstrated by the issues in incorporation of TBVC and SGT
distributors. We believe the
requirements of the industry after amalgamation are unknown - but will surely
be different to the requirements of today.
The national RED and metro REDs will provide
certainty of direction which industry employees need to achieve restructuring
objectives.
12.
Role of EDI Holdings
Eskom believes that EDI Holdings should
continue and complete its facilitation role as programme managers of
restructuring.
Eskom supports the
Blueprint statement:
“EDI Holdings would be
established as a 100% central government owned company. The Board of Directors
would be appointed by the Minister of Minerals & Energy. Its overall
purpose would be to ensure the successful implementation of government policy
towards the EDI, and hence oversee and direct the reforms described in this
report.”
EDI Holdings must have a key role to
facilitate the multiple decisions required for the EDI: industry wide
standards, shared services for maximum economy of scale, transfer principles
for assets, customers and employees, compensation, changes to legislation,
etc.
13.
Summary
In summary Eskom supports the following
conclusions:
14.
Contact Point
Thank you for this opportunity to submit our views to the Portfolio
Committee. Eskom is committed to
successful achievement of Government objectives through restructuring of the
EDI, and will work with all stakeholders to ensure successful operation of the national
RED and the 6 metro REDs.
Further information is available from Thulani Gcabashe, Chief Executive,
Eskom Holdings.