Regional Electricity Distributor 1 (RED 1)

SUBMISSION TO PUBLIC HEARINGS ON VIABILITY OF THE ESTABLISHMENT OF A NATIONAL / 7^TH RED

I refer to the invitation to make a submission to the Portfolio Committee on Minerals and Energy on the viability of the establishment of a National/ 7^th Regional Electricity Distributor and attach RED 1 's submission accordingly.

RED 1 kindly requests that you consider giving us an opportunity to do a verbal presentation to the Portfolio Committee. Please advise the date and time for RED 1 to make such presentation to your Committee.

Thanking you in anticipation.

Yours faithfully

SALEEM MOWZER: CHIEF EXECUTIVE OFFICER

SUBMISSION BY RED ONE TO PORTFOLIO COMMITTEE ON MINERALS AND ENERGY ON THE VIABILITY OF THE ESTABLISHMENT OF A NATIONAL RED / 7^th RED

INTRODUCTION

RED 1 is the first regional electricity distributor to be established in South Africa and is a municipal entity within the provisions of the Municipal Systems Act (Act No. 32 of 2000 as amended). The company is the Service Provider for electricity distribution to the City of Cape Town with which it has concluded a Service Delivery Agreement covering the Cape Town metropolitan area. In turn RED1 has concluded operating agreements with the City of Cape Town Electricity and Eskom distribution to render services on its behalf. It commenced operations on 1 July 2005.

Negotiations are in hand to extend the service provision to other municipalities in accordance with the Blueprint for the Restructuring of the Electricity Distribution Industry adopted by Cabinet in May 2001.

The proposal to establish 6 metropolitan REDs and a national RED deviates significantly from the Electricity Supply Industry (ESI) structure proposed in the Blueprint.

PURPOSE

This submission is in response to the public invitation from the Portfolio Committee on Minerals and Energy for comments on the viability of the establishment of a national REDl7th RED.

DISCUSSION

1. EDI Holdings has modelled the comparative financial position of a number of scenarios for restructuring the electricity distribution industry in South Africa. The two prime scenarios considered are a model with 6 wall to wall REDs as adopted by Cabinet in 2001 and a model that provides for 6 metropolitan REDs plus a 7^th (national) RED.

The results made available to RED1 show clearly that the wall to wall RED model is the most viable and least cost approach. As the results have still to be submitted to Cabinet, it is not possible at this stage to discuss specific figures. However, the modelling results show that Metro REDs would be increasingly cash positive while a national RED would be increasingly cash negative and would operate at a loss without external assistance.

2. The proposal for a national RED would necessitate some form of cross-subsidy if the national RED were not to operate at a loss. It has been suggested that requiring metro REDs to purchase their electricity requirements from a national RED would be one mechanism to achieve this.

This provision is opposed strongly as it would undermine one of the prime tenets of EDI restructuring, namely that restructuring should result in a more cost effective industry to minimise the cost of electricity to end-users.

If electricity costs are to be minimised, it is fundamental that REDs must be permitted to purchase from the least cost sources available to them at a wholesale pricing level. The proposal for a national RED would require metro REDs to purchase at a retail pricing level simply to make the national RED viable. This is entirely unacceptable.

3. If a national RED were established, any cross-subsidy required for viability must be transparent and, preferably, be done through the fiscus.

4. The establishment of RED1 as an operating business with assets and staff transferred from Eskom and the municipalities has encountered difficulties stemming mainly from a lack of appreciation for the objectives of restructuring. Without appropriate enabling legislation, these difficulties are likely to be replicated with the establishment of other REDs.

The purpose of such enabling legislation should be to:

4.1. Address the rights of municipalities as set out in the Constitution.

4.2. Facilitate achievement of the goals of restructuring especially the issue of providing low cost electricity to customers in particular consideration of the poorest of the poor. The wall to wall model offers the optimum balance between urban and rural customers and therefore is the best way of achieving this objective.

4.3. Define the form of entity (municipal or public).

4.4. Ensure that EDI restructuring supports the metropolitan areas as engines of

economic growth.

4.5. Remove the possibility of continual maneuvering by existing industry role

players in an attempt to maximise their advantage.

5. Consideration needs to be given to amending the Constitution to resolve conflicting rights. Municipalities have a constitutional right to choose not to transfer their distribution business into a RED, alternatively, to join a metro RED or a national RED as service provider. This choice has a major impact on the achievement of the ED I restructuring objectives.

6. To ensure that REDs, as originally envisaged in the Blueprint, are viable and effective operations, the following principles should apply to the transfer of business from municipalities and Eskom:

6.1. Customers should not have to pay twice for assets.

6.2. There must be only one wires service provider in the RED area of jurisdiction.

6.3. All electricity distribution activities (Le. wires, retail, and functional support) within the RED area of jurisdiction must be transferred to the RED.

6.4. All customers within the boundaries of RED, except existing Eskom customers with annual consumption exceeding 100 GW.h, to be transferred to the RED.

6.5. Contestable customers to be defined as those with an annual consumption exceeding 100 GW.h at one consolidated point of supply (e.g. Consol Glass & Caltex in Cape Town).

6.6. All demand-side management (DSM) arrangements with non-contestable customers to be seated within the RED.

6.7. All distribution network assets within the RED area of jurisdiction at 132 kV and below (e.g. busbars, transformers, switchgear, dedicated and non-dedicated lines, and all associated support elements such as fibre optic networks etc.) to be transferred to the RED. These assets are to include servitudes /rights of way and associated liabilities.

6.8. All other assets and associated liabilities linked to the customers to be transferred to the RED to be transferred in proportion. The infrastructure serving non-RED contestable customers must be transferred to the RED.

6.9. All business processes and systems to be transferred to the RED in proportion.

6.10. Staff must follow function. All staff that spend 50% or more of their time on electricity business within the RED area, as well as the proportionate full-time equivalent of other staff must be transferred to the RED.

6.11. All relevant functions to be transferred in proportion. Where these cannot reasonably be transferred immediately, or transfer is impractical, transitional arrangements could be considered.

6.12. All relevant contractual rights and obligations, including customer contracts to be ceded to the REDs.

6.13. REDs to purchase direct from Eskom Transmission or a producer/generator and to take supply at 400 kV.

CONCLUSIONS

1. RED1 strongly supports the model for EDI restructuring as contained in the 2001 Blueprint, namely 6 REDs, 'wall to wall', covering the whole country. It is considered that this is the most viable model for South Africa.

2. The wall to wall RED model is the model best able to achieve the objectives for EDI restructuring set out in the Blueprint.

3. Legislation to enable EDI restructuring is required urgently. This legislation should

3.1. Address rights of municipalities as set out in the Constitution

3.2. Facilitate achievement of EDIR goals

3.3. Participation is currently entirely voluntary

3.4. Compel participation of municipalities and Eskom

3.5. Define framework as basis for interaction between REDs and municipalities

3.6. Define the form of entity (municipal or public)

3.7. Address basis for transfer of assets including Eskom assets

3.8. Principle that customers should not have to pay twice for assets must be entrenched.

We thank you for the opportunity and we kindly request that you consider giving us an opportunity to do a power point presentation to your committee.

SALEEM MOWZER

CHIEF EXECUTIVE OFFICER

19 June 2006