1. Report of the Portfolio Committee on Minerals and Energy, dated 23 August 2006:

The Portfolio Committee on Minerals and Energy having held Public Hearings on 21 and 23 June 2006 on the viability of establishing a National RED/7^th RED, reports as follows:

1. Background
The Committee undertook to hold hearings on exploring stakeholders, interested and affected parties views on the viability of establishing a National RED/7^th RED as opposed to the existing Six RED model. The hearings were held on 21 and 23 June respectively. The objectives of the public hearing process were to:

provide an open platform for discourse around the REDs,
solicit suggestions on how to fast-track the REDs process,
gauge stakeholder sentiments around the REDs in general and more particularly the National RED,
understand the challenges associated with the formation of the REDs, and
formulate an approach, which, is inclusive of stakeholder preferences.

The following organisations attended the hearings and made input on the subject:

Umhlathuze Municipality
eThekwini Municipality
Nelson Mandela Municipality
Southern Karoo Electricity Forum
Energy Intensive Users Group (EIUG)
Eskom
NERSA
CENTLEC
RED1
AMEU
SALGA
SOLIDARITY
IMATU
COSATU
Chamber of Mines of South Africa

The remainder of organisations listed below forwarded their written comments:

Gauteng: Department of Local Government
Mogalakwena Municipality
Institute of Municipal Finance Officers (IMFO)
2. Contextualising the developments leading up to the public hearings
The restructuring of the Electricity Distribution Industry (EDI) has been in the offing for over a decade.
Cabinet approved a Blueprint on EDI restructuring on 2 May 2001.
EDI Holdings was established in 2003 to implement the directives of government on restructuring, through the Blueprint.
The Blueprint noted a number of outstanding issues which were to be finalized mid-course of establishment of EDI Holdings, notably the EDI Restructuring enabling legislation.
Prior to the establishment of first RED, namely RED1, which was centred around the City of Cape Town, EDI Holdings was instructed to establish it as a municipal entity within the confines of the municipal jurisdiction of the City of Cape Town including the concomitant Eskom distribution assets within the said jurisdiction, under existing municipal legislation, but excluding key industrial customers.
A number of stakeholder engagements ensued, which culminated in a proposal before Cabinet on 14 September 2005, to consider other means of establishing the REDs without necessarily upsetting the financial viability of six Metropolitan Cities.
On the basis of the arguments presented before it, Cabinet took a decision to establish six Metropolitan REDs as municipal entities and made provision for the establishment of the National RED for the remainder of the municipalities subject to the necessary financial modelling and governance issues being concluded.
The Committee requested DME and EDI Holdings to make a presentation before it in order to equip itself to better understand the ramifications of the proposed route.
The Committee invited all stakeholders to make presentations and express their views regarding the viability of the National RED and the impact that it will have on the stakeholders concerned.
3. Deliberations
Some indicated a preference for the National RED with a provision for clustering or regional REDs while others were in favour of the 6 wall-to-wall REDs. Some of the Metropolitan Cities would only support the National RED on condition that the Metro REDs would be allowed to buy electricity at wholesale price from Eskom Transmission rather than at Retail Price from the National RED, which is seen as effectively, Eskom Distribution disguised. If the Metro REDs succeed in this regard, they will not be cross- subsidizing the National RED.
In general, the views expressed by stakeholders were as follows:

Labour

Cosatu supports the 6 wall-to-wall REDs. However, it believes that all the REDs must be under the control of one national holding company to ensure equal distribution of resources all over the country and to allow for cross subsidisation.

Solidarity believes that the National RED can meet the objectives of the government if properly modelled.

Business

In general business is happy with any model provided large customers are exempted from buying from the REDs, i.e. that key industrial customers buy electricity directly from Eskom Transmission and are serviced by Eskom, mainly for safety (mining houses), pricing and good quality of supply and service (productivity and competitiveness in export markets). Currently customers consuming more than 100 GWh per annum can buy at wholesale price.

In this regard, the Metros argue strongly that key industrial consumers within their jurisdictions should remain with the Metro REDs.

Local Government
Secondary and District Municipalities (UMhlathuze, South Central Karoo, Centlec (Mangaung))
These municipalities support the sub-regional REDs, especially those that are in existence and have proven to be sustainable.

SALGA
Local government, represented by SALGA seems to support the establishment of 6 wall-to-wall REDs while acknowledging that municipalities cannot be treated the same. They do recognise the need for cross-subsidisation. This statement means that SALGA supports the 6 wall-to- wall REDs including clustering.

If a decision is to go the National and Metro REDs route, SALGA supports the concept of Sub-Regional REDs as favoured by the above secondary municipalities.

SALGA supports the governance of the REDs under the municipal entities.

Other organizations
Organizations such as AMEU and the NERSA believe that the 6 wall-to-wall REDs were properly modelled and there is justification for the demarcation. They emphasized that the EDI is sustainable on its own and does not need external financial support, therefore the restructuring should ensure that balance is maintained.

They also believe that the REDs as Public Entities will be easily Regulated by NERSA and the existing National Cross-subsidisation Framework could be maintained to help uplifting rural areas, as part of the objectives of EDI restructuring without much fiscal support.

They believe that the National RED will not be viable and it will create challenges of financial viability, sustainability and management going forward.

4. Deductions drawn from the inputs received
In general, most participants were in favour of the 6 wall-to-wall REDs as per the Blueprint. Metros support the Metro REDs with a National RED on condition that customers within the Metros do not cross-subsidise the National RED. It should be noted that the electricity distribution business is most viable around the Metros and large cities.

The 6 wall-to-wall approach requires cross-subsidization within customer categories at a larger scale even outside the Metro boundaries, thus minimising the need for fiscal intervention in the EDI. This model lends itself to easy Regulation by NERSA and governance if REDs are Public Entities.

The Metro and National RED model places Metros in a poor financial position due to having to cross-subsidize the previously disadvantaged areas, thus creating the imbalance the Blueprint seeks to address. The governance of the National RED poses a challenge due to its multi-jurisdictional nature, which would lead to further constitutional challenges.

5. Conclusion and Way forward

The Committee, yet again completed a comprehensive process in its attempt to understand the new developments with regard to the restructuring process. Over the past three years the Committee had extensively interacted with the Department of Minerals and Energy, and key stakeholders, with the main aim of discussing and developing a common understanding, and finding solutions to challenges with regard to the electricity restructuring process, with specific focus on the 6 RED Model. The ultimate aim being to give effect to the restructuring process and ensure buy-in from the public.

Satisfied with its understanding of the 6 RED Model, and the aims to achieve governments’ objectives by providing low cost electricity to all consumers with equitable tariffs for specific customer segments, providing reliable and high quality service to customers and meeting the country’s electrification targets in the most cost-effective manner, the Committee fails to understand how the proposed National RED/7^th RED can address these objectives in the absence of any evaluation which might prove the 6 RED Model ineffective.

The argument in favour of the National RED/7^th RED was emphasised and made clear in the Eskom presentation, but the Committee felt that the national objectives outlined were achievable through the Six RED Model. The Committee found it problematic that municipalities could be given the choice to join the National RED/7^th RED or Metro REDs. The Committee does not favour the National/RED7^th RED option. This position is taken based upon two factors namely:

1. the lack of convincing argument for establishing the National RED/7^th RED emanating from the hearings in particular the fact that almost none of the positions put forward could sustain the argument around the financial viability of a National RED/7^th RED; and
2. to eliminate any further delays in the restructuring process by introducing new models, spending time and financial resources on it , but to rather commit to ensuring that the 6 RED Model is operational.

In advancing the restructuring agenda and promoting the 6 RED Model, the Committee recommends, that concerted efforts by the relevant decision-makers be made to speed up the process, that collaboration amongst the Department of Provincial and Local Government, National Treasury, Department of Minerals and Energy and the Department of Public Enterprises takes place to ensure that the long, unresolved challenges hampering the successful implementation of the 6 REDs Model is addressed with urgency.

The Committee noted with concern the number of inputs which called for legislative and policy direction to drive the restructuring of the electricity distribution industry. The Committee recommends that the Department of Minerals and Energy speed up legislation in order to accelerate with change in the industry.

The Committee recommends that National Treasury finalise the process of providing clear policy guidelines with regard to the transfer of assets from Eskom to the municipalities.

The Committee recommends that The Department of Minerals and Energy provides clarity with regard to the definitive problems with "reticulation", "competition and contestable customers."

The Committee remains steadfast in its commitment to ensure an accelerated REDs creation process and that all transformation processes remain informed by the needs of our country and its people.
Report to be considered.