Policy and Regulatory Considerations Getting it right

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Policy and Regulatory Considerations - Getting it
right EDI Maintenance Summit by Phindile
Nzimande CEO EDI Holdings 9 10 June 2008
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Presentation Outline

• The Energy White Paper
• EDI Restructuring Context
• Key restructuring progress to date
• Getting it right Policy regulatory
  Considerations
• Implementation Challenges
• Conclusion

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• ENERGY WHITE PAPER

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Objectives and Principles (1)

• The energy white paper instructs a restructuring
  approach that
• Is transparent, builds public confidence, seeks
  to clarify organisational roles, communicates
  policy effectively and integrates policy
  processes
• The key policy drivers to energy restructuring
  is
• To redress economic and social power imbalances
• To recognise and cope with multi-casual linkages
  in the energy sector
• Energy restructuring occurs within the context of
  a macro-economic
• framework that
• Promotes growth
• Promotes redistribution by creating jobs
• Reallocates resources through the budget

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Objectives and Principles (2)

• Electricity as a critical energy form has the
  following challenges
• Increasing access and affordability to energy
  services
• Improving governance and delivery
• Stimulating economic development and growth
• Key achievables will include
• A comprehensive electrification programme
• Establishment of a consolidated electricity
  distribution industry
• Industry conducive to effective regulation
• Creation of an authority to manage the
  restructuring of the electricity distribution
  industry
• Creation of viable sustainable distribution
  entities (REDs)

The Energy White Paper is currently under review.
The Energy Summit held in September 2007 was part
of the process to review this White Paper
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EDI Restructuring Objectives
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EDI Profile

• Revenue R33.5 bn
• Customers 8.3 m
• Staff 31 000
• Asset Value R40 bn
• Energy Purchases 110 TWh
• Distribution Lines gt370 000 km
• Distribution Cables gt210 000 km

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• EDI RESTRUCTURING CONTEXT

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Current Electricity Supply Industry Structure
Currently, South Africa operates in the
traditional mode of vertical integration with
financial and physical flows following the same
path
Scheduling
ESKOM
Industry
187
Residential
Municipalities
Physical Energy Flow
Business
Financial Flow
Metering Billing
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Key Challenges Facing the EDI

• Current industry structure is highly inefficient
  owing to fragmentation
• Absence of economies of scale in respect of
  investing in assets, sharing of facilities,
  services, people development
• Inadequate maintenance of networks
• Estimated maintenance backlog R7 bn accumulated
  over the past 10 years
• Supply interruptions cost to the Economy R2.9 bn
  to R 8.6 bn p.a.
• Inequitable treatment of consumers across the
  country
• Significant variance in average tariffs by
  Distributors
• Range 19c/kWh 71c/kWh (medium sized
  business)
• 16c/kWh 60c/kWh (domestic customers)
• Inconsistent Electrification Performance
• Access to electricity 73 (National)
• Slow and Inconsistent Roll-Out of FBE
• Reliability of supply and the ability of the
  distributors to offer a basic and secure supply
  to low income households differs markedly across
  the country
• Current rollout is less than 40 of targeted
  community

Source 2003/4 National Integrated Resource
Plan (NIRP) Source NUS Consulting Study -
2005
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Current Electricity Challenges in Context

• The electricity distribution industry (EDI) is
  part of a broader ESI value chain
• Challenges experienced in generations filter
  through to distribution
• Current load-shedding
• These generation capacity problems tend to
  disguise distribution challenges for some time to
  come
• Every lights off moment will most likely be
  interpreted as load shedding whilst it could as
  well be a distribution issue
• In 5-7 years time major generation challenges
  will be overcome and distribution will be exposed
  if nothing happens now
• The envisaged economic growth will require to be
  supported by both additional generation capacity
  and a well oiled distribution business

The restructuring of the electricity distribution
industry remains relevant and imminent and
should, therefore, be accelerated to avoid
undesired future challenges
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Cabinet Decision 25 October 2006

• Having considered technical submissions on
• The financial viability of the different RED
  models
• The institutional and governance arrangements for
  the REDs and
• How the various models respond to the
  restructuring policy objectives.
• The Cabinet approved the following
• That 6 wall to wall REDs be implemented
• That the REDs be established as public entities
  and be regulated according to the PFMA and the
  Electricity Regulation Act
• That Eskom becomes a shareholder in the
  respective REDs for a transitional period and
  that they reduce their shareholding over time
• That DME, through EDI Holdings, will oversee and
  control the establishment of REDs
• That a roadmap will 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 capital investment requirements for the REDs
• That EDI Restructuring legislation will be
  introduced and
• That a National electricity pricing system will
  be developed.

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6 Wall-to-Wall REDs Boundary Map
Tshwane Metro (Pretoria)
RED 6
Johannesburg Metro
Provincial Boundaries
Ekurhuleni Metro
RED 4
RED 2
RED 5
RED 1
eThekwini Metro (Durban)
RED 3
Cape Town
Nelson Mandela Bay Metro (Port Elizabeth)
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• KEY RESTRUCTURING PROGRESS TO DATE

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Key progress to date(1)

• Realigned the regional project governance
  structures to ensure broader participation by all
  municipalities in line with the 6 wall to wall
  Cabinet decision
• Sponsors Committees (6)
• Steering Committees (6)
• Regional Engagement Forums (6)
• Regional Transitional Labour Relations Structures
  (6)
• 121 Municipalities have to-date signed the
  Accession to Cooperative Agreement
• Substantive progress of critical mass
  participants Section 78 and ring-fencing
• Eskom, four Metros and 10 other municipalities
  are ringfenced
• 3 Metros and 6 other municipalities have
  completed MSA S78
• Eskom 726 programme
• Have started developing a systems approach for
  the industry
• Transfer Agreement and Placement Migration
  Agreements have been adopted by the TLRS
• R1,2 billion allocated for 3 years through the
  MYPD and is being disbursed to ensure readiness

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Key progress to date(2)

• The project to quantify various policy options
  relating to asset evaluation, compensation, and
  impact analysis is progressing well
• The output of this project will help to finalise
  the outstanding RED Establishment Bill and
  related Regulations
• Substantive inputs provided on various
  policies/legislations
• RED Establishment Bill
• Draft Asset Transfer Framework (limited
  consultation stages)
• CRC process
• Policy process on the system of Provincial
  Local government
• The past five years of EDI Holdings as the
  leader of the EDI restructuring process confirms
  the critical importance for an enabling
  legislative , regulatory and policy environment
  to deliver a consolidated EDI
• A Strategic Implementation Plan (SIP) focusing on
  national goals The Deal and Transition Path has
  been developed

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Strategic Implementation Plan - Overview
Key Question
Answer
Content
What is our Destination?

• National Goals
• Definition of National Goals
• Formulation of EDI Scorecard through translating
  National Goals into metrics and targets
• EDI end-state architecture
• RED design and positioning in industry value
  chain
• Oversight role during transition and end-state

EDI Restructuring
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• National Goals for EDI
• End-state of six wall-to-wall REDs

How will we get there?

• High-level description of a staged Transition
  Path
• Key decision points to be considered en route to
  end-state

Transition Path
2

• Assuming voluntary restructuring mode
• Mitigation of risk and uncertainties by staging
  approach

Conditions for Success?

• Preliminary list of 23 Issues of The Deal
• Point of view on how to develop The Deal, based
  on analyses across the 23 Issues
• Codification tools and sequence of codification
  to implementing The Deal

The Deal
3

• Agreement from asset owners and National
  Government on preliminary list of 23 Issues
• Legislative framework and codification to cement
  agreements

Slide 17
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The Deal Framework
The Deal
Compen-sation/ Conditions
EDI assets
Guiding principles are still to be developed and
agreed with stakeholders
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• GETTING IT RIGHT
• Policy Regulatory Considerations

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Policy Environment What would help fast-track
restructuring?

• RED Establishment Bill
• DME has made significant advances in the drafting
  of the RED Establishment Bill.
• The Deal
• The project to quantify various policy options
  relating to asset evaluation, compensation, and
  impact analysis is progressing well
• Asset Transfer Framework for Municipalities
• National Treasury issued an Asset Transfer
   framework exemption from s.14 of the MFMA in
  April 2007
• NT has already prepared draft regulations for
  Asset Transfer in terms of s.14 of the MFMA
• The Municipal Fiscal Power Functions Act
• The Municipal Fiscal Powers and Functions Act,
  2007 (Act No 12 0f 2007) was passed in September
  2007 and will, amongst others, legislate the
  municipal surcharge
• Supporting regulations need to be accelerated
• Industry Regulation
• Voluntary mode of restructuring

Finality of these policy/legal instruments will
go a long way in accelerating RED creation
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RED Establishment Bill Regulation (1)

• Provide legislative guidance and parameters for
  
• The establishment of REDs
• The transfer by Eskom of its electricity
  distribution business into REDs
• The transfer by municipalities of their
  electricity distribution businesses into REDs
• Legislation should contain provisions, inter
  alia, to
• Regulate the transfers of employees to the REDs
• Streamline existing legislation governing the EDI
• Provide for the conditions under which a RED may
  be wound up
• Regulate RED reporting and oversight requirements
• Strengthen s. 93C of the Local Government
  Municipal Systems Act, 2000 (Act no. 32 of 2000)
  co-operation procedures between municipalities

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RED Establishment Bill Regulation (2)

• Spell out enabling provisions regulating
• Ring-fencing of municipal and Eskom distribution
  businesses
• Resolution of disputes between municipalities,
  REDs and Eskom
• Treatment of transfers affecting the Registrar of
  Deeds
• Exemption from transfer duties / vesting
  provisions for property transfer
• Dealing with way-leaves, servitudes, rights of
  access etc.
• Safeguard unforeseen exits from REDs
• Would provide National Government with tools to
  achieve EDI reform objectives
• Exemptions from, or amendments to, provisions in
  the Systems Act and the MFMA, as obtained
• e.g. to facilitate budget approval processes, or
  s.78 processes

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The Current Industry Regulatory Landscape

• The relative roles of NERSA (Electricity
  Regulation Act, as amended) and municipalities
  (Constitution, Systems Act) in regulating the EDI
  are unclear and currently appear to conflict.
• According to the Electricity Regulation Amendment
  Act, 2007
• The electricity supply and supply system
  supplying non-reticulation customers would be
  regulated directly by NERSA
• On the other hand, the electricity system to
  reticulation customers will be regulated by
  municipalities in terms of norms and standards
  prescribed by the Minister of Minerals and Energy
• REDs will have to comply with the Electricity
  Regulation Act and municipal legislation
  regarding
• Tariff setting powers
• Tariff harmonisation
• Regulation of quality of supply issues

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Ideal regulatory environment

• Economic regulation
• NERSAs appropriately empowered as a professional
  and independent regulator to regulate the entire
  electricity supply chain by determining tariffs
  using a holistic approach
• Tariff Rationalisation
• A single economic regulator will achieve one of
  the critical objectives of EDI reform - fair and
  equitable electricity tariffs.
• Appropriate Licences and monitoring and
  enforcement of non-compliance
• NERSA appropriately capacitated to monitor and
  enforce non-compliance in particular to technical
  licence conditions , i.e. quality of service and
  supply
• Future role of local government in relation to
  REDs
• Municipalities to still play a role in
  electrification planning and in overseeing the
  provision of free basic electricity services.
  Municipalities should also be free to contract
  with REDs to perform various municipal functions
  such as public lighting, the operation of billing
  systems, cash receipting and so on.

Clarity and streamlined regulatory regime is
necessary to ensure effective regulation of the
industry
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IMPLEMENTATION CHALLENGES
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Implementation Challenges

• Navigating through the complex restructuring
  environment characterized by
• Ambivalent stakeholder support
• The negotiated/voluntary nature of the
  restructuring process makes it difficult to
  assure anticipated objectives and results within
  timeframes
• Lack of enabling legislation
• Resolution of key enablers/outstanding policy
  issues

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• CONCLUSION

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Conclusion

• Never before has the environment for the
  establishment of the REDs looked so substantially
  promising
• The constraints that were protracting the process
  are well on their way to being resolved
• The current electricity challenges calls for an
  integrated and holistic approach to the solution
  from all industry players, business and citizens
  of this country to address the entire value chain
  of the ESI
• EDI Holdings is an active member of the National
  Electricity Response Team, the joint presidential
  work Group and is assisting the provincial and
  local government structures to cascade the
  process to the other spheres of government
• The refurbishment and maintenance of the
  electricity distribution assets can no longer be
  postponed
• In line with the Asgisa request, EDI Holdings is
  coordinating an EDI infrastructure investment
  project
• We believe that a summit like this one will go a
  long way in creating awareness about the state of
  the EDI but most importantly will help create a
  platform for stakeholders to craft workable
  corrective solutions to avoid unintended future
  challenges.

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THANK YOU
www.ediholdings.co.za