RED1 CHALLENGES

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RED1 CHALLENGES LEGISLATIVE REQUIREMENTSPARLIA
MENTARY PORTFOLIO COMMITTEE ON MINERALS AND
ENERGY SUBMISSION BY ESKOM FEBRUARY 2007
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Contents

1. Background
2. Working with RED1 in terms of an interim
   Operating Agreement
3. Lessons Learnt
4. Conclusion

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1. Background

• Eskom ring-fenced its six regions in preparation
  for six wall-to-wall public entity REDs as early
  as 2004, in line with the Energy White Paper and
  the PWC Blueprint on EDI Restructuring
• RED1 was selected as the first Regional
  Electricity Distributor to be created by July
  2005
• In May 2005 a decision was taken that REDs will
  be municipal entities and this raised some
  concerns
• Eskom credit rating, resulting industry cost
  implications and impact on the Eskom capital
  expansion program
• Governance processes associated with municipal
  entity legislation
• Notwithstanding these constraints, Eskom entered
  into an interim Operating Agreement with RED1

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1. Background (continued)

• Eskom listed its concerns and suggested ways to
  resolve them as part of transfer conditions
  (suspensive conditions) in the Operating
  Agreement
• In support of immediate progress, the Operating
  Agreement allowed for an earlier transfer of
  domestic customers
• This provided sufficient time to resolve the
  suspensive conditions
• In September 2005 Cabinet requested EDI Holdings
  to investigate a model of six Metro REDs and a
  National RED
• Eskom actively participated in this process
• In October 2006 Cabinet decided on a model of six
  wall-to-wall public entity REDs
• This resolved the suspensive conditions related
  to municipal entity governance

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2. Working with RED1 in terms of an interim
Operating Agreement
The Eskom / RED1 Operating Agreement consists of
the following components

• Eskom and RED1 obligations in terms of the
  service provided
• Transition Plan
• A guiding plan indicating phases, key
  activities and dependencies for transfer
• Statutory Exemptions and other Conditions
  (Suspensive Conditions)
• Business conditions for transfer e.g. asset
  valuation, compensation, staff related matters,
  customer and contract transfers, loan covenant
  compliance etc.
• Requirements for legislative exemptions in terms
  of the Municipal Finance Management Act (MFMA)
  and Municipal Systems Act (MSA)
• Other legislative, regulatory and statutory
  requirements e.g. regulatory compliance, PFMA
  approval, taxation relief, etc.

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2a. Operating Agreement - Some Key Obligations
and other areas of cooperation

• Eskom met the obligations in terms of the
  services provided to RED1
• Business performance within regulatory provisions
  and industry norms and standards
• Cooperation during the annual tariff increase
  process to ensure movement towards harmonized
  tariff structures
• Electrification and Free Basic Electricity
  delivery
• Minimised customer impact during restructuring
• In addition, the parties cooperated through
• Joint load shedding during times of energy
  shortages
• Making available Eskoms network operating
  (SCADA) system to City of Cape Town
• Training of City of Cape Town network operating
  staff
• Joint work groups in preparation for business
  transfer

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2b. Operating Agreement Transition Plan
In acknowledgement of their commitment to the
eventual transfer of the Eskom supply undertaking
once the suspensive conditions were resolved,
Eskom and RED1 agreed to be guided by a
transitional plan.
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2c. Operating Agreement Suspensive Conditions

• Progress
• Negotiations on staff transfer principles in
  process
• Preparation for transfer of customer and supplier
  contracts done
• Electricity supply and service contract with REDs
  defined
• Eskom loan covenants analysed
• Transformation funding principles in process of
  being confirmed
• Issues not yet resolved
• Asset Valuation and Compensation framework
• Enabling legislation
• Taxation relief

Public Entity decision MFMA and MSA exemptions
relating to governance concerns not required
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3. Lessons Learnt

1. Enabling Legislation is required to give
   certainty to the restructuring process and to
   move the process beyond a point of no return
2. Voluntary participation in EDI restructuring
   process will create uncertainty in terms of the
   future realisation of business case benefits
3. Asset valuation and compensation framework need
   to be in place
4. Staff related issues to be resolved prior to
   transfer, ensuring organised labour support
5. Realistic timeframes need to take into account
   the complexities and practicalities of the
   transformation process.

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4. Conclusion

• Eskom ring-fencing in preparation for the six
  Public Entity REDs is in an advanced stage
• Key restructuring enablers need to be supported
  by clear policy. These includes amongst others
• Asset Valuation and Compensation Framework
• Municipal Participation
• National Pricing Framework
• Industry end-state definition and roadmap
• Staff Transfer Principles
• Restructuring Funding
• Enabling legislation need to support the process,
  including effective regulatory and taxation
  frameworks
• Eskom will continue to actively support and
  participate in the EDI restructuring process.