Portfolio Committee on Minerals

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Portfolio Committee on Minerals Energy
City of Cape Town Perspective - Progress with
RED1 Way forward for REDs
Presented by Councillors Ian Neilson Lionel
Roelf Date Wednesday, 28 February 2007
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Background

• The necessary legislative procedures for
  appointing an external service provider to
  provide a municipal service were completed.
• Council mandate on 31 May 2005 that the City
  of Cape Town acquires ownership of the Municipal
  Entity, RED ONE (Pty) Ltd.
• RED1 was formally established on 1 July 2005,
  City holds the only shares, the City currently
  holds 5 shares.
• RED1 is a municipal entity operating as the
  service provider to the whole municipal
  jurisdictional area previously served by the City
  of Cape Town electricity undertaking and Eskom.
• The City of Cape Town is the parent entity,
  exercising the Service Authority role, as
  outlined in section 82 of the Municipal Systems
  Act.
• The relationship with RED1 is formalised in a
  Service Delivery Agreement, as required by
  Section 82 of the Municipal Systems Act.

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Functional Arrangements of RED1

• RED1 entered into Operating and Transitional
  Plans for Transfer Agreements (OTPTA) with the
  Cape Town Electricity Undertaking and Eskom
  Western region to service the full Cape Town
  jurisdictional area
• RED1 obtained an electricity distribution licence
  from the NER to service the City jurisdictional
  area to 31 December 2006.
• RED1 obtained all funding from the City.
• This funding was in the form of a management fee
  for the oversight of the electricity distribution
  taking place within the full jurisdictional area
  of the City of Cape Town,
• The funding agreement was contained in an
  addendum to the OTPTA, which came to an end at
  31 December 2006.
• City was/is the agent of RED1 in handling the
  daily operational financial affairs.

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Mandate up to Cabinet Decision

• On 28 August 2006, at a joint meeting of the
  Mayor, Mayoral Committee Members, City, RED1 and
  EDI Holdings Official, Madam Mayor outlined the
  Citys requirements for the establishment of
  RED1. These were as follows
• The establishment of a Metropolitan Electricity
  Distributor (MED) is supported - Cabinet
  pronouncement on the 6 1 proposal needs to be
  finalised
• The MED must be a municipal entity wholly owned
  by the City
• There must be a proper orderly process with all
  assets and staff transferred concurrently
• This transfer will be done within the
  requirements of a nationally approved Asset
  Transfer Framework
• An Asset Transfer Agreement and Staff Transfer
  Agreement (Union agreement) must govern the
  transfer
• This transfer must happen completely in concert
  with the transfer from Eskom
• There must be the necessary consultation with the
  staff members (S81 (2) (c) of the Municipal
  Systems Act.

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Cabinet Decision 25 October 2006

• Cabinet approved the proposal to create
• six Regional Electricity Distributors (REDs)
• which will be established as public entities
• under the auspices of the Electricity
  Distribution Industry (EDI) Holdings (Ltd).
• These entities will be accountable to the
  Ministry of Minerals and Energy.
• The next steps will include the drafting of
  legislation and
• business plan for the establishment of the REDs.

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Council Resolution of 7 December 2006

• Contractual arrangements with RED1 will terminate
  on 31 December 2006 if the conditions precedent
  are not met
• Seek Senior Counsel advice on the impact of the
  Cabinet decision on the Constitutional obligation
  of the City to provide electricity, and the legal
  obligations of the shareholder to RED1
• Approach NERSA regarding the transfer of the
  distribution and supply licence
• Communicate with all Electricity Department staff
  informing them that the provisions of the
  Operating and Transitional plan for Transfer
  Agreement and any related dual reporting lines
  cease and revert to single City reporting lines
  from 1 January 2007
• Negotiate the lease to accommodate some of the
  Electricity Department staff members
• Pending legal advice, facilitate any transfer to
  EDI Holdings that may be required
• The Executive Mayor be mandated to call a general
  meeting of RED 1, which will include a Special
  Company meeting, in terms of the Company Act, and
  a special board meeting of the RED 1 Board, where
  the Executive Mayor, or her delegee, may convey
  and instruct the board on the way forward as
  determined by the shareholder
• The Council remains open to negotiation with
  National Government over the restructuring of the
  electricity industry.

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Electricity Licence

• The City applied to NERSA to take back the
  Electricity Distribution and Supply Licence as
  from 1 January 2007.
• The basis of the Citys application was as
  follows
• The City is the service authority for Electricity
  Reticulation and thus the City determines which
  service provider will provide the service on
  behalf of the City.
• Although every effort has been made to
  effectively get RED1 up and running as a service
  provider to the City, it appears that national
  policy and legislation is lagging and, until
  further clarity is obtained, the City needs to
  retain full control of the electricity service,
  particularly as the roles and responsibilities of
  the REDs have not been clarified
• The City cannot afford negative publicity for no
  apparent reason when electricity has always been
  handled efficiently and effectively in an
  economically sustainable manner with competence
  by the City
• The substratum agreements come to an end as at 31
  December 2006 and in the circumstances there will
  be no legal framework within which RED1 can
  fulfill the Service Provider role required to
  adhere to the electricity supply and distribution
  licence conditions
• The City retains the Constitutional obligation to
  provide electricity and must take responsibility
  for electricity reticulation so as to ensure
  uninterrupted delivery of the service in the best
  interest of the local community. The Regulator
  has the responsibility to ensure that the City is
  appropriately licenced for the discharge of its
  constitutional obligations.

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Way Forward with RED1

• The City as sole shareholder in RED1, requested a
  Special General Meeting to consider the statement
  of the affairs of RED1 by the directors
• The City, as sole shareholder, had to evaluate
  the proposals put on the table by RED1 and the
  funding available after the verification review
  in order to determine the ultimate way forward.
• The favoured route by the Board was that the City
  negotiate the transfer of RED1 shares held by the
  City to EDI Holdings on terms and conditions to
  be agreed.
• EDI Holdings would only take over RED1 if the
  City undertook to fund the RED1 liabilities and
  its employees salaries
• The City is mindful that it is the custodian of
  public funds and must comply with the MFMA in its
  shareholder relationship with RED1.
• At a Mayoral Committee Meeting on Friday 23
  February 2007, it was determined, in principle,
  the only option available to the City, as
  shareholder, at this time was to voluntarily wind
  up RED1 at the request of the shareholder as
  effectively RED1 has ceased to carry on business.
  

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Way Forward for Electricity Restructuring (1)

• The City maintained its stance that a public
  entity is not a viable means for the provision of
  a municipal service now supported by the Senior
  Counsel opinion received by the City
• The Cabinets proposed restructuring of the
  electricity distribution industry as outlined in
  the Cabinet press statement of 26 October 2006
  would be subversive of the powers and functions
  reserved to municipalities in terms of the
  Constitution.
• A national public entity, unlike a municipal
  entity, is not amenable to the executive
  authority and administrative control of a
  municipality.
• The implementation of the policy would be in
  breach of obligations imposed on national
  government in terms of S 151 (4) of the
  Constitution.

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Way Forward for Electricity Restructuring (2)
Constitutional Legislative Obligation on Local
Government

• A municipality has executive authority in respect
  of, and has the right to administer-
• The local government matters listed in Part B of
  Schedule 4 and Part B of Schedule 51
• Schedule 4, Part B refers to Electricity and Gas
  Reticulation
• What is meant by Electricity Gas
  Reticulation?
• The Constitution does not explain, but the
  Structures Act does
• A municipality has the powers and functions
  assigned to it in terms of the
  Constitution2
• When split between a district and a local
  municipality, the district has the following
  functions and powers Bulk Supply of
  electricity, which includes for the purposes of
  such supply, the transmission, distribution and,
  where applicable, the generation of
  electricity.3
• 1 Section 156 (1) (a) of the Constitution of
  the Republic of South Africa, Act 108 of 1996
• 2 Section 83 (1) of the Municipal Structures
  Act, Act 117 of 1998
• 3 Section 84 (1) (c) of the Municipal
  Structures Act, Act 117 of 1998

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Way Forward for Electricity Restructuring (3)
Service Authority Obligation on Local Government

• The responsibilities of the Service Authority are
  outlined as follows
• regulating the provision of the service in terms
  of agreed performance indicators and an approved
  performance management system
• management of the contract for the delivery of
  the service (Service Delivery Agreement)
• performing its functions and exercising its
  powers in terms of Ch 5 of the Municipal Systems
  Act (chapter dealing with IDP)
• controlling the setting and adjustment of tariffs
  within a tariff policy determined by the
  municipal council
• exercise service authority (executive authority,
  per the Constitution) so as to ensure
  uninterrupted delivery of the service in the best
  interest of the local community.1
• 1 Section 81 (1) (a) (e) of the Municipal
  Systems Act, Act 32 of 2000

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Conclusion

• The City of Cape Town has been a dedicated
  supporter of the electricity restructuring
  process
• and The City remains a dedicated supporter!
• The City will continue to give input into
  legislative procedures supporting regulations.
• Dont lose sight of foundation of electricity
  restructuring

Better service delivery to a wider range of
clients/customers in the most effective,
economical and efficient manner possible
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• Let us work togetherfor a better city

EnkosiThank youDankie