Eskom

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Eskoms Submission on possible solutions to
Electricity Distribution Industry (EDI) challenges

• Presentation to the Portfolio Committee on Energy
• Ayanda Noah Group Executive Distribution
• 25 July 2012

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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Where to start?
• Discussions

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Electricity Value Chain Gx,Tx,Dx

• Eskom has three wires businesses
• Generation
• Transmission
• Distribution
• Eskom is licensed and regulated by NERSA

Medium to Long Term solutions required
Regulated, ring-fenced and licensed business
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The Electricity Supply Chain
POWER STATIONS
Industry, Mining Large Metros
Eskom electricity sales by customer for the
half-year ended 30 September 2011 (30 September
2010)
Commercial/Small industry/ Farming/Small Munics
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Customer services

• Total electricity sales of 114 043GWh and more
  than 4.7 million customers (including
  transmission customers) as at 30 September 2011
• Directly provides electricity to 45 of all end
  users in South Africa
• Two main types of customers
• Redistributors Mainly municipalities that sell
  electricity to end customers.
• Direct customers Industrial, commercial, mining,
  agricultural and residential consumers
• Key Sales and Customer Service unit deals with
  customers using 100GWh of energy per year
• At 30 September 2011, KSACS had approximately 143
  customers accounting for 38.6 of total revenues
• One customer has a supply contract indexed to
  commodity prices
• A member of Southern African Power Pool (SAPP)

Key figures for the half-year to 30 September 2011
Sales Split Total 114 043GWh (113 072GWh)(1)
Gross Electricity Revenue Split Total R63 096m
(R50 392m)(1)
Number of customers Total 4.7 million (4.6
million)(1)
(1) Numbers in brackets refer to the half-year to
30 September 2010
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Electricity cost composition per unit
Electricity cost composition per
unit Generation c/kWh

Transmission (at high voltages) Contribution
for asset use and technical losses

Mining, Metros and large industry
High voltage
Distribution (at high to lower
voltages) Contribution for asset use and
technical losses

Medium voltage
Administration and billing (service) By type of
service received
Industry, commercial and farming
Low voltage
NERSA approved costs and returns recovered from
tariffs
Residential
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Introduction and Background

• Eskom took significant strides in preparing the
  Distribution business for its intended role in
  the previous EDI restructuring dispensation that
  was subsequently terminated by Government.
• Eskom is committed to playing an active role in
  resolving industry issues
• Eskom recently signed an MOU with CoGTA in terms
  of the Adopt an Municipality initiative and is
  committed towards making a significant
  contribution towards this.
• Our Distribution Division mandate underscores our
  commitment based on the awareness that we need
  to contribute towards resolving industry issues
  even outside of any formal EDI restructuring
  processes

Distributions role is to service the customer,
provide reliable electricity by building,
operating and maintaining distribution assets,
while also acting in the national interest by
actively partnering with the wider industry in
resolving distribution industry issues and
enhancing stakeholder relations
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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Where to start?
• Discussions

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Distribution Division profile
Scope and mandate
To service the customer through provision of
reliable electricity by building, operating and
maintaining distribution assets, while also
acting in the national interest by actively
partnering with the wider industry in resolving
distribution industry issues and enhancing
stakeholder relations
Organisation structure
Asset base

• 4.7 million customers nationally
• Nine provinces made up of
• Zones with Customer Network
• Centres

311 831 km reticulation lines 47 509 km
distribution lines 11 415 km of underground
cables 14 164 employees
Highlights and output
Key challenges and priorities

• Improvement of the system average interruption
  duration index Improved level of energy losses
  due to increased interventions in the management
  thereof
• Electrified a total of 4 206 181 homes (2011 4
  050 968 ) since the inception of the
  electrification programme in 1991

• Step change in safety performance
• Step change in technical performance
• Reduce energy theft
• Active partnering with the Distribution industry
  in resolving industry issues
• Electrification

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Eskom Distributions role currently needs to
balance two imperatives
Contemplating on the contribution we need to make
in the interest of the wider industry
Maintain and refurbish our own infrastructure

• Maintain own asset base of
• 47 509 km of distribution lines
• 311 831 km of Reticulation Lines
• 11 415 km of underground cables

• Deteriorating state of assets in the wider
  industry
• Significant industry backlog maintenance
  estimated at R 27 bn
• Industry Skills and Capacity constraints
• EDI Restructuring shelved

This is ultimately about how to address the
industry infrastructure issues in an holistic
manner across the wider industry
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Refurbishing our own infrastructure

• The total Electricity Distribution Industry
  estimated maintenance backlog is R27 bn
• Our capital plan is addressing the refurbishment
  backlog
• We plan to spend about R68 bn on CAPEX in the
  next 6 years
• Of this, about R14,5 bn will be dedicated to
  refurbishment
• Spending on refurbishment aims to eliminate the
  backlog over a 10-year period
• We are adapting our refurbishment strategies and
  seeking ways to deal with our constrained
  capacity to execute the strategy

• The bulk of the DX asset creation occurred in the
  last 20 years.
• Based on an asset replacement value of
  approximately R130bn and a 30 year cycle,
  Distribution is under-spending on refurbishment
• Refurbishment should cater for the replacement of
  existing plant as it reaches end of life.

Our asset base has grown significantly over the
last 20 years
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Maintaining our own infrastructure

• Eskom Distributions assets are generally in a
  good condition but there are pockets where
  plant condition and performance is a concern.
• Distributions maintenance expenditure has been
  increased significantly during the last 4 years
  to increase our Preventative Maintenance
  (PM)/Corrective Maintenance (CM) ratio.
• Maintenance expenditure will continue to increase
  in nominal terms in the Eskom Business Plan
• All equipment is maintained in accordance with
  Eskom Distributions Maintenance Policy and
  Standards and compliance to the maintenance plan
  is currently 95.

Maintenance Expenditure in our MYPD3 Plan (Rm) Maintenance Expenditure in our MYPD3 Plan (Rm) Maintenance Expenditure in our MYPD3 Plan (Rm) Maintenance Expenditure in our MYPD3 Plan (Rm) Maintenance Expenditure in our MYPD3 Plan (Rm) Maintenance Expenditure in our MYPD3 Plan (Rm)
2011/12 2012/13 2013/14 2014/15 2015/16 2016/7
3 938 4 556 5 612 6 797 7 931 8 733
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The main cost drivers for maintaining and
upgrading our own infrastructure

• Change in Low Voltage Maintenance Philosophy
• Implementation of Planned Maintenance Strategy
  for low voltage networks
• Increased Maintenance on ageing Plant and Network
  Infrastructure in Electrification Areas
• Increase in Electrification Infrastructure in
  Rural and Deep Rural Areas
• Increase in Electrification Customers
• Establishment of additional Customer Network
  Centres (CNCs) to meet Regulatory Standards for
  service delivery
• Refurbishment back logs
• Network Reliability Improvement

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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Discussions

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The industry issues remain......
Although the EDI restructuring process has been
formally suspended, the issues that this process
sought to address are still there
We believe that a collaborative and all inclusive
approach should be employed that will address
these contentious EDI issues. Industry system
thinking should be applied.
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The electricity industry in South Africa is
confronted by major challenges ...
Key Industry Issues
Network maintenance and refurbishment

• Lack of optimal systems capabilities to operate,
  maintain the network and service customers
• Shortage of facilities to service the customer
  and the network infrastructure.
• Some electricity departments operate on a low
  level of maintenance maturity in terms of their
  practices.

Disparate Tariffs Customer Services
inconsistency

• Municipalities offer a base set of electricity
  delivery services, but gaps exist leading to
  inequitable customer experience across segments.
• Disparate municipal electricity surcharges lead
  to tariff discrepancies across and within the
  municipalities.

Skills Availability and Retention

• High levels of staff attrition within the
  industry due to lack of attractive career paths.
• Low levels of investment in the critical
  technical financial skills training .
• Lack of standardisation on staff compensation
  arrangements and stabilisation of labour-related
  issues.

Security and quality of supply

• Increasing electricity demand places pressure on
  supply.
• Reactive maintenance increases distribution
  losses- technical and non-technical.
• Ageing infrastructure, increasing intensity of
  maintenance and associated costs

Industry issues hamper our ability to maintain
and upgrade our own infrastructure as the wider
industry issues eventually translate into major
risks for Eskom and the country in general
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The different government institutions are in
agreement that we have serious industry issues
SALGA
COGTA

• Under-investment in people, particularly
  technical, management and leadership.
• No short cuts to get specialist skills other than
  via education and work experience.
• More creative responses needed to address scarce
  skills, such as partnering with private sector
  and shared services options.
• Not enough attention paid to skills required by
  politicians.
• Political influence - politically acceptable
  appointments at expense of competence
• Poor work environment not conducive to attracting
  and retaining talent.
• Lack of defined and enforced minimum competencies
  for certain posts.
• Outdated, non-functional and unapproved municipal
  organisation structures
• 2005 more than 1/3 of local municipalities.
  without single civil engineer, technologist or
  technician vacancies in local government for
  engineering practitioners exceeded 1000.
• South Africa has only half as many engineers as
  doctors. Australia, America, Western. Europe,
  China or India - similar number of engineers to
  doctors.
• Lack of engineering professionals directly
  impacts on state of municipal infrastructure.

• Local Government is in distress comprehensive
  turnaround is needed.
• Huge service delivery and backlog challenges -
  many municipalities unable to deliver basic
  services or grow their economies.
• There are serious leadership and governance
  challenges in municipalities including weak
  responsiveness and accountability to communities.
• Problems with the political/administrative
  interface.
• Corruption and fraud impacting on service
  delivery.
• Poor financial management, illustrated by
  negative audit opinions.
• Insufficient municipal capacity due to lack of
  scarce skills, high vacancy rates, and lack of
  performance management, training career paths
  (dysfunctional HR function).
• There is inadequate human resource capital to
  ensure professional. administrations or positive
  relations between labour, management and Councils.

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The case for change is compelling......

• The unacceptable state of the wider industry is
  not debateable.
• The industry is in need of a transformational
  type overhaul. Incremental fire fighting fixes
  will not address the underlying issues.
• We need to consider a practical and workable
  model, that demonstrates learning from past
  mistakes and avoids repeats thereof.
• Applying system thinking, we understand that the
  industry issues are all interrelated and in the
  end they become your issues, regardless of which
  side of the fence you reside
• A well functioning distribution industry is in
  the national interest.

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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Where to start?
• Discussions

20
Some of the key issues that were unresolved when
EDIR was stopped

• Asset valuation and compensation framework
• Framework for tariffs and subsidies
• Tax exemptions
• Entities credit ratings post move of assets
• Section 197 for industry employees to be
  transferred to the REDs

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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Where to start?
• Discussions

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We need to consider new approaches in dealing
with the issues.

• An approach that focusses more on resolving
  industry issues than on the institutional form
  of the industry
• An approach that will foster a shared commitment
  towards resolving industry issues.
• An approach that effectively utilises the
  strengths and capabilities within the industry to
  assist those players that lack these strengths
  and capabilities
• An approach for the industry that effectively
  heals from within
• An approach that allows for some consolidation
  within the industry where this make sense
• An approach where own interests are suspended and
  the national interest dominates

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An alternative journey to the end state for the
industry should be explored......
Effective Distribution Industry Strategic
Alliances and Partnerships throughout South
Africa are providing accessible and sustainable
electricity services
Active Partnering
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Active Industry Partnering is a pragmatic
approach to achieve these aims

• Active Partnering, in our context, can for now,
  best be described as a model for joint service
  delivery in the EDI with EDI players working in
  partnership towards this aim

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The Main Premise for the Active Partnering
Approach

• It is important to understand that the
  Distribution Industry is essentially a closed
  system with 2 key players, Local Government
  (municipalities) and Eskom.
• The collective capacity to resolve the bulk of
  the industry issues is largely contained within
  these 2 key industry players
• There is currently no appetite for large scale
  restructuring nor a belief that this is
  necessary. We need an alternative solution that
  will still achieve the same objectives
• The original EDI Restructuring strategy was to
  merge the distribution industry capacity into 6
  viable independent REDs
• Active partnering aims to utilise the existing
  industry capacity to the benefit of the wider
  industry. Essentially an approach of healing
  from within, and helping entities to help
  themselves.
• Does not exclude some consolidation taking place
  in the industry

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Active Partnering will in essence be different
from the initial EDI restructuring model

• Transfer of assets will be a last resort measure
  only. Whereas in EDI restructuring, the assets
  were ultimately going to be transferred to a
  different entity, namely the particular regional
  electricity distributor
• The mere act of creating REDs would not have
  solved the underlying problems. Each RED would
  have needed to pool and leverage the underlying
  capacity it inherited to the benefit of the
  wider RED. This is essentially what active
  partnering would seek to achieve
• Active partnering is not a one fit for all
  solution, but rather a focussed solution for
  individual local challenges
• Active partnering can be a shorter term
  intervention solution but could also be a key
  component of a future industry model.
• Active partnering is more of an non threatening
  enabling mechanism as opposed to a forced
  traumatic intervention to address service
  delivery issues

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From an Industry Perspective we need to work
towards a common vision and then consider
creating enabling mutually beneficial
partnerships towards building a sustainable
industry going forward
Common Industry Vision
Provide accessible and sustainable electricity
services to South Africa
Active Industry Partnership
ESKOM
NERSA
Research Institutions
COGTA
Municipalities
DPE
AMEU
DOE
SALGA
Large Energy Users
Existing industry capacity
Build on existing industry relationships
External Capacity
Voluntary contribution to a repository of best
practices for efficient electricity consumption
and management
2021/05/11
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We envisage an arrangement where Active
Partnering does not place undue pressure on
existing business operations and commercial
relations...
Adaptable Should accommodate partners and
situational idiosyncrasies
Common Vision There should be a shared vision
that addresses the specific needs of all
partners.
Framework for Active Partnership
Flexible Should be accommodating within existing
capacity with minimal impact on continuing
operations
Scalable Can be replicated at multiple locations
Repeatable Should be adoptable for similar
interventions with minimal customisation
required.
Value Add Should seek a long term relationship
and a willingness to commit time, effort and
resources.
2021/05/11
29
...nor place undue pressure on available
financial resources. Some conceptual thinking.

• Active Partnering support should be cost neutral
  to the service provider
• Active Partnering reimbursement from within the
  industry should be on a cost recovery basis only,
  not driven by profit
• Some of the municipal industry investment backlog
  will have to be funded by government
• Active partnering beween industry players should
  be a commercial arrangement between the provider
  and the receiver on a cost recovery basis. (not
  profit driven)
• Operational type active partnering support should
  ideally be reimbursed from existing entity
  operational budgets

2021/05/11
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Potential Active Partnering Offerings examples
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Contents

• Introduction and Background
• Looking after our own assets
• Industry Challenges
• Key Lessons Learnt from the previous EDI process
• An Alternative Approach is required
• Where to start?
• Discussions

32
The partnership should be inclusive and should be
driven by a body which will not suffer
credibility issues, i.e. will not be seen as
driving its vested interest
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Create an inclusive Virtual Industry Strategy
Office

• Strategic capability needs to be mobilised to
  map out the desired state for the Industry
• This capacity can be created through an active
  partnering arrangement with existing industry
  strategic capability, and strengthened with
  external input where necessary
• This capability effectively needs to play three
  roles

Define the overall Industry Strategy ,
Management Framework, and governance
conventions
Architect
A
Define, develop and oversee the execution of
industry processes required to manage the
industry strategy.
Align industry players and other stakeholders
B
C
Process Owner
Aligner
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From a longer term strategy development point of
view, these following questions need to be
answered
Effective Distribution Industry Strategic
Alliances and Partnerships throughout South
Africa are providing accessible and sustainable
electricity services

• Human Capital
• Information Capital
• Organisational Capital

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The Hierarchy of Active Partnering
Level Description
Strategic Active partnering between the existing industry strategic capacity, complemented by external expertise as necessary
Tactical Active partnering to assist distributors to plan and execute tactical plans to support the national longer term strategy. This can also come from the adopt a municipality initiative. This could also include partnering around national shared services
Operational The bulk of the active partnering support will likely be operational of nature. This area is likely to be the main space in which the business Adopt a Municipality initiative will play
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Ambitious? Maybe.. but a good strategy begins
with a BHAG
Big Hairy Audacious Goal
The South Africas Electricity Industry
Strategic Partnership, has managed to restore
service delivery, reduce manufacturing costs by
10 resulting in 20 increase in direct
investment and 8 reduction in unemployment
November 2017
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In our stakeholder engagements we have become
aware of thinking along similar lines
The Business-Adopt-A Municipality is an
initiative by DCoG that seeks to foster a closer
working relationship between Government, SOEs and
the private sector towards supporting vulnerable
municipalities. The initiative allows private
sector companies and State Owned Entities to
identify municipalities that they wish to
support. On the 6th of June 2012, this MoU was
signed

• Key Strategic Conversation items raised by SALGA
  in a previous engagement
• Do we really need restructuring to resolve
  industry issues?
• How do we ensure that Electricity budgets in
  local government are fully cost reflective?
• Sustainability of the current applied tariffs at
  different municipalities?
• The responsibility for governance in all areas,
  including the Eskom supply areas?
• How do we deal with the backlog, and the
  strengthening of the infrastructure?
• How do we deliver on UA?
• Requested Eskom to explore models on how we can
  co-operate going forward.

Similar discussions took place with EDI Holdings
just before they wound down
2021/05/11
38

• Thank You and
• Discussion