Presentation to Parliamentary Portfolio Committee for

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• Presentation to Parliamentary Portfolio Committee
  for
• Energy
• 15 September 2009

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Presentation Outline

• The essence of the Constitution Seventeenth
  Amendment Bill
• Background to and Motivation for the Bill
• Stakeholder engagement on the Bill
• The Regional Electricity Distributor (REDs) model
• High level proposed content on the Draft REDs
  Establishment
• Bill

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THE ESSENCE OF THE BILL
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The essence of the Bill

• The Constitution Seventeenth Amendment Bill of
  2009, was developed as a result of a
• Cabinet decision in April 2008 to amend the
  Constitution of the Republic of South Africa,
• 1996 (the Constitution) to enable EDI
  Restructuring
• Since this decision was taken, an EDI
  Restructuring Inter-Departmental Task Team was
• set up to develop the Bill amending the
  Constitution
• The Constitution Seventeenth Amendment Bill of
  2009 is a collaborative product of this
• Task Team
• While the Bill is broad and general in its
  application to all municipal functions, as
• necessary, it has been triggered as a means to
  facilitate the achievement of regional
  efficiencies and economies of scale within the
  EDI, in particular

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The essence of the Bill

• The Bill seeks to vest national government with
  new powers of intervention at local government
  level when it is necessary to achieve regional
  efficiencies and economies of scale in respect of
  municipal functions
• This is sought to be achieved by the insertion
  of a new subsection (1A)
• in section 156 of the Constitution. The
  proposed new section 156(1A)
• is designed to facilitate not only EDI
  Restructuring, but also the regionalisation of
  other municipal functions, when necessary
• The purpose of the proposed new section 156(1A)
  is to allow national government to further
  regulate the executive authority of local
  government in certain circumstances, for e.g.
  where a municipal
• function can be provided to communities more
  effectively, efficiently
• and sustainably on a regional basis than on a
  local basis
• While the proposed new section 156(1A) is not
  expressly linked to the electricity function, it
  allows for the removal of the current constraints
  
• that prevent national government from effecting
  EDI Restructuring

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BACKGROUND TO AND MOTIVATION FOR THE BILL
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In April 2008, Cabinet took the decision to
amend the Constitution for the following
reasons
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To enable EDI Restructuring

• Background to EDI Restructuring
• In 2001, Cabinet approved a plan to restructure
  the EDI, as contained in the Blueprint Report,
  dated February 2001
• In terms of this plan, the entire EDI is to be
  restructured into six independent REDs by merging
  the distribution businesses of Eskom and local
  government
• The restructuring is meant to address certain
  well recognized problems in the industry i.e.
• (i) the highly fragmented structure of the
  industry
• (ii) the resulting loss of economies of scale
  and specialization within municipal
  components of the industry
• (iii) the ongoing loss of skills within the
  sector
• (iv) ongoing and severe underinvestment in
  distribution networks by municipalities
• (iv) wide disparities in electricity tariffs
  and
• (vi) the uneven spread of electrification
  across the country

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To enable EDI Restructuring

• Cabinet decision of 25 October 2006
• Cabinet approved that six wall-to-wall REDs be
  implemented
• Cabinet approved that REDs be established as
  public entities and that REDs be regulated in
  accordance with the Public Finance Management
  Act, 1999 and the Electricity Regulation Act,
  2006
• Cabinet approved that Eskom becomes a shareholder
  in the respective REDs for a transitional period
  and that Eskom reduce their shareholding over
  time
• Cabinet noted that the DME, through EDI Holdings,
  will oversee the establishment of the REDs
• Cabinet noted that a strategy needs to be
  developed to deal with the capital investment
  requirements of the REDs
• Cabinet noted that a roadmap will be put in place
  to move from the current scenario into the future
  Industry structure
• Cabinet noted that EDI Restructuring legislation
  will be introduced as a legislative instrument
  for the creation of REDs
• Cabinet noted that a national electricity pricing
  system will be developed

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6 Wall-to-Wall RED Boundary Map
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To enable EDI Restructuring

• Progress with EDI Restructuring
• Since the Blueprint was adopted in 2001, attempts
  to restructure the
• EDI within the current constitutional framework
  and therefore on a voluntary basis have proven
  unsuccessful
• In 2006, RED1 was established and subsequently
  liquidated as a result
• of the loose agreements that had to be put in
  place due to the legislated extent of local
  government powers and functions in so far as it
  relates to electricity
• Restructuring the EDI on a voluntary basis means
  that participation of
• local government is ad hoc and therefore
  unpredictable. In addition,
• if local government did participate, there was
  no guarantee that they
• would remain in the REDs
• Restructuring the EDI on a voluntary basis means
  that restructuring
• could drag on indefinitely and inevitably result
  in exorbitant costs

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To enable EDI Restructuring

• What the constitutional amendment will mean for
  EDI Restructuring
• It will give national government sufficient
  powers of intervention at local government level,
  when it is necessary to achieve regional
  efficiencies
• and economies of scale
• It will enable the enactment of mandatory EDI
  Restructuring legislation which will accelerate
  Restructuring, and also reduce the cost of the
  Restructuring since it will no longer be
  necessary to negotiate separate deals with 187
  individual municipalities

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To enable EDI Restructuring

• Give national government appropriate powers
• To effect EDI Restructuring into six wall to wall
  REDs in accordance with
• the Cabinet approved Blueprint
• To regulate the Industry more effectively than
  present by setting or
• approving retail tariffs and ensuring
  appropriate investment in distribution assets
• Leave appropriate powers with local government
• To retain their equitable share allocation
• To retain their power to apply surcharges in
  terms of section 229 of the
• Constitution
• To retain local accountability for service
  delivery
• Empower REDs
• To overcome current Industry fragmentation and
  achieve consolidation
• To achieve integration of various merged
  undertakings
• To undertake regional planning
• To efficiently plan, prepare and implement
  budgets and business plans

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To achieve effective economic regulation for the
sector

• The current regulatory framework governing the
  EDI is open to dispute
• The Electricity Regulation Amendment Act, 2007
  gives NERSA the right to regulate electricity
  reticulation licensees. NERSA has the right to
  impose licence conditions relating to the setting
  and approval of tariffs
• Municipalities also have regulatory powers over
  reticulation, as derived
• from the Constitution and the Local
  Government Municipal Systems Act,
• 2000. In terms of this legislation,
  municipalities have the right and duty to
• set electricity tariffs
• The constitutional amendment and pursuant
  national legislation will
• resolve the prevailing regulatory conflicts by
  extending NERSAs authority
• to the entire electricity industry
• Regulation by NERSA will also address the
  inequity in tariffs, which is essential for
  business and economic development

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To facilitate the restructuring of other
municipal functions

• Since the Constitution Seventeenth Amendment
  Bill is broad and general in its application to
  all municipal functions, it may also be used to
  restructure other municipal functions in the
  future, in order to achieve regional efficiencies
  and economies of scale, for e.g. the water
  services sector

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STAKEHOLDER ENGAGEMENT ON THE BILL
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Stakeholder Engagement

• Since the Cabinet decision, the Department of
  Energy (DOE) working
• closely with EDI Holdings embarked on a robust
  process of stakeholder consultations using the
  forum of the EDI Restructuring
  Inter-Departmental Task Team to draft an
  appropriate Bill amending the Constitution
• This Task Team is made up of officials from the
  Departments of Public Enterprises Co-operative
  Governance and Traditional Affairs Justice and
  Constitutional Development (DOJCD) National
  Treasury the South
• African Local Government Association (SALGA)
  DOE and EDI Holdings
• Numerous meetings with this Task Team have taken
  place since April
• 2008, and the Constitution Seventeenth Amendment
  Bill is a collaborative product of this Task Team
• Since the beginning of 2009, officials from the
  DOJCD DOE and from EDI Holdings have been
  working closely to finalise the technical
  drafting
• aspects to the Bill, prior to publication
  for public comment

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THE REDs MODEL
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The REDs Model

• In line with the Cabinet decision taken in
  October 2006, REDs will
• established as public entities and be regulated
  according to the Public
• Finance Management Act, 1999 and the Electricity
  Regulation Act, 2006
• Eskom and municipalities will transfer their
  electricity distribution assets liabilities and
  employees to the REDs
• Shareholding in the REDs by current asset owners
  will be in proportion to
• the value of the business transferred
• The commercial transaction will be between
  Eskom municipalities and
• the REDs or proxy thereof
• REDs will be new companies jointly owned by
  Eskom national and local government

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The REDs Model

• All asset contributors will be compensated.
  Compensation will be in the
• form of ordinary shares in the REDs, and be
  based on agreed
• compensation formula. Smaller contributors may
  be compensated
• through cash or fixed interest bearing debt
• To ensure revenue neutrality of the current
  asset owners
• Foregone income will be payable to Eskom and will
  be phased out over time
• (10 years) and later replaced with dividend
  payment and,
• Surcharges will be used as a top-up revenue
  charge to recoup forgone
• income for municipalities
• The envisaged transaction has elements of both a
  merger and a
• legislated transfer of assets

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High Level Proposed Content of the Draft REDs
Establishment Bill
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Proposed Content

• The proposed draft REDs Establishment Bill will
  provide inter alia for the following
• The declaration of six electricity distribution
  and trading regions by the Minister of Energy
• The incorporation of a company (a RED) in respect
  of each region, which has as its main object the
  distribution and trading of electricity in its
  region
• The incorporation of each RED as a public entity,
  as contemplated in the Public Finance Management
  Act, 1999
• The transfer of Eskoms distribution undertaking
  and municipalities distribution undertakings to
  REDs

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Proposed Content

• Compensation to the asset contributors to the
  REDs
• Shareholding arrangements for the REDs
• The governance arrangements for the REDs,
  including the composition and appointment of the
  RED boards
• The appointment by municipalities of REDs, as
  service providers for electricity distribution
  and trading functions
• The conclusion of service delivery agreements
  between the relevant REDs and municipalities
  
• The regulation of REDs by NERSA, in terms of
  relevant legislation

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Thank You