Title: THE VIABILITY OF THE ESTABLISHMENT OF THE NATIONAL RED / 7th RED
1THE VIABILITY OF THE ESTABLISHMENT OF THE
NATIONAL RED / 7th RED
- PRESENTATION TO THE PARLIAMENTARY PORTFOLIO
COMMITTEE ON MINERALS AND ENERGY - By
- The NERSA Secretariat
- 23 June 2006
- Smunda Mokoena Chief Executive Officer
2DISCLAIMER
- Due to the short notice the Regulator did not
have the opportunity to consider its response and
as a result, this presentation is that of the
Secretariat only. - The Energy Regulator requests the opportunity to
make its submission to this Committee later, once
it has formulated its position and more
importantly, to extensively comment on the
Seven-RED-Model, as soon as more information is
available. - Due to the unavailability of information
underpinning the National / Seven-RED-Model, this
presentation is a preliminary view of the NERSA
Secretariat - This submission is consistent with previous NER
decisions. - We are aware of the Cabinet decision of 14
September 2005.
3OVERVIEW OF SUBMISSION
- PURPOSE OF PRESENTATION
- CONTEXT OF COMMENTS
- EDI restructuring effort
- Models evaluated
- Basis for modelling
- Maximum number of financially viable REDs
- Modelling criteria
- Financial objectives
- THE SIX RED (BLUEPRINT) MODEL
- THE NATIONAL RED MODEL
- MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- CONCLUSION
- REQUEST TO PPC
4PURPOSE OF SUBMISSION
- To provide comments on the proposed structure of
the distribution industry, particularly the
National RED (RED 7) - To ensure that the objectives for restructuring
are met in reforming the EDI. - To give the PPC an overview of the development
and effort in the restructuring process.
5EDI Restructuring Effort
EDIH 2003 - Present
NELF 1993/4
EWG 1995/6
ERIC 1997/8
EDIRC 1998/01
Farm Inn Consultations 2002/3
NELF led to establishment of the NER. NER to
restructure through licensing
MSF 2005/6
5 Distributors Restructuring Task Force
Cabinet Max. number of Financially viable REDs
Reticulation issue Voluntary participation Revised
Boundaries Non viable entities Inter RED
subsidies
24 consultative workshops Detailed
modeling International consultants Consolidate
into 1 to 17
International Consultants Detailed Modeling EDI
Blueprint 6 REDs Financially Independent Mandatory
participation
NER PARTICIPATION IN GOVERNMENT COMMITTEES
6Structure Models Evaluated
1. Vertically integrated
2. National Distributor
3. Regional Distributors (Recommended)
4. Eskom and some LGs (New Model)
5. Splitting wires and trading
7EWG Recommendations adopted by Cabinet in 1998
- That the industry be consolidated into
- the maximum number of financially healthy
independent regional distributors - to strengthen the weakest distributors,
- facilitate a standardisation of tariffs,
- facilitate the electrification programme and to
- increase the efficiency of the industry
- so it can continue to be an engine for growth and
prosperity. - That the industry
- move to cost-reflective tariffs and
- that transparent taxes be established for
- electrification and
- other municipal services
- to ensure the industry is able to meet its
obligations long-term.
8EDI Restructuring Effort
EDIH 2003 - Present
NELF 1993/4
EWG 1995/6
ERIC 1997/8
EDIRC 1998/01
Farm Inn Consultations 2002/3
NELF led to establishment of the NER. NER to
restructure through licensing
MSF 2005/6
5 Distributors Restructuring Task Force
Cabinet Max. number of Financially viable REDs
Reticulation issue Voluntary participation Revised
Boundaries Non viable entities Inter RED
subsidies
24 consultative workshops Detailed
modeling International consultants Consolidate
into 1 to 17
International Consultants Detailed Modeling EDI
Blueprint 6 REDs Financially Independent Mandatory
participation
NER PARTICIPATION IN GOVERNMENT COMMITTEES
9Maximum number of financially viable REDs
- Any number of REDs can be viable if they charge
their full cost to consumers and the consumers
are able to pay. - The challenge is to find a position where tariffs
reflect cost and are aligned between
distributors. - Within a RED, the cost to supply customer
categories are pooled to have equitable tariffs. - Proposed number of distributors
- EWG process, between 1 to 17
- ERIC process, optimum 5
- EDIRC process, recommended 6
- New proposal
- 6 Metro REDs (Urban) PLUS 1 National RED
(Municipalities and Rural) - National RED not financially independent
- REDs not balanced
- No supporting report
- No evidence of detailed modeling.
10EDI Blueprint Modeling Criteria
- Size loss of economies of scale in creating
businesses that are unmanageably large - Balance between REDs
- Urban / rural customers each must have a
significant urban load centre - Load mix domestic load is a key cost driver and
should be balanced across REDs - Assets employed Broad equivalence in the assets
employed - Load density (MWh per km line) should be
balanced - Load factor balanced within a small range, above
70 LF - Income per household balanced across REDs
- Financial independence
- Avoid long term financial transfers between REDs
- Implementation cost
- Observe network configuration
- Observe facility requirements Control centers
work management centers stores and depots - Observe significant geographical boundaries
physical and political.
11Financial requirements
- Need strong robust REDs
- Fund ongoing operation
- Fund required new capital expenditure
- Service debt
- Earn reasonable return on equity at prices which
reflect efficient supply costs. - Blueprint Recommendations
- Reliance of any one RED on financial transfers
from other, financially stronger REDs should be
avoided, except for the possibility of limited
financial support during the establishment phase. - A system in which some REDs are financially
strong and others weak would be a critical
mistake, and against the long-term interests of
final customers. - Any scheme of inter-RED financial transfers would
quickly come under pressure, and be the cause of
difficulty and tension from the outset. - A desire by the stronger REDs to avoid/minimise
the cash transfer is inevitable, the effect of
which would be to place the weaker RED under
financial strain to the ultimate detriment of
the final customer.
12EDI Restructuring Effort
EDIH 2003 - Present
NELF 1993/4
EWG 1995/6
ERIC 1997/8
EDIRC 1998/01
Farm Inn Consultations 2002/3
NELF led to establishment of the NER. NER to
restructure through licensing
MSF 2005/6
5 Distributors Restructuring Task Force
Cabinet Max. number of Financially viable REDs
Reticulation issue Voluntary participation Revised
Boundaries Non viable entities Inter RED
subsidies
24 consultative workshops Detailed
modeling International consultants Consolidate
into 1 to 17
International Consultants Detailed Modeling EDI
Blueprint 6 REDs Financially Independent Mandatory
participation
NER PARTICIPATION IN GOVERNMENT COMMITTEES
13THE SIX RED BLUEPRINT MODEL
- Process and Analysis
- Developed through a very thorough consultation
process - Based on extensive independent consultancy
support - Rigorous modelling with aim of achieving
restructuring objectives - Recommendations were preceded by substantial
expenditure to enable the best possible solution - Outcomes
- Restructuring objectives met
- REDs are balanced
- REDs are independently financially viable
- Mandatory participation by both Eskom and the
municipalities
14THE SIX RED BLUEPRINT MODEL (Cont)
- Outcomes Continued
- No gross tariff disparities in neighbouring
communities - Cost reflective tariffs and viable supply areas
- Potential for a better credit rating
- More attractive to scarce skills
- Faster decision making
- Best able to incorporate / be responsive to local
stakeholder input and needs - More likely to foster competitive behaviour
leading to improved levels of service and
efficiency
15THE NATIONAL RED MODEL
- PROCESS AND ANALYSIS
- No public document
- No evidence of a detailed study and analysis
- Not aware that stakeholders, including NER /
NERSA were consulted on the change to a National
RED / 7th RED - OUTCOMES
- REDs, not balanced
- National RED not financially viable
- National RED is substantially larger long
communication lines, removed from local
constituencies
16THE NATIONAL RED MODEL (Cont)
- OUTCOMES CONTINUED
- Potential for large tariff discrepancies with
Metro REDs and negative impact on customers - Require subsidies from Metro REDs or the Fiscus
tension and reluctance to subsidise potential
inefficient operations - Reluctance to cash transfers will place the
National RED under financial strain - Challenge to regulate efficiency of operations -
National RED can not be benchmarked against the
Metro REDs - Single rural entity with central planning and
execution potentially stifles much needed
innovation and learning and inter RED
competition. - Voluntary participation in the REDs is likely to
result in the industry not changing substantially
from its present status. - Unresolved policy issues.
17MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Financial viability of the National RED
- Concerns
- The National RED is not financially viable
- Continued financial support is required to
contain tariffs at equitable levels between the
REDs - Metro REDs will be reluctant to transfer cash to
the National RED - Metro REDs will be reluctant to accept a higher
bulk purchase tariff (wholesale) than the
National RED - Condition
- Provisions from the fiscus be put in place to
fund a National RED.
18MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Ownership and Governance of a National RED
- Concerns
- Uncertainty regarding industry ownership and
governance - Transition arrangements are likely to cause
further uncertainty and delay restructuring to
the end state. - Condition
- A firm policy position must be taken regarding
the ownership and governance structure of the
National RED and implemented from day one. - Transfer of staff, assets and customers to the
REDs on day one.
19MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Regulation of the National RED
- Concerns
- No provision is made for the Regulator (NERSA) to
regulate the National RED - The Regulator is the only entity that can ensure
the regulatory objectives are achieved - Regulatory skills are scares.
- Condition
- Appropriate legislation be put in place to ensure
the National RED, and the Metro REDs are
regulated by NERSA
20MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Municipal levies (taxes to replace
surpluses) - Concerns
- Municipal revenue will be impacted by the
restructuring of the EDI. - Uncoordinated taxes could result in irrational
and discriminatory levies on electricity sales. - Customer resistance to input taxes impacting
competitiveness. - Discriminatory windfall taxes to municipalities
with large users. - Condition
- legislation to ensure fair and equitable levies
are raised by municipalities, to replace the
existing surpluses generated
21MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Tariff rationalisation
- Concerns
- The National RED will have a different cost
structure from the Metro REDs. - The regulatory principles for rationalisation of
tariffs in the industry can not be applied
uniformly - Cost reflective tariffs will not be uniform
between REDs - Customers will want to move RED boundaries.
- Condition
- Metro REDs should be allowed to expand their
customer base to adjacent areas in the National
RED.
22MITIGATING CONDITIONS FOR NATIONAL RED MODEL
- Issue Voluntary participation by municipalities
- Concern
- Voluntary participation of municipal distributors
in the National RED is a major cause for concern
in restructuring - An inflexible stance by stakeholders will
continue while unresolved policy issues can still
be influenced in their favour - An inappropriate industry structure could result
- Using incentives to encourage voluntary
participation may lead to discriminatory
treatment of consumers by the National RED. - Conditions
- Outstanding policy issues must be urgently
resolved to obtain mandatory municipal
participation.
23CONCLUSION
- Not enough time was available for the Energy
Regulator to formulate its position - We have no details on the National RED
- We have supported EDI restructuring throughout
the existence of the NER - We have indicated our preference for the six RED
model, based on sound restructuring principles - Notwithstanding, we recognise that if policy
makers wish to proceed, we will support it . - Subject to the mitigation conditions for the
deficiencies of the National RED model
24CONCLUSIONS (Cont..)
- Continued delays in the restructuring and policy
uncertainty is at the expense of the industry.
This is reflected in - Underinvestment in infrastructure
- Lack of appropriate maintenance
- Loss of skills and deterioration of assets
- Excessive transfer of electricity revenues to
municipal surpluses. - Policy finalisation is a matter of critical
urgency - Delays increases restructuring costs
- Delays may limit potential investors.
25Request to PPC
- The NERSA Secretariat respectfully requests that
the Parliamentary Portfolio Committee consider
the comments and recommendations of the NERSA
Secretariat. - Due to the unavailability of a public document on
the National RED, the Regulator, respectfully
request an opportunity to comment on such a
document, once it is publicly available. - Thank you for your attention