THE VIABILITY OF THE ESTABLISHMENT OF THE NATIONAL RED / 7th RED - PowerPoint PPT Presentation

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THE VIABILITY OF THE ESTABLISHMENT OF THE NATIONAL RED / 7th RED

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Title: THE VIABILITY OF THE ESTABLISHMENT OF THE NATIONAL RED / 7th RED


1
THE 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

2
DISCLAIMER
  • 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.

3
OVERVIEW 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

4
PURPOSE 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.

5
EDI 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
6
Structure Models Evaluated
1. Vertically integrated
2. National Distributor
3. Regional Distributors (Recommended)
4. Eskom and some LGs (New Model)
5. Splitting wires and trading
7
EWG 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.

8
EDI 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
9
Maximum 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.

10
EDI 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.

11
Financial 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.

12
EDI 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
13
THE 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

14
THE 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

15
THE 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

16
THE 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.

17
MITIGATING 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.

18
MITIGATING 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.

19
MITIGATING 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

20
MITIGATING 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

21
MITIGATING 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.

22
MITIGATING 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.

23
CONCLUSION
  • 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

24
CONCLUSIONS (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.

25
Request 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
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