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Title: Presentation to Parliamentary Portfolio Committee for


1
  • Presentation to Parliamentary Portfolio Committee
    for
  • Energy
  • 15 September 2009

2
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

3
THE ESSENCE OF THE BILL
4
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

5
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

6
BACKGROUND TO AND MOTIVATION FOR THE BILL
7
In April 2008, Cabinet took the decision to
amend the Constitution for the following
reasons
8
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

9
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

10
6 Wall-to-Wall RED Boundary Map
11
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

12
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

13
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

14
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

15
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

16
STAKEHOLDER ENGAGEMENT ON THE BILL
17
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

18
THE REDs MODEL
19
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

20
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

21
High Level Proposed Content of the Draft REDs
Establishment Bill
22
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

23
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

24
Thank You
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