Title: Presentation to Parliamentary Portfolio Committee for
1- Presentation to Parliamentary Portfolio Committee
for - Energy
- 15 September 2009
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2Presentation 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
4The 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 -
9To 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
11To 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
12To 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 -
13To 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
14To 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
15To 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
16STAKEHOLDER ENGAGEMENT ON THE BILL
17Stakeholder 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
18THE REDs MODEL
19The 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
20The 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
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- The envisaged transaction has elements of both a
merger and a - legislated transfer of assets
21High Level Proposed Content of the Draft REDs
Establishment Bill
22Proposed 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
23Proposed Content
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- 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
24Thank You