60 th AMEU CONVENTION TOWARDS SUSTAINABLE REDs PRESENTED BY DR WILLIE DE BEER, COO: EDI HOLDINGS 17 OCTOBER 2007

17 October 2007Slide 2 Presentation Content Introduction Global EDI Reform Drivers South Africa: EDI Context Business Model RED Sustainability Brief Summary RED Value Proposition Global EDI Reform Assessment Progress Towards Sustainable REDs Conclusion

17 October 2007Slide 3 Global EDI Reform Drivers In the global context, restructuring and the EDI have become synonymous South Africa is not unique with respect to the EDI reform challenges Globally there are many restructuring case studies to learn from; inclusive of many success stories Reform is informed by a number of drivers, such as: Customer service expectations Customer choice Socio economic drivers Increasing need for access to affordable energy sources Economic growth requirements Asset management challenges Efficiency improvement requirements Investment/funding requirements Improved regulation Industry sustainability Employment sustainability

17 October 2007Slide 4 South Africa: EDI Context The ESI is dominated by Eskom The EDI in South Africa is confronted with: Significant inconsistency from a customer service and product offering perspective Free Basic Electricity Access to electricity High level of fragmentation and inefficiencies Inadequate maintenance, refurbishment and investment in network capacity Increase in security of supply and reliability challenges Distribution component of ESI value chain suspect Demand Side Management (DSM) Challenges to attract, train and retain resources Two important differences with respect to EDI restructuring in South Africa: It takes place in a voluntary environment There are no privatisation motives Current asset owners will be the future RED shareholders

17 October 2007Slide 5 NERSA Report: EDI Maintenance Perspective Source: NERSA Independent Technical Audit E=Excellent; VG=Very Good; G=Good; NI=Needs Improvement DistributorReliabilityControlMaintenanceNetworksSkillsFunding Eskom RegionGVGVG-EG-VGVG-EG Eskom RegionGVGVG-EG-VGVG-EG Metro 1GVGVG-EVGGG Metro 2GVGGG-VGGNI Metro 3GG-VG GG Metro 4G-VGNII GG Metro 5NI GG-VGNI Municipality 1NI G Municipality 2NI G Municipality 3NI Municipality 4NI

17 October 2007Slide 6 EDI: Maintenance and Refurbishment Requirement

17 October 2007Slide 7 CREATING SHAREHOLDER AND CUSTOMER VALUE REVENUE EFFIENCY AND CONTINIOUS BUSINESS IMPROVEMENT OPERATING & CAPITAL EXPENDITURE Business Model: RED Sustainability RED FINANCIAL SUSTAINABILITY

17 October 2007Slide 8 Business Model: Brief Summary Distinct wires and retail focus Pursue appropriate best practices Benchmarking Promote RED sustainability Balance between revenue realisation and continuous business efficiency improvement Close to the customer Centralisation vs decentralisation Effective shareholder and stakeholder management Focus on, interalia: Technical losses Non-technical losses Effective asset management Staff development and skills retention Service Provider to Service Authority (Municipalities) SDA as contemplated in MSA 2000 Section 81 Integrated inter RED network management approach: Managing distribution grid integrity Enhance customer interface opportunities

17 October 2007Slide 9 EDI Holdings Direct & Oversee EDI Restructuring EDI Holdings Direct & Oversee EDI Restructuring EDI Interim State REDs x 6 Wires Retail Shared Services Industry Association

17 October 2007Slide 10 RED Value Proposition: Brief Summary Current Asset Owners Shareholding in a sustainable business Derive revenue from a sustainable business Protection of credit rating Assets managed in a prudent manner Customers Consistency in customer service practices and service offerings Improved service delivery Transparent tariffs Predictable pricing signals Well regulated industry Staff Skills development opportunities Employment in a sustainable industry

17 October 2007Slide 11 Staff: Indicative Age Profile

17 October 2007Slide 12 Global EDI Reform Assessment Restructuring is easily blamed when things go wrong Reality is, that “sins of the past” and implementation “mistakes”, are the main contributors to “failures”- it is not the concept which creates in the failure Restructuring is not an “overnight quick fix” solution Requires time Significant capital and other resource investment The longer the restructuring is delayed the more difficult it becomes to realise the restructuring benefits Significant capital investment requirements can present return on investment challenges There is no conclusive evidence suggesting a performance difference between private and public electricity companies The global trend suggests a well defined wires and retail businesses A sound regulatory regime is critical to ensure effective business operations Continuous cost cutting is not a sustainable business philosophy Correct leadership selection is critical There are more than enough successful restructuring case studies, providing comfort, to learn from

17 October 2007Slide 13 Reform Assessment: Customer Supply Interruptions Source data: Ofgem

17 October 2007Slide 14 Reform Assessment: Distribution Losses as Percentage of Units Distributed Source data: Ofgem

17 October 2007Slide 15 Losses: Reduction Potential

17 October 2007Slide 16 RED FOUR: Losses Improvement Potential

17 October 2007Slide 17 Progress Towards Sustainable REDs 2003 to to to Date o EDI Holdings established o Eskom Distribution ringfenced within Eskom Holdings o Boundaries for the six REDs defined o Eskom and SALGA signed the accession to the co-operative agreement o EDI Holdings developed various tools to reduce cost and to facilitate the restructuring process o Eskom Distribution (7 Regions) aligned with the boundaries of the six REDs o RED project governance structures implemented o Transitional Labour Relation Structure (TLRS) established o Metros and numerous municipalities started the MSA Sect 78 process and business ringfencing o NERSA approved (April 2006) through the MYPD R1.2bn over a 3 year period to assist in funding some of the EDI restructuring costs o 25 th October 2006 Cabinet reconfirmed support to the creation of six wall to wall REDs as Public Entities o RED 1 was established (June 2005)as a Municipal Entity wholly owned by the City of Cape Town o Municipal electricity business asset transfer enabling mechanism approved by National Treasury o Eskom Distribution 95% ringfenced o Boundary energy metering installed as per the six RED footprint o 78 Municipalities (ITD) signed the accession to the co-operative agreement o Six Regional Engagement Forums (REF) established to enhance participation in the RED establishment process o RTLRS roll out in progress o City of Cape Town took a resolution to liquidate RED 1 o Extensive progress towards a REDs system solution o MFPF Act promulgated

17 October 2007Slide 18 Conclusion The EDI in its current format will not be able to underpin the projected economic growth or provide customers with a reliable electricity supply There is a need to define the market rules and to establish the market The critical reform success factors must be addressed It is essential that South Africa continuous with the EDI restructuring journey The restructured EDI must be positioned in such a way that it will be able to effectively respond to any future market structure Based on the global experience and having considered the proposed RED model for South Africa; all indications are that the EDI restructuring in South Africa could go down in history as an example of a successful transformation business case

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