STREAM 1B: SECTOR STRUCTURAL AND RESTRUCTURING ISSUES CLLR C JOHNSON, SALGA NEC ELECTRICITY DISTRIBUTION MAINTENANCE SUMMIT 9 JUNE 2008

Key Developments since 2003 Maintenance Summit 2. Sept 2005 / Oct 2006 Cabinet Decisions Movement from 6+1 REDs as Municipal Entities (Sept ‘05) to 6 Wall-to-Wall REDs as Public Entities (Oct ’06) 3.SALGA National Conference 2007 Municipalities resolve on matters of Electricity Distribution in context of 2004 National Conference Resolutions 4. Local Gov Laws Amendment Bill 2007 E xemptions to be granted to municipalities in respect of chapter 8 and 8A of the Municipal Systems Act. 5. Asset Transfer Framework To facilitate the transfer of electricity distribution assets from municipalities to the REDs as public entities. 6. REDS Establishment Bill Central to the enablers that will expedite and remove a large percentage of the restraints 1. RED 1 Establishment Establishment of RED 1 as a municipal entity 7. National Electricity Emergency 8. Proposed Constitutional Amendment Wave of electricity load shedding Considerations to Amend the Constitution to ensure successful implementation of restructuring

SALGA Resolutions & Progress Sept 2004 & April 2007 Endorse and support 25 Oct ‘06 Cabinet Decision; Ensure that municipalities are not worse off on revenue with the establishment of REDs; Fully participate and play a leading role in the establishment of REDs’ Regional Engagements Forums; Encourage all municipalities to commence with the preparatory steps towards the establishment of the REDs; Pursue DME and ESKOM to conduct an audit on electricity backlogs Engage DME in upgrading existing energy generation and distribution infrastructure in terms of Progress 2008 In excess of 110 municipalities signed the Accession Agreements; 11 municipalities 100% complete with Ring Fencing Process & 20 ongoing; 15 municipalities completed Section 78 process, with others still in the process with funding now available on application from EDI Holding; Municipalities continuously encouraged to conduct Due Diligence Process; All Regional Engagement Forums established; Through NEDLAC Summit EDIH mandated to conduct audit on maintenance & backlogs, SALGA to support

SALGA Resolutions SALGA’s Response to Cabinet Decision SALGA NEC (4 Dec ’06) confirmed support for initiative to establish six wall-to-wall RED’s; Reasons outlined for support includes:- - this will bring to end to the fragmentation that leads to inefficiencies in the industry as it currently exists; -will assist in addressing the network maintenance backlog; -promote equal treatment of consumers countrywide through a national electricity pricing system. -REDs will also assist in expediting the national electrification programme to ensure sustainable, affordable electricity supply to low - income consumers, regardless of location.

Key Considerations and Implementation Enablers for LG CRITICAL AREAS OF CONCERN TO LG Shareholding in the REDs; Governance arrangements of the REDs; Transfer of electricity undertakings; Compensation for electricity undertakings; Service delivery agreements; Articles of association of REDs; and Municipal revenue stream. Considerations to Amend the Constitution REASONS FOR CONCERN Formulae to be used for the allocation of shares to national government, Eskom and municipalities; As executive authority on electricity municipalities to be part of decision making; Compensation and the valuation methodology to be used for the valuation of such assets; Service delivery agreements; As key revenue stream for municipalities, financial incentives for municipalities to join the REDs and impact on the credit rating of municipalities; Ownership of Key Industrial Customers (whether they should be transferred over to the REDs and the financial implications thereof); Motivation for constitutional amendment and direct impact on municipal powers, functions & revenue

Considerations to Amend the Constitution Critical Elements for Successful Restructuring participation by municipalities is assured and predictable; once a municipality has transferred assets to a RED, may not reverse that decision; RED management controls a stable asset base, capable of integration. RED tariffs must be approved by a single regulator, namely Nersa. Municipalities’ participation in the business planning of REDs must take place in an efficient way. Perceived Impediments for Successful Restructuring Municipal participation is uncertain and unpredictable; If a municipality decides to participate in RED, it may reverse that decision, leaving REDs unstable; Termination of the SDA with RED, would constrain RED management from integrating assets and systems; Municipalities’ right to set tariffs undermines RED management’s ability to overcome the problem of differentiated tariffs; and obligation on municipalities to take budget decisions introduce considerable complexity and inefficiency to RED decision-making.

Considerations to Amend the Constitution Constitutional Amendment Proposal Option to allow national government to limit municipalities’ legislative and executive authority in certain circumstances; Circumstances would include, for example, where a municipal function or service can be provided to communities more effectively, efficiently and sustainably on a regional basis than on a local basis. if this option is successfully pursued, it will mean that the current constraints preventing national government from effecting EDI restructuring will be overcome. SALGA Proposals Various other interventions are required and should be explored, including:- (i)REDs participation must be incentivised (ii)outstanding policy issues (shareholding, governance arrangements for REDs, compensation) must be addressed; (iii)Eskom (like municipalities) must transfer its distribution division to REDs; (iv)Enablers - EDI restructuring legislation and if necessary regulations must be promulgated to fully implement the restructuring.

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