1. EDI RESTRUCTURING PRESENTATION to PPC: PROVINCIAL & LOCAL GOVERNMENT by
PHINDILE NZIMANDE: CEO of EDI HOLDINGS
29 MAY 2007

2. Presentation Outline EDI Holdings Overview
Electricity Distribution Industry (EDI) Historical Context
25 October 2006 Cabinet Decision
Key Implementation Enablers and Their Status
What are REDs?
How Will We Get There?
Key Progress to Date
Conclusion
29 May 2007

3. EDI HOLDINGS OVERVIEW
29 May 2007

4. EDI Holdings - Strategic Statements
Mandate
Restructure the electricity distribution industry in South Africa
Vision
A consolidated and sustainable Electricity Distribution Industry for the benefit of the economy and the people of South Africa
Mission
To create 6 wall to wall REDs as viable and efficient public entities
29 May 2007

5. EDI HISTORICAL CONTEXT
29 May 2007

6. Current Electricity Supply Industry Structure
Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path
Scheduling
ESKOM
Generation
Transmission
Distribution
Industry
180
Residential
Municipalities
Physical Energy Flow
Metering
& Billing
Business
Financial Flow
29 May 2007

7. EDI Profile Revenue : R33.5 bn Customers : ~8.3 m Staff : ~31 000
Asset value : ~R30 bn
Energy Purchases : ~110 TWh
Distribution Lines : > km
Distribution Cables : > km
29 May 2007

8. Key Challenges Facing the EDI (…1)
Current industry structure is highly inefficient owing to fragmentation
Absence of economies of scale in respect of investing in assets, sharing of facilities, services, people development.
Inadequate maintenance of networks
Estimated maintenance backlog: R5 bn accumulated over the past 10 years
Supply interruptions cost to the Economy: R2.9 bn to R 8.6 bn p.a.**
Inequitable treatment of consumers across the country
Significant variance in average tariffs by Distributors:
Range#: 19c/kWh – 71c/kWh (medium sized business)
16c/kWh – 60c/kWh (domestic customers)
Unfair discrepancies exist between Eskom Distribution and Municipal Distribution purchasing tariffs from Eskom Transmission.
** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study
29 May 2007

9. Key Challenges Facing the EDI (…2)
Inconsistent Electrification Performance
Access to electricity: ~73 % (National)
Institutional misalignment adds complexity
Slow and Inconsistent Roll-Out of FBE
Reliability of supply and the ability of the distributors to offer a basic and secure supply to low income households differs markedly across the country
Current rollout is less than 40% of targeted community
29 May 2007

10. EDI Restructuring Objectives
Energy White Paper Objectives (1998)
EDI Restructuring Blueprint Objectives (2001)
Ensure electrification targets are met
Achievement of government’s electrification programme
Universal access to electricity for all South Africans
Provide low-cost electricity
Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices
Facilitate better price equality
Improve the financial health of the industry
Future REDs to operate on a sustained, financially viable basis as independent businesses
Improve quality of service and supply
Acceptable and sustainable levels of supply security and quality
Foster proper co-ordination of operations and investment capital
Attract and retain competent employees
Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business
Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan
Planned and managed transition
29 May 2007

11. History of Restructuring
Early 1990s
Considerable Debate over EDI
1997
RED s Approach Endorsed
ERIC Report
1999
Cabinet Approved
Start of Restructuring Process
End 1999
EDIRC Established
April 2000
Appointment of PWC
Aug 2000
Blueprint Approved by EDIRC
May 2001
Blueprint approved by Cabinet
July 2003
EDI Holdings established
July 2005
RED 1 established
Sept 2005
Cabinet decision
Oct 2006
Cabinet decision
29 May 2007

12. CABINET DECISION: 25 OCTOBER 2006
29 May 2007

13. Cabinet Decision: 25 October 2006
Having considered technical submissions on:
The financial viability of the different RED models;
The institutional and governance arrangements for the REDs; and
How the various models respond to the restructuring policy objectives.
The Cabinet approved the following:
That 6 wall to wall REDs be implemented;
That the REDs be established as public entities and be regulated according to the PFMA and the Electricity Regulation Act;
That Eskom becomes a shareholder in the respective REDs for a transitional period and that they reduce their shareholding over time;
That DME, through EDI Holdings, will oversee and control the REDs;
That a roadmap will be put in place to move from the current scenario into the future industry structure
That a strategy needs to be developed to deal with capital investment requirements for the REDs
That EDI Restructuring legislation will be introduced; and
That a National electricity pricing system will be developed.
29 May 2007

14. 6 Wall-to-Wall RED Boundary Map
Provincial Boundaries
Cape Town UniCity
Ekurhuleni Metro
Nelson Mandela Metro
Johannesburg Metro
eThekwini Metro
Tshwane Metro
29 May 2007

15. Underlying Boundary Rationale
Size
Ensuring economies of scale, benchmarking, and critical mass
Balance
Urban / rural balance, Customer numbers ( – 1.4m rising to 1.1m – 2.4m) , Rural electrification
Implementation Costs
Do not violate significant geographical boundaries / features
Minimization of network re-configuration requirements
Financial Viability
Each RED is able to fund their on-going operations and be able to earn a reasonable return on equity on the business, at prices which reflect efficient levels of underlying supply cost
29 May 2007

16. REDs Statistical Information
DESCRIPTION
RED ONE
RED TWO
RED THREE
RED FOUR
RED FIVE
RED
SIX
2004 FIGURES
No of customers: Eskom No
279122
363832
496490
636527
506564
No of customers: Municipality
977742
936180
536661
651320
889157
819781
Energy Sales: Eskom
TWh
3.860
4.112
1.312
6.597
3.186
7.644
Energy Sales: Municipality
11.269
11.671
4.818
12.945
14,745
13.737
Assets: Eskom
Rbn
2.196
2.694
2.297
3.414
3.652
6.375
Assets: Municipalities
3.581
4.154
2.693
5.537
5.731
2.634
Personnel
5069
5059
2649
5707
5302
7899
Revenue
5.169
4.775
1.959
5.268
5.119
5.957
PROJECTED
5 Year Refurbishment Capital Requirement
1.437
1.923
1.306
2.197
2.833
2.444
29 May 2007

17. KEY IMPLEMENTATION ENABLERS AND THEIR STATUS
29 May 2007

18. Key Considerations and Implementation Enablers
Key Implementation Enabler
Responsible
Status
Governance of the REDs
DME
This issue will be addressed in the EDI Restructuring Bill
Electricity Restructuring Legislation
The process is driven by DME and indication from them is that the Electricity Restructuring Act is targeted for mid 2007
Promulgation of Asset Transfer Framework to enable effective and orderly transfer of assets from local government and Eskom to the REDs
National Treasury
NT exempted municipalities and municipal entities from sections 14 & 90 of the LG: MFMA with regard to electricity transfers.
National Electricity Pricing System
NERSA
The process is driven by NERSA
National Tariff Harmonisation Framework to ensure rationalisation of tariffs nationally
EDI Holdings will submit a position paper by 31 March 2007 for input into the NERSA process
Salary Harmonisation Framework
EDI Holdings
A proposal served at the TLRS during January 2007 as part of the process of addressing the COS and salary harmonisation
Capital Investment Strategy for Infrastructure
DME /
Will be attended to through the RED Establishment Business Case
Surcharge Principles Framework
The principles are being covered in the Municipal Fiscal Powers and Functions Bill to be promulgated during 2007
29 May 2007

19. WHAT ARE REDs?
29 May 2007

20. Future REDs (…1)
New companies into which both municipalities and Eskom will transfer their electricity distribution businesses
Shareholding to be split between Eskom, National and Local Government
Options for allocation of shares still under consideration
Service providers of choice to the service authorities:
Municipality remains service authority and RED becomes Service provider
REDs will collect surcharges in accordance with the Municipal Fiscal Powers & Functions Bill on behalf of the municipalities and pay it over to them
REDs will pay dividends to shareholders subject to financial performance
Relationship between RED and municipalities to be governed through the Service Delivery Agreement as contemplated in Section 81 of Municipal Systems Act
Streamlined relationship reducing duplication and creating clear accountability
Better regulation with role clarity between service authorities, service providers and the National Energy Regulator of South Africa
29 May 2007

21. Future REDs (…2) Decentralised geographical service delivery
Enable Government’s social policy, e.g. electrification and free basic electricity
Single institution
Focus on service
Consistency in operating policies and application across RED geographical area
Development and application of best practices
Support Government’s objective of universal access to electricity by 2012
Become more efficient and able to service customers equally well, at realistic tariff levels through:
Lower Interest charges due to improved access to capital markets
Efficiencies in “non-payroll” related areas, i.e., general costs
Accounts Receivable. Using best practices in a reasonable, good faith effort approach to reduce bad debt accounts
29 May 2007

22. Municipal Revenue Stream
Municipalities will continue to derive income from electricity sales within their area of jurisdiction
The income will be based on the current audited revenue generated from electricity sales and transferred to the municipality to support other services
The method through which municipalities will receive a continued revenue stream from electricity sales would be through:
A surcharge to customers on electricity sales
Dividends from the relevant RED, subject to financial performance and within the approved policy of the relevant RED
Surcharges collected by the RED will be paid over to the relevant municipality on a basis agreed to between the relevant municipality and the RED
29 May 2007

23. RED Future Business Model
Bundled but clearly demarcated wires and retail businesses
Wires business key characteristics:
Asset intensive
Capital intensive
Geared for serving an one to many relationship
Monopoly business with strong regulation
Retail business key characteristics:
Customer driven
Trading in energy
Products and services aligned according to market segmentation
Business geared towards competition and less regulation
Shared corporate and support services to wires and retail
Focus on buy in of services to avoid stranded costs and duplication
Business model to be customised to complement the geographical composition of the RED area of jurisdiction
29 May 2007
Slide 23

24. GOVERNANCE OF REDS
29 May 2007

25. PRINCIPAL LEGAL INSTRUMENT
Governance of REDs
The principal legal instruments which will govern the operation of a RED when established will be:
PRINCIPAL LEGAL INSTRUMENT
OBJECTIVE
PFMA
Regulates governance and financial management of public and state owned entities
Companies Act
Regulates governance of companies as well as other aspects of running companies
Shareholders Agreement
To regulate the relationship between shareholder
King II Report
For sound corporate governance guidelines for boards
SDA
To regulate the provision of electricity reticulation services by a RED on behalf of a municipality
NERSA Distribution Licence
Regulates the operation of networks, tariffs, quality of supply and customer management
29 May 2007

26. Relationship Governance
RELATIONSHIP OWNER
RELATIONSHIP PARTNER
GOVERNANCE INSTRUMENT
National Government
RED Board
Shareholders Agreement
Shareholder Compact
Business Plan
Local Government (Service Authority)
RED Board (Service Provider)
Service Delivery Agreement (SDA)
Eskom Holdings
Asset Transfer Agreement
RED Management
Performance Contract
National Energy Regulator of South Africa (NERSA)
NERSA Licence
29 May 2007

27. HOW WILL WE GET THERE?
29 May 2007

28. RED Establishment Roadmap
29 May 2007

29. Requirements for Participation
Signing of the Accession Agreement for participation in the RED
MSA Section 78 Process Completed (toolkit available)
Ringfencing Completed (toolkit available)
Due Diligence Completed (EDI Holdings support)
29 May 2007

30. KEY PROGRESS TO DATE
29 May 2007

31. Industry Readiness
29 May 2007

32. STAKEHOLDER ENGAGEMENT
29 May 2007
Slide 32

33. Regional Project Governance Structures
29 May 2007

34. Provincial & Local Government / EDI Holdings Partnership
EDI Holdings continues to work closely with SALGA through various planned forums including Provincial Workshops and Ministerial Roadshows to accelerate the restructuring process
The Cabinet decision of 25 October 2006 was welcomed by the SALGA NEC in December 2006, and endorsed at its 3rd National Conference in April 2007.
We continue to engage MECs for Local Government across all provinces
We have addressed the MINMEC on the restructuring process
SALGA and Provincial Government participates in the established RED creation structures namely, Regional Engagement Forums, Sponsors Committees and the Steering Committees
29 May 2007

35. WHAT SUPPORT CAN BE EXPECTED?
29 May 2007

36. EDI Holdings Support Toolkits available for: Ringfencing MSA S78
Modeling Information
Financial
Statistical
Funding
NERSA approved, through Eskom Multi Year Price Determination, the allocation of R1,2bn over a 3 year period
Projects initiated after 1 April 2006 will be considered for pro-rata funding
Establishment of a Central Panel of Service Providers for Ringfencing and MSA S78
Restructuring funding criteria and process to be communicated in due course
29 May 2007

37. CONCLUSION
29 May 2007

38. Conclusion
EDI Holdings welcomes the certainty created by the Cabinet decision to create 6 wall to wall REDs as Public Entities, regulated under the PFMA
We remain committed to continue working with all stakeholders to ensure fast-tracking of the restructuring process in order to ensure the realization of the restructuring objectives
The PPC on Provincial & Local Government to monitor and evaluate progress and provide leadership of the EDI restructuring process
All municipalities should be encouraged to support the implementation of the Cabinet Decision by:
Signing Accession to Co-operative Agreement,
Commencing the preparatory work:
MSA Section 78
Ringfencing
Due Diligence; and
Establish and join the Regional Engagement Forum
29 May 2007

39. THANK YOU