1. BUSA’s position on electricity distribution
26 July 2012

2. Electricity distribution: problem statement
Electricity and energy security is vital for economic growth
All aspects of the electricity chain have fundamental problems that are hurting business confidence, curtailing present production and job creation and hurting future investment prospects. 83% of SACCI local chambers indicated that electricity provision (not cost) is a concern and impacts on doing business
Electricity distribution impacts on electricity generation. Efficiency losses mean more productive capacity is needed and more environmental impact for same level of GDP
The electricity crisis also has broader social implications through lost opportunities and increased costs, impacting on job creation and government revenue

3. Electricity distribution: broader context
The current crisis in electricity distribution is symptomatic of broader problems and issues
A lack of maintenance of public sector assets
A lack of new investment in the public sector
A lack of skills and/or an inefficient or incorrect allocation of skills
Lost institutional knowledge and the danger of further capacity losses (due in some cases to age of incumbents)
Distribution is tied into local government finances, embedding conflicts of interests. Numerous objectives detract from the primary objective (energy security) and increases inefficiency

4. The problem has been chronic underinvestment: 1
Source: South African Reserve Bank

5. The problem has been chronic underinvestment: 2
Source: South African Reserve Bank

6. Current structure is not ideal
Municipalities distribute a large portion of electricity generated
Around 50% of distribution through municipalities, the rest is through Eskom
Municipalities perform all three functions:
asset management (principally new investment),
network operation and maintenance,
customer services (principally billing and enquiries)

7. Preferred structure
Ideally there should be a separation of responsibilities – within distribution but also between transmission and generation
It allows for specialisation and improved efficiency
The lifeblood of an economy is competition and where this is possible should be encouraged
It eliminates inherent conflicts of interest
It provides opportunities for the private sector to participate in and to contribute to better energy security
International best practice and experience

8. What about social and other objectives?
Municipalities receive a large part of their revenue from distribution services
Around 30% of revenue is obtained from this source
There are clearly significant opportunities for cross subsidisation of other activities

9. Electricity and gas sales make up nearly 30% of revenue
Source: StatsSA: Financial census of municipalities for the year ended 30 June 2011

10. What about social and other objectives?
Municipalities receive a large part of their revenue from distribution services
Around 30% of revenue is obtained from this source
There are clearly significant opportunities for cross subsidisation of other activities
However, social and other objectives can be met through a new model
Clearly municipalities would have to be compensated for the loss of this source and the transfer of assets, mostly through grants, but indirect benefits could be considerable