Presentation to Parliamentary Portfolio Committee for Energy 15 September 2009

1. Presentation to Parliamentary Portfolio Committee for Energy 15 September 2009

2. Presentation 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

4. The 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

9. To 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. Cape Town UniCity Ekurhuleni Metro Nelson Mandela Metro Johannesburg Metro eThekwini Metro Tshwane Metro RED 6 Provincial Boundaries RED 4 RED 2 RED 5 RED 1 RED 3 6 Wall-to-Wall RED Boundary Map

11. To 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

12. To 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

13. To 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

14. To 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 NERSA’s authority to the entire electricity industry • Regulation by NERSA will also address the inequity in tariffs, which is essential for business and economic development

15. To 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

16. STAKEHOLDER ENGAGEMENT ON THE BILL

17. Stakeholder 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

18. THE REDs MODEL

19. The 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

20. The 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 The envisaged transaction has elements of both a merger and a legislated transfer of assets

21. High Level Proposed Content of the Draft REDs Establishment Bill

22. Proposed 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 Eskom’s distribution undertaking and municipalities distribution undertakings to REDs

23. Proposed Content • 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

24. Thank You