Draft RED Establishment Bill and Regulations Presentation

1. Presentation to Parliamentary Portfolio Committee for Minerals and Energy 25 March 2008

2. Presentation Outline • Background • High Level Content of the Draft RED Establishment Bill and Regulations • Consultation process

3. Background

4. Background • 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 (PFMA) and the Electricity Regulation Act; • 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

5. 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

6. High Level Content of the Draft RED Establishment Bill and Regulations

7. Drafting approach • Recognition of current constitutional and legal landscape • Bill framed as a Bill of principles. • Regulations to contain details. • Consultative approach.

8. Content • In summary form, the Draft Bill provides for the following: • General principles governing the implementation of the Restructuring, to ensure that the Restructuring takes place in a manner that: • Consolidates and integrates electricity distribution and trading regions; • Gives effect to the benefits associated with economies of scale, greater efficiency and improved access; • Strikes an appropriate balance between national development objectives and the executive authority of municipalities, mindful of the Constitutional principles of co-operative government.

9. Content • The declaration of six electricity distribution and trading regions. • The incorporation of a new public entity company to own and operate electricity distribution businesses. • Ownership control of the REDs. • National Government’s right as shareholder in each RED will be exercised by the Minister of Minerals and Energy. • The objects and powers of the REDs, including its main object to distribute and trade electricity within its geographical boundary. • The governance arrangements for the REDs, including the composition and appointment of the RED boards. RED boards shall consist of between two and thirteen non-executive directors; and two executive directors viz. a chief executive officer and a chief financial officer. Board members will be appointed by shareholders, in proportion to their shareholding.

10. Content • The transfer of Eskom’s electricity undertakings into each RED, on a date stipulated by the Minister of Minerals and Energy, by notice in the Gazette. • The voluntary transfer of a municipality’s electricity undertaking into its local RED, on a date to be stipulated in a written agreement between the municipality and its local RED. • The voluntary appointment by a municipality of a RED as its service provider in respect of electricity distribution and trading services. • The conclusion of standardised service delivery agreements between participating municipalities and the relevant RED. • Regulation of REDs by Nersa in terms of the Electricity Regulation Act. • The role of EDI Holdings as the implementation agent on behalf of Government to implement the Restructuring, including, empowering the Minister of Minerals and Energy to delegate certain appropriate powers to EDI Holdings, to effectively execute its role. • Regulations

11. Issues to be contained in Regulations • The Draft Bill makes provision for the following issues to be contained in Regulations: • Compensation to be paid to Eskom and Local Government for assets contributed to the REDs; • Valuation methodology to be used for the valuation of assets; • Formulae to be used for the allocation of shares to National Government; Eskom and Local Government; • Capital structure for the REDs; • Financial incentives for Local Government to join the REDs within the context of voluntary mode of Restructuring; • Transitional nature of Eskom’s shareholding in the REDs and how Eskom will exit the REDs; • Mitigation of the impact on the credit rating of Eskom and Local Government.

12. Consultation process on the Draft Bill and Regulations

13. Consultation process on the Draft Bill • DME engaged in a process of consultation with the Intergovernmental Forum on the Draft Bill, since March 2007. • Parties consulted are as follows: • National Treasury • Department of Public Enterprises • Department of Provincial and Local Government • Nersa • Eskom • SALGA (process commenced) • EDI Holdings • Labour (presentations made) • Comments received have been incorporated to the extent possible

14. Consultation process for development of Regulations • Intergovernmental Forum has commenced working on outstanding issues. • Due to the complex nature of the issues, Intergovernmental Forum developed Terms of Reference for the appointment of Transaction Advisors. • Procurement process is underway. • Transaction Advisors will report to the Intergovernmental Forum. • Extensive and structured consultation with all key stakeholders • Regulations will settle the outstanding issues and essentially encapsulate the negotiated “Deal” amongst key participants.

15. Thank You