Topic: Possible Restructuring of the Electricity Distribution Industry

1. Joint Public Hearings between the Portfolio Committee on Energy and the Portfolio Committee on Cooperative Governance and Traditional Affairs Topic: Possible Restructuring of the Electricity Distribution Industry Presentation Date: Tuesday 31 July 2012 Presenter: Louise Muller

2. Agenda • IMFO • Context of the Presentation • Importance of Electricity Distribution to Local Government • Rationale for Restructuring • Some Concluding Remarks Institute of Municipal Finance Officers

3. The Institute • A professional body in local government finance that was established in 1929 • In terms of the Old Companies Act, a Section 21 company, registered as an Association Not for Gain • A constructive role player in policy formulation processes in local government finance • Vision: To be “the” recognized professional body for the development and promotion of municipal finance officers and local government finance Institute of Municipal Finance Officers

4. Context of Presentation • Most presentations heard would be from the Electricity Distribution perspective • Local Government needs to remain sustainable, viable and fulfill its mandate of the service delivery arm of government • The vision for local government should be towards more efficient and effective governance and service delivery • SDA’s with all service providers • Single point of contact for the customer Institute of Municipal Finance Officers

5. Importance of Electricity Distribution (1) • A municipality has executive authority in respect of, and has the right to administer, the local government matters listed in Part B of Schedule 4 of the Constitution • Electricity Reticulation • Reticulation is defined by Section 1 of the Electricity Regulation Act 4 of 2006 as meaning “trading or distribution of electricity and includes services associated therewith.” Looking at the other definitions Trading means ‘the buying or selling of electricity as a commercial activity”, while distribution means “the conveyance of electricity through a distribution power system excluding trading”. Institute of Municipal Finance Officers

6. Importance of Electricity Distribution (2) • Electricity is the lifeblood of finances in a well-organised municipality • Ito Constitution – a municipality may impose surcharges on fees for services provided by or on behalf of the municipality • Ito legislation & related court rulings – Electricity can be cut-off for non-payment therefore it serves as a means of debt collection • A municipality is rendered a service authority - “the power of a municipality to regulate the provision of a municipal service by a service provider”. • Avoid generalisations regarding service delivery • In many cases the municipality has no control over the service provider • A “one size fits all solution” should be avoided Institute of Municipal Finance Officers

7. Rationale for Restructuring (1) • Is it size? • International research has shown there is no greater economy of scale above 30 000 customers in a distribution utility • It is for universal access to electricity services? • Estimated 25% of households are still without access to electricity • Is it to compensate for skills loss? • Single public service / TASK will set salary levels • Restructuring to a larger entity is a cumbersome way of resolving salary issues – and affects prices of electricity • Is it for synergy of tariffs? • Tariffs are impacted by numerous different factors • Is it due to infrastructure backlogs? • The lack of economic return on some assets will perpetuate underinvestment Institute of Municipal Finance Officers

8. Rationale for Restructuring (2) • Is it due to alternative energy sources? • Subsidies for alternative energy sources at this time are funded by electricity customers in most cases • Is it for the promotion of a market structure? • Electricity utilities support social and economic development - distinct from a market-based structure that is meant to promote economic efficiency and efficient allocation of resources Institute of Municipal Finance Officers

9. Some Concluding Remarks (1) Restructuring should: • Directly address the determining factor for the restructuring • Minimise any disruptions to local government and electricity services • Consider various options such as wires and retail split • Look at standardising electricity distribution by Eskom and municipalities • Recognise diversity and not impose a “one size fits all” • Ensure that all parties are willing or legislated parties Institute of Municipal Finance Officers

10. Some Concluding Remarks (2) Restructuring should: • Take into account the following: • No departure from Constitutional mandate of Local Government • The cost of legal compliance for a foregone conclusion or legislated outcome • The potential of a Service Utility or Multi-jurisdictional Service Utility for the provision of services • Transfer of assets at no cost • Labour legislation and the impact of section 178 of the Labour Relations Act • Customers remain with local government Institute of Municipal Finance Officers

11. Thank You Thank you for the opportunity to present to you. We would like to offer our services to assist from a municipal finance perspective if further restructuring of the Electricity Industry is considered www.imfo.co.za Institute of Municipal Finance Officers