Inter-Ministerial Task Team Advisory Panel on Electricity Reticulation

1. Inter-Ministerial Task Team Advisory Panel on Electricity Reticulation Prelim – INTERIM REPORT to Minister of COGTA 13 June 2018

2. Purpose of Prelim-Interim Report • This Preliminary Interim Report provides a brief overview of the matters influencing the impasse between SALGA on behalf of Municipalities and Eskom, including • A broad overview of stakeholders interpretation and suggestions how matters could be resolved between Eskom and SALGA • Broad thrusts of the Panel’s Observations

3. OVERVIEW OF SALGA VS ESKOM • SALGA threaten to seek a Judicial declaratory on the constitutionality of electricity reticulation and distribution of ESKOM (i.e. constitutional mandate) • Constitution states that “electricity and gas reticulation” is an exclusive local government function and hence the executive authority (Municipal Council) is exclusively responsible for the function (i.e. exclusivity) & provisions of Municipal Systems Act • ESKOM essentially challenges not the location of the constitutional function, but the interpretation of what is defined as “executive authority” (i.e political accountable institution) • Also, ESKOM claims its historic role in generation, transmission and distribution (public provider of last resort), hence its contestation of “executive authority” • Both raise the concern of economic and fiscal sustainability of ESKOM & Municipalities

4. Panel Methodology • The Methodology of the Panel comprises

5. Panel Methodology...2 • The Methodology of the Panel comprises….

6. Stakeholders Submissions

7. Stakeholder Engagement • The following stakeholders have made submission before the Panel • Eskom • South African Local Government Association • National Energy Regulator South Africa • Department of Energy • National Treasury • Financial and Fiscal Commission • Department of Public Enterprise • Municipal Demarcation Board

8. SALGA • Municipalities have constitutional authority for electricity reticulation. In terms of Section 156(1) of the Constitution, municipalities have the executive authority in respect of, and the right to administer electricity reticulation (as per local government matters listed in Part B of Schedule 4 of the Constitution). • As executive authority for electricity reticulation, municipalities decide the service provision arrangement. SALGA endorses the definition of reticulation as outlined in the ERA, namely “trading or distribution of electricity and includes services associated therewith”- This executive authority resides in the council and cannot be delegated and by implications cannot be shared • Implementation of a municipality's function is facilitated by national legislation, in particular the Systems Act. A municipality is the service authority as per the Municipal System Act, which is defined as "the power of a municipality to regulate” the provision of a municipal service by a service provider. • Eskom as a service provider must have a service delivery agreement with municipalities as the service authority. Where a service is provided through an external mechanism (such as Eskom) municipalities are required to enter into a service delivery agreement with the service provider

9. SALGA (cont) • Eskom is a service provider and provides a service (electricity reticulation) that a municipality must provide entirely on the strength of a licence issued to it by NERSA. It does so as a public company (regulated by company legislation) without reference to the Systems Act and.without a service delivery agreement (as required by Section 76(b) of the Systems Act) • The Electricity Regulation Act (ERA) acknowledges the executive authority of a municipality in terms of reticulation. Chapter IV of the Act which regulates the reticulation of electricity by municipalities deliberately adopts the legal framework of the Systems Act it compels a municipality to comply with Chapter 8 of the Systems Act which amongst other provisions, requires a SDA where a service is provided through an external mechanism. • The ERA requires every decision of NERSA to be consistent with the Constitution and all applicable laws and to be within the power of NERSA, however the present authorisation of Eskom to reticulate electricity within municipal areas conflicts with all these requirements • Municipal tariffs include fees for municipal services which prioritise the basic needs and development of the local community (in accordance with principles set out in Section 74(2) of the Systems Act). Eskom tariffs do not include such fees (thus some users/enterprises are able to purchase bulk electricity from Eskom on the same terms as municipalities). These differences in pricing result in some enterprises having to absorb municipal costs, whilst others (where Eskom provides services) operate at an advantage

10. SALGA (cont) • Municipal collection rates (for all municipal services) compared to areas where Eskom provides electricity to end customers, tend to be much higher. In Eskom supply areas municipalities cannot effect credit control through the switching-off of electricity for non-payment of other municipal services. • Surcharges cannot be charged in Eskom supply areas - thus municipal supply areas subsidise services for residents and businesses in Eskom supply areas • The current dispensation in the Electricity Distribution industry is subversive of the existing legal frameworks which directly undermines municipalities’ ability to fulfil their constitutional mandate in the provision of service. NERSA  cannot usurp the constitutional powers of municipalities. License cannot make Eskom an executive authority. - It is not line with Municipal Systems Act, Act 32 of 2000. Eskom is a service provider and not a service authority and therefore required SDA to provide electricity in the municipal area • NERSA should not continue with the GIS project as it does not have the authority to decide and confirm supply areas • SALGA believes the Panel should deal only with legal and constitutional aspects of this inquiry- want to narrow the mandate

11. Eskom • Eskom is firmly of the view that they are not a Service Provider to municipalities and that the NERSA license provides Eskom with the required “rights” to distribute and reticulate electricity • Eskom is of the opinion that there is sufficient history to demonstrate the Eskom presence in the electricity distribution and reticulation business • Eskom is of the opinion that “Executive Authority” is not exclusive to municipalities • Eskom took a position not to sign the SDA as contemplated by the Municipal Systems Act • Eskom is of the view that both Eskom and municipalities are key in delivery of services to customers • Eskom is of the view that an agreement is required that recognise the rights of both Eskom and the municipalities to co-exist in electricity distribution within the municipal demarcated area • Eskom submitted that the license conditions of both Eskom and municipalities should be protected

12. Eskom (cont) • Based on the Eskom view, an interim mechanism is required to ensure that technical industry issues are addressed while Government review and proposes alternative reform/restructuring • Eskom prefer municipalities to directly bill customers supplied by Eskom in the municipal area of jurisdiction to deal with the Levy • Review alternative credit control measures • Eskom submitted that the license conditions of both Eskom and municipalities should be protected • Based on the Eskom view, an interim mechanism is required to ensure that technical industry issues are addressed while Government review and proposes alternative reform/restructuring • Eskom prefer municipalities to directly bill customers supplied by Eskom in the municipal area of jurisdiction to deal with the Levy • Review alternative credit control measures

13. NERSA • Draft Amendment of Eskom Licensing that can include the agreed contents of the Service Delivery Agreement or full Service Delivery Agreement • NERSA is awaiting for the past two years for inputs on the Draft Amendments from SALGA (Eskom involved in drafting) • Service Delivery Agreement (SDA) must be based & referenced to the Electricity Regulation Act • A number of Municipalities indicated that they do not have the competency or capacity to distribute electricity and want to handover their electricity distribution/reticulation and trading license to Eskom • Multiple participants ( National Treasury, NERSA, municipalities) in the regulation of electricity delivery introduces unnecessary complexity • NERSA Geographic Information Systems(GIS) under development will assist in facilitating distribution network dispute resolution between Eskom & MunicipalitiesCurrent ESKOM license under review vs rest of industry obliged to work under licenses (2years under review due to non-response from SALGA)

14. National Treasury (NT) On Electricity Reticulation and Distribution • NT ideal strategy: • Financially viable Municipalities • Financially viable State Owned Enterprises (incl ESKOM) • A stable electricity supply to power the economy • The current electricity distribution model is not sustainable and will need to be overhauled • The immediate focus should be on ensuring Municipalities are collecting revenue and meeting current obligations to suppliers • National government will not bailout Municipalities as the Local Government Fiscal Framework is adequate and Municipalities are sufficiently funded for their obligations • Hold no view on the Service Delivery Agreement (SDA) as contemplated in Section 78 of the Municipal Systems Act without empirical evidence on the likely impact of the SDA

15. Electricity Reticulation & Distribution Sustainability Observations

16. Electricity Reticulation & Distribution Sustainability Observations • The current electricity distributions industry is experiencing serious sustainability challenges • Bulk electricity debt on increase • Payment/collection/arrears from end customers • Incorrect tariff structures resulting in under recover on electricity sales • Inability to effectively collect payment from customers and to normalize the bulk payment status could result in the electricity supply industry running into financial and sustainability challenges • Absence of sustainable revenue will put ability to pay back loans at risk • Inability to effectively manage the infrastructure and invest in maintenance and network expansion will put supply security at risk • Electricity distribution infrastructure maintenance, refurbishment and strengthening backlog (R68bn in 2014) on the increase • Industry will not be able to support the expected economic growth • Risk of current trend of distribution related power failures to increase • Absence of good industry performance will “force” more customers to consider alternative supply options • Potential investor confidence risk should the industry performance not improve

17. Electricity Reticulation & Distribution Sustainability Observations (Cont) • The current distribution industry model is unsustainable • Customer profile changing and diversity in customer base lack in many electricity supply jurisdictions • Inability of industry to respond effectively to alternative energy opportunities • Current business model based on kWh sales which is radically on the decrease • Alternative energy options and more efficient appliances/equipment becoming more affordable • Absence of level playing field in respect of bulk electricity purchases posing a significant risk to municipalities from a viability perspective and to attract larger customers • Inefficiencies within the sector contributes to higher operating costs which must be recovered through the tariffs • Incorrect tariff methodology/approach applied resulting in unrealized revenue potential

18. Electricity Reticulation & Distribution SustainabilityObservations(Cont) • Neither municipalities nor Eskom do have the capacity to be the only supplier of electricity to end customers • A supplier arrangement is required which will contribute towards industry sustainability and customer satisfaction • Effective regulatory regime is required • Absence of an effective regulatory regime will result in further deterioration in service delivery standards • Uniform industry norms and standards are required to ensure effective service delivery • Ability to enforce standards essential to ensure regulatory compliance and industry efficiency • The industry in many areas operate in the absence of “line of sight” • Most of the current electricity providers operate without a ring-fenced business • Understanding the costing is problematic while industry standardized benchmarking is not applied • Absence of the above directly contributes to industry inefficiencies

19. Electricity Reticulation & Distribution SustainabilityObservations (Cont) • The industry requires urgent investment in technology to enable the industry to effectively respond to the challenges at hand • Technology applications can assist in: • Improving supply availability • Improving response times to outages and customer requests • Facilitating the inclusion of alternative energy options in the grid portfolio • Accommodating embedded generation • Managing energy storage • Improving grid management

20. Conclusion

21. 5 SUBSTANTIVE MATTERS OF CONCERN • Historic Urgency of Electrification Access Crowds-Out Importance of Location of Electricity Reticulation (New Roles?) • Economic and Financial Sustainability of both Municipalities and ESKOM • Constitution, subsidiary legislation and court judgments (Need for changes?) • Consequence and Impact of Continuity and Discontinuity of electricity reticulation and distribution on mix of customers – citizens and various industries (costs of previous multi-year infrastructure investment) • Multi-layers classical disjunctures in Governance, Leadership and Management, including ethical follow-through on agreements on the electricity reticulation and distribution networks (institutional stubbornness vs institutional arrogance)

22. Matter of Concern • Eskom and SALGA “took specific positions” and therefore to design a sustainable solution to the impasse will require radical and forward thinking • In the Service Delivery Agreement (SDA) impasse the following matters are at stake: • Section 156 (1) of the Constitution and in particular the competencies allocated to municipalities in Part B of Schedule 4 of the Constitution • The status of the NERSA license vs the authority granted to municipalities in respect of electricity distribution and reticulation • Whether Eskom can be compelled to be a Service Provider to municipalities despite the fact that the assets used to serve customers in certain municipal areas of jurisdiction are owned by Eskom • Signing of the SDA will not address the real challenges at hand or improve the financial position of municipalities and Eskom • Further deliberations are required on the constitutional competencies in respect of electricity and gas reticulation and the exclusive function • The EDI requires tighter regulation while benchmarking is essential to monitor the performance of the industry • A structured intervention is required to address the sustainability of the ESI and municipalities

23. Thank You!