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Portfolio Committee on Energy & Portfolio Committee on Cooperative Governance and Traditional Affairs. PUBLIC HEARINGS ON THE RESTRUCTURING OF EDI. Sandile Maphumulo 26 July 2012. Introduction to AMEU. Established 1915 Membership Councillor and Engineer representatives
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Portfolio Committee on Energy & Portfolio Committee on Cooperative Governance and Traditional Affairs PUBLIC HEARINGS ON THE RESTRUCTURING OF EDI Sandile Maphumulo 26 July 2012
Introduction to AMEU • Established 1915 • Membership • Councillor and Engineer representatives • Technical support to SALGA • Involved in EDI restructuring process from 1992 to 2011 • Supported the RED model
Electricity distribution industry [EDI] • Overview • Municipal electricity distributors have existed since 1882 (Kimberley) – Eskom established 1922 • Number reduced to 187 licensed municipal distributors following the demarcation process in 2000, and now standing at 180 (175) • Large variation in size (customers, income, expenditure, staffing) • Corresponding large differences in size and capacity of electricity network infrastructure • Well documented problems and deficiencies in the current industry, some of which the EDI restructuring process had been initiated to address
AMEU MANDATE AT THESE HEARINGS The two Committees requested AMEU to address them on two issues relating to the Electricity Distribution Industry and they are: • Solutions for the revitalisation of the DI • Solutions for the rehabilitation of the electricity infrastructure
EDI RESTRUCTURING OBJECTIVES Energy White Paper Objectives EDI Restructuring Blueprint Objectives Achieve the govt electrification programme Universal access to electricity Sustainable electricity supply to low income customers, regardless of location, at affordable prices Industry to operate on a sustained, financially viable independent businesses Acceptable and sustainable security and quality of supply. • Ensure Electrification targets are met • Provide low cost electricity • Facilitate better price equality • Improve financial health of the industry • Improve quality of service and supply • Foster Proper coordination of operations and investment capital • Attract and retain competent employees
EDI RESTRUCTURING OBJECTIVES • A lot of work done by EDI Holdings indicated that we are no where near achieving this, citing a number of reasons for it. • These reasons need to be explored before attempting to respond to the Committees brief
CHALLENGES FACING EDI UTILITIES (MUNICS AND ESKOM) Many Municipal Electricity Distributors are struggling to deliver electricity services due to reasons relating to: • Ineffective asset management • Insufficient infrastructure investment, including maintenance and recapitalisation which has resulted to systems constraint leading to increased supply interruptions
CHALLENGES FACING EDI UTILITIES (MUNICS AND ESKOM) • Lack of skills • Ineffective revenue management – eg Soweto for ESKOM – remedy disconnections • Ineffective customer interaction systems such as Call Centres as reflected in low customer satisfaction indices. • Ineffective network management systems
EDI HOLDINGS’ RINGFENCING INSIGHTS By the time EDI Holdings was wound up, it had assisted around 28 (56) municipalities to perform ring fencing exercises as required by NERSA and also was a prerequisite for participation in the process of the REDs establishment. The Ring fencing exercises provided EDI Holdings with data which helped develop the crucial insight into the state of the the business for different municipal distributors. These insights focused on six areas relating to effective Distribution Business management, and they are • Capital Investment • Network maintenance • Service delivery • Skills and Experience • Quality of Supply • Customers and Revenue
CAPITAL INVESTMENT In terms of capital investment, the insights revealed that: • More than 50% of the Municipalities’ distributors invest less than 5% of their revenue • Capital spending achieved is much lower than the budgeted amount • Capital investment plans are not clearly defined
SKILLS AND EXPERTISE For Skills, the insight revealed that: • There is high vacancy rate in more than half the municipalities analysed • Remuneration is not consistent with the market rate • There is no formal staff development in many municipal distributors • There is lack of evidence of Performance management system and also a lack of evidence of the existence of WSP • Training is not a priority – (Prof this morning alluded that is so) • Municipalities are struggling to attract and retain appropriately qualified staff (linked to bullet 2) • Competitors including Eskom attract the critical skills in the market because of their competitive packages • Aging workforce
NETWORK MAINTENANCE The network maintenance issues identified were: • There is still a predominant use of manual network management systems which are not sustainable • There is no maintenance plans and clear implementation thereof • Maintenance spend is not in line with NERSA recommended level • Long-term asset maintenance and refurbishment programmes are absent in a number of Municipalities Below is an extract of one of the slides EDI Holdings compiled during the ring fencing of different municipal distributors.
Networks are managed via limited / manual systems which are not a sustainable solution Key Points Source: Information Systems Review Documents Source: Information Systems Review Documents Municipality #1: Does not have a formal IT strategy in place, there is no specific call logging system in place. Employees with IT related issues call ITS, who then action the request. Electrical Services department utilizes 4% of applications, services and support. Suprima is a pre-paid sales system used exclusively and dedicated to Electrical Services. Municipality #3: There are no SCADA systems in place to monitor the network. All faults and network abnormalities are noted in a log sheet and captured into the respective registers and databases. The registers and databases are used to compile monthly reports, which are consolidated into two half yearly reports. Municipality #6: The technical support and maintenance provided by Sabata Municipal Solutions. Municipality #7: Incidents are logged via the BMS Consulting call logging system and a technician is dispatched. Municipality #8: There is currently no comprehensive IT strategy in place. Municipality #11: Event and fault management reporting is done on an adhoc basis with monthly reports. The function is performed by the IT Manager – a manual process.
SETTING THE RECORD STRAIGHT • Eskom is running a smooth Distribution Business free of problems (ADAM backlog includes Eskom, revenue collection challenges, losses (compare with comparable Munics), What about network constraints. • Municipalities unable to manage their distribution businesses – refer to comment from NT presentation on electricity losses • Electrification – Munics not spending (dependencies and level of funding from INEP) – Inequities in funding between the two implementing agencies • Signing of SDAs – Obedient child – (NERSA role) - Centlec • Service Delivery Protests (Those that are EDI related, which areas)? • Municipalities not embracing Energy efficiency programmes for fear of revenue loss – Perception rather than reality. • Challenges of Copper theft and illegal connections (contribution to non technical losses • NERSA comments Comments from Prof
REVITALISATION OF EDI Now that the picture has been painted, one may start to address the Committees’ request. While we were given two separate issues to address, it is very difficult to separate, and will therefore deal with both of them as one. As literature from the work of EDI Holdings indicates deteriorating network assets caused by lack of asset maintenance and asset recapitalisation, caused by lack of management expertise and resource constraints, AMEU is recommending a simple approaches to ensuring rehabilitation of Electricity Distribution Infrastructure which will lead to the stability of operation at local level and finally culminating in the stable industry. These will be briefly discussed now.
SHORT TERM INTERVENTIONS • As there is acknowledgement that, not all the utilities are challenged in the same manner, it makes sense that those stronger players assists those that are struggling for now. Again, EDI Holdings developed a strategy document suggesting an “Approach for Assistance to Municipalities with Severe Electricity Service Delivery Challenges. • EThekwini Metro, uMsunduzi Municipality, and Eskom are the living example of the implementation of this approach. • It must be noted that this approach does not suggest takeover, but ensuring that immediate delivery shortcomings are addressed and the assisted is provided with tools to improve capacity to stand on their own, by ensuring effective skills transfer.
MEDIUM TERM INTERVENTIONS • Yes, much publicity has been given to the maintenance backlogs and expressed in financial terms, implying that if the funds are injected into the business, all these challenges will disappear. Unfortunately that is not the case. • As we are the people on the ground, we believe that some fundamentals need to be put in place first before talking money. • The country needs to address the skills issue, ensuring that every utility devices clear training programmes for all critical skills needed in the industry.
MEDIUM TERM INTERVENTIONS • It is unthinkable that there is a utility that can operate without the appropriate mix of well qualified engineers, Technicians, and Electricians. • To be able to achieve this healthy mix, Municipal Distributors must be afforded a chance to compete effectively in the market by ensuring that they offer market related packages which will ensure that the talent they have developed is not lost to the likes of Eskom and other players competing for the same resources
DEALING WITH FRAGMENTATION AND SCM ISSUES • It is important to note that the so called fragmentation of the South African EDI is derived from schedule 4B of the Constitution giving Electricity Distribution authority to Municipalities. • As there are 234 Municipalities in the country we have a potential of 234 Municipal Electricity Distributors in the country. However, some have, by circumstances, opted to engage Eskom as their service provider, leaving only 180 (175) different municipal distributors, down from 187. • The question is how do we remain separate and still achieve economies of scale and therefore exploit our buying power as a collective? (economies of Scale)
LEGAL ENVIRONMENT • While SCM policies and processes have been blamed for many ills experienced in our distribution system maintenance and expansion due to long processes that the Electricity units have to go through. • This is not necessarily the case. We have to identify enablers in the legal environment that can facilitate quick turnaround in procurement processes. MFMA allows for the use of the existing contract by a municipality where the proper process was followed by one of the municipalities or any organ of state. • If we cooperate in terms of standardisation of network design and equipment specifications, we can easily exploit this MFMA provision, and among other things, achieve economies of scales as we can pool our requirements and can also facilitate sharing of spares if one utility experiences problems with spares especially for maintenance.
FUNDING • When one considers the extent to which maintenance backlogs have escalated, R27.4 billion in 2008 and increasing by R2.5 billion a year as EDI Holdings ADAM project findings, it means that municipalities, and Eskom, are not in a position to raise relevant funds to eradicate this backlog. • We do not have to reinvent the wheel. We have to leverage on the work already concluded by EDI Holdings and modify it a bit. • It is believed that the proposed ADAM funding can work in an environment where all the players are effectively capacitated. • When considering ADAM programme may need to find ex EDI Holdings staff with project management experience to assist in managing projects within the programme.
ON RESTRUCTURING • There was a lot of good work done during the days of the EDIR Project Office before the establishment of EDI. My sense is that not all that work was harvested and used as a platform when EDI Holdings started it work of restructuring the industry. • The same mistake must not be repeated. There is significant good work completed by EDI Holdings which need to be evaluated for relevance and utilised in any decision related to any possible future restructuring of the EDI. • The silence following the winding up of EDI Holdings without any clear pronouncement of what was to happen with the process of restructuring left most industry players confused.
ON RESTRUCTURING • We are grateful at this intervention by the Committees as we believe the outcome of these Public Hearing will provide the much needed clarity on the future of the Distribution Industry. • The view that all Municipalities are struggling must be corrected. Some are operating at the same level as their counterpart, Eskom, and even better in some areas of distribution system. • ADAM report has details of struggling Municipalities and the efforts must be focused on those to avoid network and service collapse.
SOME VIEWS ON RESTRUCTURING • While there are municipal distributors that are still struggling, there is some evidence that those that still have some capacity are prepared to assist the ones that struggling. We must therefore exploit that willingness to ensure stabilised service delivery by encouraging MoUs between the parties. • As Eskom has a bigger footprint nationally, we need to encourage joint efforts between Eskom and the stronger Municipality willing to assist. • This will start the process of cooperation and the piloting of combined SCM processes ensuring that the smaller municipal operations ride at the back of the contracts of the assisting partners to source equipment and services, and building their credibility at the same time.
SOME VIEWS ON RESTRUCTURING • As ring fenced Electricity Operation is one of the licence conditions, Municipalities must be encouraged to keep their Electricity operations ring fenced and those not ring fenced to start the ring fencing process to allow them to account properly to the regulator. This will obviate criticism that some municipalities were not able to provide the information required by the regulator as it is hidden in the parent municipality’s information such as financials. • To ensure optimum performance, the Association recommends that Municipal Entities are formed, but remain strongly accountable to the parent Municipality. There are strong reasons for this recommendation. • We also believe that with the establishment of municipal entities, the country will be ready for any end state restructuring that may ultimately be recommended while acknowledges Local Government mandate and authority to distribute electricity.
