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Presented by: P Nzimande CEO - EDI Holdings 19 November 2003

Towards a Restructured Electricity Distribution Industry. Presented by: P Nzimande CEO - EDI Holdings 19 November 2003. Notes. Presentation Outline. History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs

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Presented by: P Nzimande CEO - EDI Holdings 19 November 2003

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  1. Towards a Restructured Electricity Distribution Industry • Presented by:P Nzimande • CEO - EDI Holdings • 19 November 2003 Notes

  2. Presentation Outline • History of Restructuring • Challenges Facing the Industry • Vision of Restructuring • Main Features of The Blueprint • Maps of REDs • Restructuring Process • REDs Characteristics • Effects On Stakeholders • EDI Holdings Company and Role • Co-operative Agreements • Key Milestones • Benefits of Restructuring • Short-term Objectives • Risks • Conclusion

  3. History of Restructuring Considerable Debate over EDI REDs Approach Endorsed ERIC Report Cabinet Approved Start of Restructuring Process EDIRC Established Appointment of PWC Blueprint Submitted to EDIRC Early 1990s 1997 1999 End 1999 April 2000 Aug 2000 Blue Print Approved by Cabinet: May 2001

  4. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  5. Current Situation PERCENTAGE OF CONSUMERS SALES VOLUME 234 Municipalities Eskom Distribution Eskom Distribution 234 Municipalities

  6. Challenges Facing the Industry • Current industry structure is highly inefficient owing to fragmentation • Inadequate maintenance of networks • Inability to supply electricity to the indigent • Unequal treatment of consumers across the country • Significant disparities in tariffs • Current industry structure is highly inefficient owing to fragmentation • Absence of economies of scale in respect of investing in assets, sharing of facilities, services, regulation, people development etc. • Limited opportunity to introduce competition

  7. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  8. Vision of Restructuring To Consolidate the South African Electricity Distribution Industry Into Six Financially Viable Regional Electricity Distributors

  9. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  10. Main Features of Blue Print • Six REDS • Creation of EDI holdings • EDI holdings to have effective control over REDS • Human Resources Planning including Social Plan • RED ownership • Cost reflective tariffs • Prices to poor households to be capped • Local government levy on electricity prices

  11. Main Features of Blue Print (Cont..) • Special deals for large industry to be honoured • Mitigate the required increase in tariffs • Electrification to continue • Competition for large customers • Regulation of EDI • Transitional support to the weakest distributors • Support from EDI Holdings for the restructuring process

  12. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  13. Rationale For Boundaries • Size • Ensuring economies of scale • To ensure benchmarking • Critical mass in the competitive wholesale electricity market • Balance • Urban / rural balance • Rural electrification • Customer numbers (700 000 – 1.4m rising to 1.1m – 2.4m) • Load mix (domestic consumption which is the key driver of customer service costs, is balanced) • Assets employed (line length and transformer capacity per customer) • Income per household

  14. Rationale For Boundaries • Implementation costs • Minimization of network re-configuration requirements • Contain at least one existing distribution control centre • Contain at least one work management centre, one call centre and a reasonable distribution of local stores / depots • Do not violate significant geographical boundaries / features • Financial viability • Each RED must be able to fund their: • On-going operations • Required new capital • Service debt to a gearing level of up to 70% • Earn a reasonable return on equity on the business

  15. PREFERED OPTION - SIX REDS 6 4 5 2 1 3

  16. RED 4 Customers (000’s) 720 Load (TWh) 31 Electrified (%) 70 RED 2 Customers (000’s) 1006 Load (TWh) 29 Electrified (%) 73 RED 6 MAP & BOUNDARIES Customers (000’s) 1008 Load (TWh) 28 Electrified (%) 60 6 6 Pretoria Pietersburg Pretoria Lydenburg East Rand Rustenburg Nelspruit 4 East Rand Lichtenberg Vryburg 5 5 Witbank Kroonstad Johannesburg 2 4 Johannesburg Newcastle Gauteng area enlarged Ulundi 2 2 Harrismith Kimberley Upington Bergville Richards Bay Bloemfontein Pietermaritzburg Durban Prieska RED 5 Household income less than R15,000 per year De Aar Calvinia Customers (000’s) 683 Load (TWh) 37 Electrified (%) 60 1 Victoria West Umtata District Management Areas (few customers) RED 1 Graaf Reinet Customers (000’s) 857 Load (TWh) 14 Electrified (%) 81 3 Large Industrial Customers RED 3 Customers (000’s) 1400 Load (TWh) 29 Electrified (%) 56 East London Cape Town Port Elizabeth

  17. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  18. Restructuring Process Stakeholder Management Establish Holding Company Blue Print Planning and Ring fencing Of EDBs Establish REDs Support And Oversee REDs Phasing Out Of Holding Co May 01 June 03 18 Months 24 Months 24 Months +-6 Months EDIR Project Office EDI Holdings EDIRC EDI Holdings Board

  19. Restructuring Process (Cont..) • restructuring process will take place in a controlled manner with minimal risk to ongoing operations • .... whilst maintaining sufficient momentum to ensure completion

  20. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  21. REDS Characteristics [transition] • REDs will be owned by asset contributors transferred to the RED through a share scheme and are subsidiaries of the Holdings Company • Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating • For the businesses transferred into a RED, the RED will • be service providers of electricity and Municipalities are service Authorities • have its own Board appointed by shareholders • be registered under the Companies Act • hold distribution licenses • comprise employees working for Municipal distributors and Eskom distribution transferred to the REDs • On day one REDs will be similar but will subsequently diversify • Municipalities not yet transferred will • be customers of the REDs • hold distribution licenses • Business as usual

  22. REDs Characteristics [post transition] • REDs will be owned by asset contributors through a share scheme • Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating • REDS will : • be service providers of electricity and Municipalities are service Authorities • have its own Board appointed by shareholders • be registered under the Companies Act • hold distribution licenses • comprise all employees working for Municipal distributors and Eskom distribution

  23. REDs Characteristics [shareholding] National Government Golden Share Reducing EDI Holdings Voting Share Reducing Municipalities Dividend Shares Increasing 5 Year-period

  24. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  25. MUNICIPALITIES current surplus earned from the provision of electricity to be assured through the levy and dividends required to ring-fence electricity business assets contributed will represent value of shareholding in the REDS govern the provision of electricity through the service delivery agreement SALGA will have representation on EDI Holdings Board ESKOM separate and ring-fence distribution business into six regions assets contributed to REDS will be compensated may choose to be a contestable market retailer ESKOM will have representation on EDI Holdings Board Effects on Stakeholders

  26. EMPLOYEES employees involved in electricity distribution businesses of municipalities and ESKOM will be transferred to REDS in terms of section 197 of the Labour Relations Act no change to their conditions of service unless collectively negotiated Conditions for redeployment will be collectively negotiated a national bargaining council will be established focus on skills development and utilisation a social plan will minimise negative effects to employees as a result of the restructuring CUSTOMERS standardised tariff structures will apply rationalised tariffs initially those consuming more than 100 GWh per annum will be entitled to select retailer of choice improved reliability of supply continued roll-out of electrification schemes Poor residential customers will be subsidized Effects on Stakeholders (Cont…)

  27. Restructuring of the Financial Operations • In the process of RED establishment, the objective is to maintain smooth financial operations. This will be done through: • Maintaining internal financial controls • Maintaining financial reporting capabilities • Planned and structured transfer of financial accountabilities and responsibilities • Maintaining compliance with corporate governance principles • Avoidance of the loss of essential financial skills and experience

  28. Role of EDI Holdings Financial Operations • In the process of RED establishment the role of EDI Holdings Financial Operations will be: • To develop asset evaluation methodologies and principles • To develop financial ringfencing tools and project manage this process • To model the financial viability of REDS • To prepare RED financial plans and business plans • To develop RED financial reporting systems

  29. Role of EDI Holdings Financial Operations cont… • In the process of RED establishment the role of EDI Holdings Financial Operations will be to cont…: • To develop RED financial policies and procedures • To develop RED commercial polices and procedures • To develop EDI funding strategies and to obtain funding • To plan the structured transfer of financial operations to REDS • To manage EDI Holdings financial operations

  30. Impact on Municipal Financial Operations • In the process of RED establishment the role of Municipal Financial Operations will be: • To provide financial services until the REDS have taken over financial operational accountabilities and responsibilities • To ringfence the electricity distribution business • To undertake data clean-up of the electricity distribution business’s customer base, financials and asset register • To provide shared services to the RED as agreed upon in a negotiated SLA • To revise commercial processes • To revise commercial contracts • To transfer customer base, financials and asset register data to the RED

  31. Impact on Municipal Finances • Loss of Revenue • Surplus will be ensured through dividend and levy • Levy currently inherent in municipal tariffs, to be made transparent • Discussions with National Treasury underway on how to deal with this matter • Challenge • Impact on cashflow

  32. Impact on Municipal Finances • The loss of surpluses generated from electricity distributing activities • The loss of cash flow • Reduced effectiveness of credit control • Effect on municipal borrowing; and • The costs of restructuring

  33. Impact on Municipal Finances • The effects of corporate taxation • The differentiation between fair return on capital and monopoly rent • Entitlement to surpluses • The impact on municipal cashflows of in the short to medium term; and • Municipalities ability to borrow

  34. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  35. EDI Holdings Company • 100% owned by national government through the Department of Minerals and Energy Ministry • Board representation - SALGA , ESKOM & GOVERNMENT- 3 non-executive directors each and 3 independent non-executive directors • CEO, COO and CFO • Led by a competency based board • Essentially operating as a project management company to be phased-out in five years

  36. Role of EDI Holdings Company • Plan, control and manage the process of the establishment and implementation of 6 independent and financially viable regional electricity distribution (REDS) companies • Will retain effective control over the REDs through special voting shares • Manage the provision of short-term support by strong and capable electricity providers • Prepare and implement an electricity distribution industry-wide social plan

  37. EDI Holdings Board Members • Advocate Sandile Nogxina-DG, DME (Chairperson) • Ms Nelisiwe Magubane-DDG (Electricity & Nuclear), DME • Ms Thoko Mashiane-Municipal Manager Ehlanzeni District Council (SALGA) • Mr Thabo Mokoena-CEO, SALGA • Dr Stephen Lennon-ESKOM • Mr Jacob Maroga-ESKOM • Ms Dolly Mokgatle-ESKOM

  38. EDI Holdings Board Members (cont..) • Dr Zavareh Rustomjee-IUG • Mr Clive Dunstan-IMATU/FEDUSA • Mr Oupa Komane-COSATU • Ms Judy Parfitt-Resolve Group (Independent) • Mr Ashley Ally-LAETOLI (Independent) • Ms Annalise Jacobs-ABSA (Independent) • Ms Phindile Nzimande-CEO

  39. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  40. Rationale • To legislation the parties have agreed that they shall enter into a co-operative agreement that will enable the Holdings company to achieve its mandate of restructuring the electricity distribution industry facilitate the restructuring in the absence of enabling

  41. Purpose • To bind the signatories to the process of restructuring • To enable the Holdings company to interact with the signatories as autonomous entities in the industry • To facilitate the material assistance to EDI Holdings by industry

  42. Contents • Consent of the parties to the restructuring process • Definition of how Eskom and Municipalities must ring-fence their distribution activities to advance the restructuring of the industry • Framework for provision of resources to Holdings company

  43. Status • the co-operative agreement has been entered into and signed by the following parties: DME, SALGA, Eskom, NER, EDI Holdings • individual municipalities are required to accede to the agreement once their councils have agreed to signing the co-operative agreement

  44. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  45. Key Milestones • Blueprint approved by Cabinet [April 2001] • Co-operative Agreement Signed [May 2002] • Registration of EDI Holdings Company [March 2003] • EDI Holdings operational [July 2003] • Business plan and budget to be approved [October 2003]

  46. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  47. Benefits of Restructuring • A consolidated industry capitalising on economies of scales • Financially viable distributors • Competitive electricity distribution utilities • Rationalised and competitive tariffs • Efficient provision of service • Improved reliability of supply • Continued roll-out of new electrification schemes. • Cross pollination of best practices between utilities

  48. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

  49. Short-term Objectives • Boundaries • Valuation method • Compensation methodology • Ring-fencing toolkit for Municipalities • Restructuring Bill

  50. Presentation Outline History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs Restructuring Process REDs Characteristics Effects On Stakeholders EDI Holdings Company and Role Co-operative Agreements Key Milestones Benefits of Restructuring Short-term Objectives Risks Conclusion

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