ESKOM POWERS AHEAD WITH LOCAL MERGERS

Monday February 07, 2005 07:07 - (SA)

By Khulu Phasiwe

The merger of Eskom's seven distribution network businesses with the 187 licensed municipalities is on track, says Electricity Distribution Industry Holdings (EDI).

The first of SA's six regional electricity distributors (Reds) will be launched this June. Restructuring the R25bn industry is aimed at eliminating the 2000 different tariff structures that exist between the licensed municipalities and Eskom . These means customers are charged different tariffs even though they live in the same towns or neighbouring suburbs.

The consolidation of the electricity distribution industry is also expected to improve the power supply and its reliability and accelerate government's electrification programme for rural areas. EDI CEO Phindile Nzimande said on Friday that the company expected to establish the first two of six regional electricity distributors this year.

The project would be completed by January 2007.

Cape Town's municipality will get the first distributor in June and Gauteng's Ekurhuleni municipality will get the second, expected to be operating by September.

Nzimande said experience gained during the establishment of the first entity would be used to ensure continuous improvement.

General managers for the proposed new distribution businesses have already been appointed . The remaining regional electricity distributors will be established in the metropolitan councils of Johannesburg, eThekwini, Tshwane and Nelson Mandela (Port Elizabeth). Nzimande said municipalities would own shares in the proposed distributors in accordance with their contribution of assets.

"They will share the profits earned through levies and dividend income, and will govern the provision of electricity through service delivery agreements."

Some municipalities have been reluctant to relinquish their distribution assets for fear of losing out on the billions of rands they generate annually through electricity reticulation.

In terms of the South African constitution, one of the key functions of municipalities is electricity reticulation. Before a municipality can change its mechanism for provision of services, it must first comply with prefeasibility studies and consultations with organised labour and the community.

The Democratic Alliance (DA) said the creation of the Reds was expensive and "inappropriate".

Business Day

RESTRUCTURING OF THE ELECTRICITY DISTRIBUTION INDUSTRY

The distribution of electricity is undertaken by Eskom and about 415 municipalities. The municipalities collectively service about 60% of total customers by number, and about 40% of total customers by sales volume. Municipal electrical departments generally supply to consumers in their local government areas. The municipal distributors differ greatly in customer density, size and type of customer base, geographic spread, financial base and effectiveness.

The challenges that are currently facing the EDI were within the Electricity Industry for a number of years. As a result, numerous studies into the Electricity Supply Industry (ESI) have taken place over the past couple of years, such as NELF, EWG and ERIC.

The issue in the Electricity Distribution Industry is how to transform the industry so that it meets Government’s stated objective of providing low-cost electricity and a high-quality service to our growing economy and to our growing population.

It is important to note that biggest need for change in the South African electricity industry is within the EDI. Therefore, the restructuring of the electricity industry in the near future will be focused on the EDI and not the whole industry.

As a result an Electricity Restructuring Inter-departmental Committee (ERIC) was formed to formulate Governments position on the future structure and financial model for the EDI. The ERIC report describes the challenges facing the industry and Government’s recommendations on the steps that need to be taken to put in place a more effective and efficient industry which is better able to serve the needs of electricity customers. It was intended to be used as the basis for the consultation process with stakeholders on the distribution industry restructuring.

GOVERNMENT’S POSITION ON EDI

Cabinet decided that the EDI should be rationalised to place it on a sound financial footing and to enable it to meet its key objectives. Cabinet’s decision was based on the findings of the Electricity Restructuring Inter-departmental Committee (ERIC).

The recommendations approved by Cabinet and which represent Government’s position on the Electricity Distribution Industry, are the following:

* the consolidation of the electricity distribution industry into the maximum number of financially viable and independent regional electricity distributors. This means that the distribution sections of Eskom and the 420 licensed local authorities will be combined into a small number of RED’s. The number of regional distributors still has to be determined;
* the introduction of cost-reflective tariffs, an electrification fund and a capped tax for part funding of municipal services. The tariffs, any subsidies and tax will be fully transparent. The electrification fund will be administered nationally;
* consultation by the Ministers of Minerals and Energy, of Finance, of Public Enterprises, Labour, Trade and Industry and of Provincial Affairs and Constitutional Development, with major stakeholders;
* the appointment of a full-time restructuring team to investigate detailed issues and involving major stakeholders in the planning of the transformation process.
 

EDI RESTRUCTURING PROCESS

The EDI restructuring process was officially launched with a Ministerial Workshop on 22 August 1997 in Pretoria. All major stakeholders participated in this workshop.

Although detailed differences on matters of principle were expressed, a general message of proceeding with the proposal phase at speed, came to the fore.

In order to activate the EDI restructuring process, the first structure to be put in place was the Stakeholder Advisory Committee (SAC). The Minister of Minerals and Energy appointed 22 stakeholders to this committee, representing all the major role-players in the EDI, consisting of suppliers, customer and labour groupings.

STATUS OF EDI RESTRUCTURING

The EDI restructuring process differs from most of the other State restructuring activities, as it addresses a number of diverse stakeholders, of which the most important are:

- Eskom (60 % of sales, 40% customers);

- electricity departments of municipalities (40 % of sales, 60% customers);

- Provinces (related to their governance of municipalities);

- consumers, ranging from very large and electricity intensive to small;

- labour;

- a number of government departments.

This has the result that the normal state restructuring process needs to be modified at the entry level for the EDI restructuring, in such as manner that the Eskom and the EDI restructuring process are inter linked in this process.

The first phase is the proposal phase, and is nearly completed. The next phase will be the transformation phase to transform form the current fragmented EDI structure, to the implementation of Regional Electricity Distributors.

After a long and difficult gestation period, the birth of EDI Holdings (Pty) Ltd has been announced. The company is destined to lead the long planned and awaited restructuring of the electricity distribution industry, from over 200 municipal electricity distributors and seven Eskom distribution regions, to six independent regional electricity distribution companies.

On 11 July 2003, editor Chris Yelland interviewed Phindile Nzimande, the CEO of EDI Holdings, at her new offices at Eskom Megawatt Park, to find out more about the company and its CEO.

Question 1: What is the current status of EDI Holdings, when did you take up your position as CEO, has the board of directors and management been appointed yet, and if so who are they?

EDI Holdings (Pty) Ltd has been registered and commenced business on 1 July 2003, the day I commenced work. The board of directors has been appointed and comprises:

* Ms. Thoko Mashiane, Ehlanzeni District Municipality * Ms. Dolly Mokgatle, Spoornet * Mr. Oupa Komane, COSATU * Mr. Ashley Bazil Ally, Laetoli * Ms. Nelisiwe Magubane, DME * Ms. Juddy Parfitt, Resolve Workplace Solutions * Ms. Phindile Nzimande, EDI Holdings (CEO) * Ms. Annelies Jacobs, ABSA * Dr. Stephen Lennon, Eskom * Dr. Zavareh Rustomjee, BHP Billiton * Mr. Jacob Maroga, Eskom * Mr. Clive Dunstan, Municipal and Allied Trade Union * Adv. Sandile Nogxina, DME (chairman) * Mr. Thabo Mokwena, SALGA

Question 2: Are the directors stakeholder based, and if so what stakeholders are represented on the board, and in what proportion?

Firstly I must say the board is competency based, with expertise in all the necessary areas, including legal, finance, human resources, business, management, etc., and with a heavy emphasis on expertise in the electricity distribution sector.

Having said this, the process for the appointment of the board comprised nominations from various stakeholders as follows: the Department of Minerals and Energy (2), South African Local Government Association (3), Eskom (3), Labour (2), the Energy Intensive User Group (1), and independents (3).

Question 3: What is your background, and why do you feel you were chosen to lead EDI Holdings?

I qualified and practised as an attorney for four years, and then in 1994 I was appointed special adviser to the MEC in the Gauteng Department of Housing and Local government.

Later, I moved to Johannesburg Metro, as a specialist policy advisor, after which I was seconded as legal advisor to Ketso Gordhan, the then City Manager, for the business transformation of the city structures, which included the former Johannesburg Metropolitan Electricity.

I dealt with the institutional arrangements that were key to the transformation, including the legal framework to ensure that it was compliant with both existing legislation and legislation that was still under development ? to understand and find the connectivity between sometimes competing legislation.

In this I worked closely with the team setting up City Power, and I was also executive sponsor of the Kelvin Power Station IPP deal involving City Power and AES.

Thus, apart from my legal qualifications, I believe I have specific and relevant experience in public sector restructuring, including in the electricity sector, and perhaps this led the selection panel to consider that I was a suitable candidate that could contribute to the restructuring of the electricity distribution industry.

Question 4: What is your personal economic and social outlook, business philosophy and management style? How will this affect your leadership of EDI Holdings?

I am a person who believes in equity, justness and fairness ? things that one does not find easily in this world. I have always operated in the public sector, and I have sought opportunities for enfranchising the previously disadvantaged and furthering the interests of the poor through public service.

And in this I believe that the key is: public service with excellence. Often public service is associated with poor service, and this is something that must be changed.

As far as my management style is concerned, I show and sell people the vision and the goals of the organisation and the direction to be taken, and then give them room to perform and excel as individuals to produce the results.

I am look for solutions, products and results, not explanations.

Question 5: What is the vision, mission, role and function of EDI Holdings in the EDI restructuring process, and what is the timetable?

EDI Holdings has been established to plan, control and proceed to implement the establishment of six independent and financially viable regional electricity distribution companies (REDs).

This will be done in a phased approach. The distribution businesses and assets of municipal electricity distributors and Eskom will not be transferred into EDI Holdings but to the relevant RED, to avoid a double transfer.

When the Minister of Minerals and Energy considers that EDI Holdings has achieved its main objectives, the company will be wound up. At present the timetable envisaged is five years, with the last year planned for support and monitoring of the established REDs to ensure they take off in the right direction.

Question 6: We heard that the Treasury delayed the formation of EDI Holdings pending an investigation into the structure and cost of setting up and staffing the company, and whether this was justified. Did any changes in the initial role/structure envisaged for EDI Holdings result from this investigation?

I do not want to comment on the reasons for the delay by the Treasury as I was not involved in this, and in any case I would consider this to be confidential.

Although the high level design initially envisaged for EDI Holdings was not changed, there were some amendments in setting up and staffing of both EDI Holdings as well as in the EDI restructuring itself, in order to keep costs at a minimum. For example, the staffing of EDI Holdings and the number of executives at the top was adjusted to reduce costs.

However, the conceptualisation of EDI Holdings, and the function and role of the company, was not changed.

Question 7: Who are the shareholders of EDI Holdings and who do the directors of EDI Holdings report to? National government? Local government? Other?

The sole shareholder of EDI Holdings is the state as represented by the Department of Minerals and Energy (DME), and ultimately the board is responsible to and reports to the DME.

It should be remembered that EDI Holdings is essentially a project company with a limited life, set up to perform specific tasks that might otherwise have been conducted by project teams within the DME. EDI Holdings is therefore not an asset based or trading business that might otherwise be considered as a conventional state enterprise.

Question 8: Is there any significance that EDI Holdings is based at Eskom Megawatt Park? Unintentionally or otherwise, what message do you think this sends out?

EDI Holdings is coming in as a rent paying tenant, and there is no significance in the fact that we are based at Megawatt Park, other than that it is all about making the best use of existing industry resources. We needed a cost effective premises and facilities that were centrally located and convenient in terms of our dealings with the major players.

I believe the industry has matured enough not to be concerned about the issue you raise, and perhaps the length of the establishment period has allowed the parties to get to know each other better and assisted in this.

Similarly, players should not be concerned that I may come from a local government background. These are not factors that will determine who benefits. The policies and actions of EDI Holdings will be determined by its corporate governance structures and the need to serve the economy and people of South Africa.

Question 9: There has been some disagreement reported between local government structures (SALGA/municipalities), Eskom and the DME regarding the final shareholdings in the REDs. After transferring its distribution assets into the REDs, will Eskom be compensated e.g. by shareholding in the REDs or by other means? Or will National Government as the sole shareholder of Eskom hold the shares in the REDs as per the initial blueprint proposed by PwC?

The issue of the Eskom/National Government shareholding in the REDs, and any compensation to Eskom for distribution assets transferred to the REDs, is not settled yet, but still under discussion between the DME and Eskom. However the matter is in the open and on the table, and there are a number of possibilities, as you mention. It should be noted that all genuine issues and concerns are being carefully considered and weighed-up in order to achieve an appropriate solution.

Question 10: In the wrangling leading up to the formation of EDI Holdings, some have seen an undue emphasis on the needs of local government, Eskom, management, staff and labour. In contrast, the needs of customers, and in particular industrial, commercial, business and agricultural customers who form the engine of the productive economy, seemed to be the least concern. Your comments?

In the restructuring of the EDI, we need to be very concerned with the needs of customers both large and small, for without customers there is no business. Customers are in fact a key consideration, and special attention is being given to the contestability of energy intensive users amongst the REDs, and the establishment of a competitive energy market. In this regard, customer choice and competition will be an important issue from the beginning. We are also determined that customers will be no worse off in the restructured EDI than under the existing dispensation.

Yes, I agree that in the initial phase there has been a lot of emphasis on the inputs to and the structure of the EDI, and how to proceed from the present position to the envisaged end-state. But as we move forward I expect the emphasis to shift towards the outcomes expected and needed by the economy and the people of South Africa, such as the needs of industry to maintain and improve its competitive position in regional and world markets, for access to electricity by the poor, and for adequate capacity and a reliable electricity supply for all.

Thus I expect there will be different emphases at different points in the restructuring process. But throughout the restructuring, there is the ongoing need to ensure that we keep this plane in flight with a clear view ahead for the pilot, while the managers, engineers and technicians ensure that the engines keep on turning and the wheels don't fall off before the landing!

Question 11: What are your primary short and medium term objectives as CEO of EDI Holdings?

In the very short term, the business plan of EDI Holdings must be finalised and approved.

Then over the next six months, I will attend to seconding and appointing key management executives, and the resourcing of the company to start the restructuring process. These positions include a chief operations officer (COO), chief financial officer (CFO), human resources executive, legal and institutional executive, and company secretariat.

We will also need to re-establish and re-invigorate some of the EDI restructuring project teams that were set up a year or two ago to make progress even before the establishment of EDI Holdings. All of this is key to re-energize and bring direction to the restructuring process.

In the medium term, say after two years, I expect the ring-fencing of the distribution businesses to be very far advanced, with at least one RED in place, and after the third year I hope we will be much further down the road than that.

Question 12: Is there any message you want to give to our readers and the industry as the EDI restructuring process starts?

On the one hand I don't want to pretend to be a knight in shining armour. However, I am here to ensure that EDI restructuring commences in earnest, and that we start seeing the results.

By the end of my term, I want to see a more effective and efficient electricity distribution industry, through rationalisation of the operations of the over 200 existing electricity distribution entities, into six financially viable regional electricity distribution companies, that are capable of providing accessible, affordable and reliable electricity, for the benefit of the economy and the people of South Africa.