1 National Electricity Regulator (NER) & National Energy Regulator (NERSA) Annual Reports 2005/2006

2 Content Introduction NER: –Structure of the Board –Structure of the Secretariat –Strategic Objectives –Performance Against Objectives –Highlights –Staff Analysis –Financial Performance NERSA: –Structure of the Energy Regulator –Structure of the Secretariat –Strategic Objectives –Performance Against Objectives –Highlights –Staff Analysis –Financial Performance Conclusion

3 Introduction The National Electricity Regulator (NER) was established in 1995 to regulate the electricity industry NER discontinued its operations on 30 September 2005 but continued regulating the electricity industry until 16 July 2006 when it ceased to exist Therefore the NER Annual Report covers the period 1 April 2005 to 30 September The electricity regulation report continues until 31 March The period 1 April 2006 to 16 July 2006 is covered with an attached addendum

4 Introduction (Cont.) The National Energy Regulator (NERSA) was established on 1 October 2005 and the Regulator Members were appointed with effect from that date NERSA took over all assets and liabilities of NER as well as all personnel and other resources on its establishment date, 1 October Therefore the NERSA Annual Report covers the period 1 October 2005 to 31 March 2006 NERSA started regulating piped-gas and petroleum pipeline industries on 1 November 2005 and electricity industry on 17 July 2006

5 National Electricity Regulator (NER)

6 Structure of the Board The NER Board consisted of 9 Board Members –8 Members were part-time –1 Member was full-time (CEO) Board Members were appointed by the Minister of Minerals and Energy The Board had 7 committees –Policy –Regulatory Committees: Pricing and Tariffs Licensing, Compliance, Complaints and Customer Services –Governance Committees: Audit and Risk Finance Human Resources –Ad Hoc Committee on the establishment of NERSA

7 Structure of the Secretariat 3 Divisions each with a number of departments –Headed by Executive Managers 3 Specialised Support Units –Headed by Senior Managers Executive Managers and Senior Managers report directly to CEO Total staff complement = 115

8 Strategic Objectives Ensuring the effective and efficient regulation of the existing electricity industry Ensuring that the NER is appropriately prepared and able to effectively regulate the future reformed electricity industry Promoting appropriate procurement mechanisms and regulatory frameworks for new generation capacity Developing and retaining requisite skills and competencies within the NER Improving and sustaining the good image of the NER

9 Strategic Objectives (Cont.) Enhancing the integrity of the NER by improving internal management systems and procedures Effectively contributing to the socio-economic development programmes of government Establishing a single energy regulator (which will incorporate gas and petroleum pipelines regulation, in addition to electricity regulation) on the foundation of the experience of the NER

10 Performance Against Objectives Of the planned activities 57% were executed as planned Of the 37 planned activities, 30% were on track Key factors impacting on execution: –ESI/EDI restructuring process –Slow responses from external participants –Challenges in the effective management of projects –High staff turnover experienced during the year

11 Highlights The Multi-Year Price Determination (MYPD) mechanism was approved by the Board and published for stakeholder comments followed by a well attended stakeholder workshop The Board approved the MYPD for Eskom Price Basis2006/072007/082008/09 Average price increase excluding EDI restructuring costs 4.57%5.37%5.67% Average price increase including EDI restructuring costs 5.10%5.90%6.20%

12 Highlights (Cont.) Licensed RED 1 before it was formally launched on 1 July 2005 Announced the findings of an independent technical audit of City Power Conducted independent technical audits in eleven municipalities and Eskom electricity distributors Launched second National Integrated Resource Plan (NIRP2) and commenced with development of NIRP3 under the guidance and approval of the NIRP Advisory and Review Committee Western Cape Power Outages investigation and report Tariff review of 157 municipalities

13 Highlights (Cont.) Participated in a “Take a girl-child to work” programme where six girls from Khayelitsha, Mitchell’s Plain and Langa were mentored by the Board members, CEO and Executive Managers NER Staff raised an amount of R for the Schaaphok School near Entabeni Game Farm in the Limpopo Province Launched the National Energy Regulator (NERSA) on 22 November 2005 Participated in and contributed to regional and continental initiatives (RERA & AFUR)

14 Staff Analysis (Race) LevelAfricanColouredAsianWhiteTotal Top Management3 (75%) 1 (25%) 4 Senior Management 10 (77%) 3 (23%) 13 Professional & Middle Management 30 (69%) 2 (5%) 2 (5%) 9 (21%) 43 Skilled and Technical 19 (83%) 1 (4%) 1 (4%) 2 (9%) 23 Semi-skilled14 (93%) 1 (7%) 15 Total76 (78%) 3 (3%) 4 (4%) 15 (15%) 98

15 Staff Analysis (Gender) LevelMaleFemaleTotal Top Management3 (75%) 1 (25%) 4 Senior Management6 (46%) 7 (54%) 13 Professional and Middle Management 22 (51%) 21 (49%) 43 Skilled and Technical12 (52%) 11 (48%) 23 Semi-skilled4 (27%) 11 (73%) 15 Total47 (48%) 51 (52%) 98

16 Financial Analysis Financial Management and Accounting at the NER is governed by: –PFMA –Treasury Regulations –Generally Accepted Accounting Practices (GAAP)

17 Financial Analysis (Cont.) Approved expenditure budget (excluding Capex) for the period 1 April 2005 to 30 September 2005 was R36.2 million Actual Expenditure for the period 1 April 2005 to 30 September 2005 was R33.5 million Surplus as at the end of the financial period was R2.8 million

18 Financial Analysis (Cont.) Budget Variance Analysis BudgetActual Income (R’000) LeviesR 34.0 millionR 35.3 million Expenditure (R’000) Employee CostsR 18.2 millionR 16.3 million Other Operating CostsR 11.1 millionR 14.2 million Fees for ServicesR 6.1 millionR 2.1 million Board MembersR 0.8 millionR 0.9 million Total Operating ExpenditureR 36.2 millionR 33.5 million CapexR 1.1 millionR 3.9 million Total ExpenditureR 37.3 millionR 37.4 million

19 Financial Analysis (Cont.) Expenditure categories in relation to the total operating expenditure –Employee Costs = 49% –Fees for Services = 6% –Board Members = 3% Capital expenditure amounts to 10% of total expenditure

20 Financial Analysis (Cont.) NER received an unqualified audit opinion from the Auditor-General The audit did however raise the following emphasis of matter: –Payroll (Salary) Fraud –Transfer of operational activities to NERSA

21 Financial Analysis (Cont.) Operational Results: –Total assets have increased to R54.8 million indicating an increase of 24% from 31 March 2005 –Cash and cash equivalent of R23 million consists of the NER’s main bank account and deposits held at the Reserve Bank in terms of Co- operation of Public Deposits (CPD) –Other operating expenditure includes rental under operating leases for office equipment, variable costs and notional depreciation charges –12% of capital expenditure was spent on acquisition of computer hardware and accessories, 14% on computer software, (16%) on office equipment and the balance on the building –Land and building is fully paid up and owned by NERSA with a carrying value of R20.0 million as at 30 September 2005 –The ratio for current assets to current liabilities is 6:1 which indicates that NER was a viable entity as a going concern on 30 September 2005 when all assets and liabilities were transferred to NERSA and NER discontinued its operations

22 National Energy Regulator (NERSA)

23 Structure of the Energy Regulator 9 Regulator Members –5 part-time Members –4 full-time Members Appointed by Minister of Minerals and Energy Chairperson & Deputy Chairperson part-time Full-time Regulator Members: –Chief Executive Officer –3 Regulator Members primarily responsible for each of electricity, piped-gas and petroleum pipelines regulation

24 Structure of the Energy Regulator (Cont.) 8 Subcommittees of the Energy Regulator: –Policy –Regulatory: Licensing Pricing and Tariffs Compliance and Dispute Resolution –Governance: Finance Audit and Risk Human Resources Remuneration

25 Structure of the Secretariat 4 Divisions each with a number of departments –Headed by Executive Managers 5 Specialised Support Units –Headed by Senior Managers Executive Managers and Senior Managers report directly to CEO Total staff complement = 143

26 Strategic Objectives To monitor and administer the Mozambique Gas Pipeline Agreement To implement the Gas Act To license existing and new activities in the piped- gas industry To implement the Petroleum Pipelines Act To license new and existing activities in the petroleum pipeline industry To facilitate access to the petroleum pipeline infrastructure

27 Strategic Objectives (Cont.) To develop and implement appropriate pricing and tariff methodologies for the petroleum pipeline industry To implement the National Energy Regulator Act, especially in areas of public hearings, enquiries, tribunals and resolution of disputes Effectively contributing to the socio-economic development programmes of government To establish and maintain a comprehensive database for the energy industry To promote competition and BEE in the three industries To ensure that the requirements of the industry acts on safety, environmental, health and security in the industry are complied with

28 Performance Against Objectives NERSA Strategic Plan (2005/06 – 2007/08) and Business Plan (2005/06) was developed under the assumption that NERSA would be established on 1 April 2005 This only took place on 1 October 2005 Gas Act, 2001 (Act No. 48 of 2001), Petroleum Pipelines Act, 2003 (Act No. 60 of 2003), Gas Regulator Levies Act, 2002 (Act No. 75 of 2002) & Petroleum Pipeline Levies Act, 2004 (Act No. 28 of 2004) came into operation on 1 November 2005 Activities relating to the regulation of the piped-gas and petroleum pipeline industries only started on 1 November 2005 (7 months later than planned for in the Business Plan) Therefore it was expected that all projects relating to the regulation of piped-gas and petroleum pipelines will not be concluded as planned Of the 35 planned projects – work on only 7 (20%) commenced 28 projects that were not started did not form part of the basis of reporting

29 Performance Against Objectives (Cont.) 84% of activities executed as planned Of the 56 planned activities – 73% on track Key factors impacting on execution: –Start-up momentum associated with a new Energy Regulator, especially regulating piped-gas and petroleum pipelines industries for the first time –High staff turnover –Number of secondments due to the establishment of NERSA

30 Highlights - Regulatory Inaugural meeting of the Energy Regulator on 9 November 2005 Gas Act Rules Part One: Licensing 2006 were approved by the Energy Regulator and promulgated Petroleum Pipelines Act Rules Part One: Licensing 2006 were approved by the Energy Regulator and promulgated Energy Regulator submitted comments on the draft Piped-Gas and Petroleum Pipeline Regulations to the Minister of Minerals and Energy

31 Highlights - Governance Members of the Energy Regulator appointed with effect from 1 October 2005 As required by the National Energy Regulator Act, 2004 (Act No. 40 of 2004), all staff in the employment of the NER on 30 September 2005, were transferred to the employment of NERSA with effect from 1 October 2005 NER assets and liabilities transferred to NERSA on 1 October 2005

32 Highlights – Governance (Cont.) Ring-fencing methodology was implemented as part of National Energy Regulator Act requirement for financial reporting structure The proposed piped-gas and petroleum pipeline levies were gazetted in November 2005 and representation received, analysed and taken into account in revising the 2006/07 budget Revised Strategic Plan (2006/07 – 2008/09) and Business Plan with Budget (2006/07) was submitted to the Minister of Minerals and Energy for approval Participated in and contributed to regional and continental initiatives (RERA & AFUR)

33 Staff Analysis - Race LevelAfricanColouredAsianWhiteTotal Top Management4 (80%) 1 (20%) 5 Senior Management 15 (75%) 1 (5%) 4 (20%) 20 Professional & Middle Management 27 (69%) 3 (8%) 1 (3%) 8 (20%) 39 Skilled and Technical 17 (85%) 1 (5%) 2 (10%) 20 Semi-skilled17 (89%) 2 (11%) 19 Total80 (78%) 5 (5%) 2 (2%) 16 (15%) 103

34 Staff Analysis - Gender LevelMaleFemaleTotal Top Management4 (80%) 1 (20%) 5 Senior Management10 (50%) 10 (50%) 20 Professional and Middle Management 20 (51%) 19 (49%) 39 Skilled and Technical10 (50%) 10 (50%) 20 Semi-skilled3 (16%) 16 (84%) 19 Total47 (46%) 56 (54%) 103

35 Financial Performance Financial Management and Accounting at NERSA is governed by: –PFMA –Treasury Regulations –Generally Accepted Accounting Practices (GAAP)

36 Financial Performance (Cont.) Approved expenditure budget (excluding Capex) for the period 1 October 2005 to 31 March 2006 was R53.5 million Actual Expenditure for the period 1 October 2005 to 31 March 2006 was R49.3 million Deficit as at the end of the financial year was R15.6 million

37 Financial Performance (Cont.) Ring-fencing methodology –According to Section 13 of the National Energy Regulator Act –All direct costs – allocated directly to the three regulated industries –The common costs will be apportioned based on the direct employment costs for each industry –All common costs will thus be allocated on the following ratio: 60% electricity industry 20% piped-gas industry 20% petroleum pipeline industry

38 Financial Performance (Cont.) Budget Variance Analysis (Combined) BudgetActual Income (R’000) LeviesR 56.2 millionR 31.0 million Expenditure (R’000) Employee CostsR 24.5 millionR 16.9 million Other Operating CostsR 20.6 millionR 23.7 million Fees for ServicesR 6.9 millionR 6.5 million Regulator MembersR 1.5 millionR 2.2 million Total Operating ExpenditureR 53.5 millionR 49.3 million CapexR 5.9 millionR 2.6 million Total ExpenditureR 59.4 millionR 51.9 million

39 Financial Performance (Cont.) Budget Variance Analysis (Electricity Industry) BudgetActual Income (R’000) LeviesR 34.0 millionR 31.0 million Other IncomeR 0.8 millionR 1.3 million Expenditure (R’000) Operating ExpenditureR 36.2 millionR 36.0 million Deficit from Operations -R 3.3 million

40 Financial Performance (Cont.) Budget Variance Analysis (Piped-gas Industry) BudgetActual Income (R’000) LeviesR 11.1 million- Other Income-R 0.5 million Expenditure (R’000) Operating ExpenditureR 8.7 millionR 6.7 million Deficit from Operations -R 6.2 million

41 Financial Performance (Cont.) Budget Variance Analysis (Petroleum Pipeline Industry) BudgetActual Income (R’000) LeviesR 11.1 million- Other Income-R 0.5 million Expenditure (R’000) Operating ExpenditureR 8.7 millionR 6.6 million Deficit from Operations -R 6.1 million

42 Financial Performance (Cont.) Expenditure categories in relation to total operating expenditure –Employee Costs = 34% –Fees for Services = 13% –Regulator Members = 4% Capital expenditure amounted to 5% of total expenditure

43 Financial Performance (Cont.) NERSA received an unqualified audit opinion from the Auditor-General The audit did however raise the following emphasis of matter: –Payroll (Salary) Fraud –Establishment of NERSA Implementation of audit findings are being addressed and monitored by the Operational Risk Committee at staff level and reported on to the Audit and Risk Subcommittee of the Energy Regulator to ensure compliance

44 Financial Performance (Cont.) Operational Results: –Net deficit for NERSA for the year ended 31 March 2006 was R15.6 million –R30.9 million was collected as levies from the electricity industry for the period 1 October 2005 to 31 March No levies were received from the piped-gas and petroleum pipeline industries –Expenditure incurred of R49.3 million was within the approved budget –Fees for Services included Auditor General Remuneration and technical consultancy costs for projects –More than 50% of NERSA purchases are made through BEE companies

45 Financial Performance (Cont.) Operational Results (Cont.): –Total assets have increased to R47.8 million indicating an increase of 8.4% from 31 March 2005 –The ratio for current assets to current liabilities is 1.6:1 which indicates that NERSA is a viable entity as a going concern –Cash and cash equivalent of R21 million consists of NERSA’s main bank account and deposits held at the Reserve Bank in terms of Co-operation of Public Deposits (CPD)

46 Financial Performance (Cont.) Operational Results (Cont.): –Other operating expenditure includes rental under operating leases for office equipment, variable costs and notional depreciation charges –40% of capital expenditure was spent on acquisition of computer hardware and accessories, 29% on office equipment, (8%) on computer software and licenses and the balance on the building –Land and building is fully paid up and owned by NERSA with a carrying value of R20.6 million as at 31 March 2006

47 Conclusion NER formed a good basis for NERSA establishment Electricity regulation existed since 1995 whilst hydrocarbons regulation is at its infancy (2005); licensing in particular is a challenge On the date of transfer of the assets and liabilities NER was a viable entity as a going concern Transition from NER to NERSA is being managed Cash-flow mitigating strategies and (piped-gas and petroleum pipelines) levies collection mechanism are being developed, formalised and implemented Staff recruitment, development, motivation and retention remain a challenge

48 Thank You