COSATU NUM, NUMSA and SAMWU Submission on the Restructuring of the EDI: Response to the 6+1 model 21 June 2006 Portfolio Committee on Minerals and Energy

Presentation Outline Introduction COSATU’s perspective on the EDI Restructuring COSATU’s position on the 6+1 model Way-forward

Introduction - EDI Restructuring is long overdue from the National Electricity Forum and RDP - (2001) PriceWaterhouseCoopers Blueprint: still no end-state vision ? - (2003) EDI Restructuring Bill - withdrawn? - (2004) Electricity Pricing Policy – withdrawn?

Introduction, continues … - 2004/5: “Policy Shift?” Minister Alec Irwin – Budget Vote Speech; public sector-led investment in infrastructure; forging a “Developmental State” ? - Yet: the privatisation of mothballed generators (Kelvin, Grootvlei and Athlone power stations) continues 2005 Electricity Regulation Bill allowing for for concessions and privatisation

Introduction, continues … The 6 + 1 EDI Model leading to stand-alone and deregulated distribution sector, with competition - The multinationals and the free trade lobby has targeted deregulation of ESI and EDI sectors in terms of the General Agreement on Trade in Services (GATS) – in the Hong Kong Round in December 2005

COSATU’s perspective on the EDI Restructuring 1 Overall objectives - End fragmentation in the EDI: 187 licensed municipal distributors with more than 1000 different tariffs - Create and leverage economies of scale – to ensure lower tariffs especially for small business, small manufacturers and the urban and rural poor

COSATU’s perspective on the EDI Restructuring, continues …. - Redress disparities by facilitating skills transfer and leveraging existing infrastructure for the benefit of rural municipalities - Facilitate geographic, inter-tariff and intra- tariff cross-subsidisation from the rich to the poor - Enhance electrification to eliminate the backlog and ensure equal service level -

COSATU’s perspective on the EDI Restructuring, continues …. 2 A National Electricity Distribution Utility (Public Entity): - comprising six wall-to-wall REDs (Eskom Distribution and Municipal distributors) through legislation - Under the National Distributor Utility, REDs remaining as public entities -with national board and decentralised management at RED level

COSATU’s perspective on the EDI Restructuring, continues …. - National government retaining its equity (DME as a policy custodian and DPE as a shareholder ministry through Eskom) - Municipalities owning distributors keep their equity in the national distribution utility – maintaining their credit rating and revenue base

COSATU’s perspective on the EDI Restructuring, continues …. - A strategy to deal with challenges of RED 3 - in addition to using geographic cross-subsidisation - The National Distributor as the end- state of the EDI restructuring rather than a transitional entity - RED 1 should be regarded as a 5 year lead pilot-project

COSATU’s perspective on the EDI Restructuring, continues …. Promulgation of an enabling legislation to: - Provide for governance framework - Provide for the integration of various distribution infrastructure - Provide for equity arrangements between national government (through Eskom) and municipalities owning distributors

COSATU’s perspective on the EDI Restructuring, continues ….. - As a statutory public entity – it must be accountable to Parliament - Enter into service delivery agreements with municipalities - May lead to an amendment of the Municipal Systems Act to permit municipalities to hold equity in the national distributor utility

COSATU’s position on the 6+1 model 1 A competitive end-state will lead to: - Fragmentation, duplication and forfeiture of economic of scale - Stand-alone REDs will have negative impact on Eskom’s balance sheet if it looses its distribution assets - Prevents geographic cross-subsidisation and reinforcement of disparities between regions, urban and rural: undermining the White Paper’s calls for cross- subsidies, in addition to free basic subsidy

COSATU’s position on the 6+1 model, continues … - Competitive EDI will undermine weaker REDs such as RED 3 and RED 6 – as stronger REDs corner large energy users’ market - Prevents geographic cross-subsidisation and reinforcement of disparities between regions, urban and rural: undermining the White Paper’s calls for cross-subsidies, in addition to free basic subsidy

COSATU’s position on the 6+1 model, continues ….. - With 94% customers being households, of which 55% are indigent – the 7th RED would be unsustainable - In the focused scenario, the 7th RED is expected to be loss-making (at least R1.8 billion)

COSATU’s position on the 6+1 model, continues ….. 2 A deregulated EDI with competitive REDs will undermine: - Eskom’s net-worth based on rolling years of profitability - (2004/05 = R5.2 billion). Currently rated A1 (domestic currency debt) and A2 (foreign currency debt) by Moody's Investors Service - Eskom’s debt-to-equity ratio which has recently improved, helping the utility to negotiate cheaper loans for capital expansion – in line with ASGISA.

COSATU’s position on the 6+1 model, continues ….. - Creating competition in the EDI amongst independent REDS is going to lead to corporitisation and privatisation COSATU opposes: - Corporitisation – making the entities to be at arms length, paying tax and dividends like private companies - creation of the stand-alone metro-based REDs as proposed in terms of the 6+1 Model

Way-forward Immediate termination of a piecemeal EDI restructuring process, pending thorough-going engagement on the details of the phases and end-state vision COSATU – NUMSA, NUM and SAMWU scheduled to meet on the EDI Restructuring – in the context of the Jobs and Poverty Campaign

Way-forward, continues … - Need for labour relations stability in the sector for the restructuring to succeed. Therefore, there is a need for clarity on the end-state in terms of the sector-wide bargaining - Social plan is not a substitute for job- security in the sector. Therefore, COSATU would fight against any model that would lead to privatisation and job- losses

- END - Thank you!