ELECTRICITY REGULATION AMENDMENT BILL RESPONSE : ELECTRICITY REGULATION AMENDMENT BILL `

Outline BACKGROUND Why do we need this amendment bill? This is how this Bill facilitates EDI Restructuring STAKEHOLDER INPUTS What stakeholders have said Detailed stakeholder views/responses (Annexure) DME RESPONSE Electricity value chain Industry structure Regulatory status quo Consequences of unregulated “reticulation” PROPOSED WAY FORWARD

Why do we need the Amendment Bill? The Bill seeks to do the following: Facilitate the economic regulation of the whole electricity value chain including municipalities Regulate reticulation services in a manner which recognizes the role of municipalities. Provide for the regulation of service providers by municipalities (SDA) and to harmonize this with the licensing framework Provide uniformity in the treatment of end-users by licensing them Lays a solid foundation towards the formation of REDs

STAKEHOLDER INPUTS

What stakeholders have said There are diverse views in relation to the needs of the stakeholders. “Reticulation” means entire distribution value chain. “Reticulation” is 380 volt distribution only NERSA believes the entire industry needs to be licensed in a similar manner. Licensing the reticulation part of industry impedes municipalities in the execution of their constitutional mandate Municipalities are averse to the regulator’s intervention in the case of non-compliance and only s139 is applicable as a means to intervene Intervention by s139 is not appropriate for reticulation The detailed stakeholder responses are Tabulated below

ELECTRICITY VALUE CHAIN Transmission Lines Substations TRANSMISSION (765/220 kV) POWER STATIONS Industrial Distribution Lines DISTRIBUTION (132/33 kV) Distribution Substations GENERATION METRO/ RED RETICULATION HV (11 & 22kV) Electrification Commercial Reticulation LV (380 / 220V) Domestic Agriculture

Annexure

DME RESPONSE

Industry structure Current EDI structure is highly inefficient owing to fragmentation Absence of economies of scale in respect of investing in assets, sharing of facilities, services, people development, etc. Insufficient investment by municipalities in maintenance, system strengthening and skilled professionals and managers. The root cause of this underinvestment is poor municipal governance

Regulatory status quo NERSA regulates the complete value chain, with limited success at the distribution level. Municipalities have executive authority over reticulation in terms of the Constitution. However, the Constitution does not define reticulation which gives rise to various interpretations from stakeholders. The above anomaly presents challenges in terms of regulating reticulation.

Economic regulation of reticulation Reticulation businesses are not ring-fenced to allow application of regulatory principles Economies of scale are non-existent. Economic regulation should promote efficiencies in the licensed entity. Economic regulation should promote low electricity tariffs in an efficient industry. Municipalities can still apply surcharges AFTER efficient tariffs have been charged for services

Consequences of unregulated “reticulation” There is a proliferation of different tariffs (approx 2000).This results in unequal treatment of domestic end users especially. Municipal domestic tariffs are determined outside the current regulatory methodology that is applied for generation, transmission and distribution. The setting of tariffs outside the regulatory framework has an adverse effect on end-users socially:domestic end users suffer, macro- economically: industry does not invest NERSA has limited powers to enforce regulatory framework over municipalities under the above circumstances.

This is how this Bill facilitates EDI Restructuring The Bill intends to provide regulatory clarity in respect of the role of Municipalities in the envisaged REDs. This is critical given the contestation by stakeholders as already expressed in the submissions Without a resolved regulatory framework, EDI restructuring objectives cannot be fulfilled.

This is how this Bill facilitates EDI Restructuring Scenario Implication for formation of REDs “Reticulation is tantamount to distribution and cannot be licensed” R35 billion industry difficult to regulate. Less appetite for munics to join the REDs. Industry consolidation difficult. Tariffs remain fragmented Some municipalities, especially non-Metros, cannot execute mandates “Reticulation is 380V supply” No municipal buy-in into REDS Risk of Constitutional challenge Persistent regulatory uncertainty as to enforcement Define reticulation by separating wires from retail business

Proposed way forward Scenario Implication Provide for ring-fencing of distribution business License all service providers. Service delivery agreement (by municipality) made compatible with the license conditions (by NERSA) Economic regulation principles easier to implement NERSA has jurisdiction and can enforce compliance e.g. quality of supply and capital investment Challenge of dual regulation addressed