National RED Presentation to the Portfolio Committee on Minerals and Energy June 2006 by Eskom Holdings Limited

Contents Background EDI Restructuring Blueprint Objectives Movement towards 6 Metro REDs and 1 National RED Advantages of a National RED Compliance with Government requirements for restructuring National RED aligned to Blueprint objectives The National RED is financially viable Benefits to Municipalities Key Government Objectives Evolution of the National RED Role of EDI Holdings Summary Conclusion

1. Background Cabinet decision - 14 Sep 2005: “6 metro REDs to be set up as soon as possible after the local elections” “Eskom to play a critical role in the national RED”

2. EDI Restructuring Blueprint Objectives The 5 key objectives of EDI restructuring are: Low cost electricity Reliable & high quality supply & service Electrification targets Meet legitimate employment, economic & social interests of all employees Operate in a financially sound & efficient manner

3. Movement toward 6 Metro REDs and 1 National RED RED Formation Principles Transfer to metro REDs Eskom business within metro boundaries Metro RED’s to be formed as municipal entities under local government legislation National RED to be formed from non metro munics and Eskom Distribution Metro RED’s and National RED will have critical mass to achieve restructuring objectives National RED a credible consolidation vehicle for non-Metro municipalities Minimum changes to network configuration, to avoid costs & disruption to customers Tshwane Johannesburg Ekurhuleni eThekwini Nelson Mandela Bay Cape Town The names of the six new Distribution regions are listed at the top of the picture i.e. RED 1 (Western)

4. Advantages of a National RED Credible consolidation vehicle for municipal electricity undertakings - immediately address weak rural distribution - leverage on Eskom experience of TBVC and SGT incorporations - equalise the financial impact of restructuring through inclusion in the national rate base Use the Eskom national footprint as the basis of the National RED - enhanced economies of scale through proven technology, business processes & scaleable IT solutions - improved service delivery through customer focused value chains - sustained industry skills in various centres of excellence - national planning and infrastructure development earlier progress - limited dependence on RED creation and related cost - a base for equitable national tariffs Support free basic electricity & universal access to electricity by 2012 - proven Eskom track record particularly in rural electrification - economies of scale with respect to planning, project management & national infrastructure development - delivery of national electrification infrastructure - government interaction on electrification funding and reporting limited to a single service provider (national RED) as opposed to multiple municipalities Staff Related Benefits Limited staff transfer : stability for industry employees Low impact of harmonization of different C.O.S.

5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring National RED Restructuring in accordance with the Constitution Enhance municipal responsibility for service delivery Transfer Eskom business in metro boundaries for integrated metro service delivery Provide a full service under a standard agreement (in line with regulatory requirements) Support municipal obligation for social & economic development through strong role in integrated development planning, electrification & FBE Municipal finances not adversely affected Metro REDs will gain additional revenue from transfer of Eskom businesses within their boundaries Municipalities to be compensated through interest bearing financial instruments or lease payments

5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring (continued) National RED Aggregate personnel cost must not increase Using the 6 Metro REDs and the National RED as consolidation bases for the industry, ±70% of the industry employees (Eskom Distribution and Metro’s) will not be adversely affected by transfers (as a result of restructuring). Resulting in: Limited changes in conditions of service, pension funds, job content and grading, etc. Stability to the bulk of the workforce and thus the industry Transfers to be limited to essential direct staff only No additional funds or taxes to fund restructuring There is no immediate need for National RED to create a new legal entity, avoiding the financial implications of transferring assets, staff, business operations and data. Economies of scale to support benefits realisation

5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring (continued) National RED Expedite Delivery Metro’s electricity distributors can easily absorb the Eskom businesses within their geographic and jurisdictional boundaries, avoiding unnecessary delays Eskom Distribution division can be used to immediately amalgamate non-metro municipalities Both Metro’s and Eskom are largely kept bundled in current form, thus allowing them to immediately deliver on key outputs

6. National RED aligned to Blueprint Objectives Proposed RED structures Low cost equitable tariffs Enhance economies of scale & skill through maximum industry consolidation facilitate the implementation of equitable national tariffs quality of supply & financial viability Maintain investor confidence Eskom based National RED access to capital markets Quality of Supply Enhance service delivery by transferring Eskom business in metro boundaries for integrated metro service delivery by providing national capability for rural distribution Minimise extent of National RED creation process to accelerate amalgamation

6. National RED aligned to Blueprint Objectives (continued) Proposed RED structures Electrification Support social & economic development through strong role in integrated development planning, electrification & FBE Staff career opportunity Through consolidation, enhance national opportunity for all industry staff Financial Viability Minimise financial impact on municipalities through fair compensation for assets transferred lease income where assets are not transferred Appropriate compensation for municipal surpluses Maintain investor confidence Eskom based National RED access to capital markets Suppliers to keep current Key Industrial Customers Minimise transfer of staff to limit impact of harmonization of C.O.S.

Current Dx base excl. metros 7. The National RED is financially viable with current industry structures maintained All amounts are in R millions (2004) Current Dx base excl. metros National RED Revenue 17 655 18 695 Sales Revenue 11 905 13 441 Network cost (wheeling and subsidy) 3 771 3 621 Elec & Rural Subsidy (Key Industrial Customers) 1 060 1 000 Elec & Rural Subsidy transferred to metro REDs Incl in sales revenue -287 Elec & Rural Subsidy (Metro RED contribution) 920 Purchases @ 12.62c/kWh 7 240 6 088 Gross Profit 10 416 12 608 Operating Expenses 8 922 11 010 Bad debt 239 578 Service Charges 617 591 Other 8 066 9 841 Net Income before Tax 1 494 1 597 Financial modelling indicates: National RED is financially viable Key Assumption: maintain current industry structures Maintain regulated subsidies Maintain regulated network service charges No worse than current losses No worse than current bad debts No long-term municipal (service) support Failure of Assumptions would imply High Metro RED profits based on retention of rural subsidies High tariffs for rural customers Failure of objective for equitable tariffs Incentives contrary to ASGI-SA for rural development Financial support from National Treasury

8. Benefits to Municipalities MUNICIPAL REQUIREMENT NATIONAL RED OFFERING Financial Position not adversely affected Through fair asset compensation (sale or lease), plus appropriate compensation for surpluses Effective and efficient electricity service provision Effective service provision based on NERSA regulatory standards Delivery on Electrification and FBE targets based on contractual agreements Equitable electricity tariffs Low equitable tariffs in the long term due to enhanced business efficiencies through consolidation and economies of scale The viable National RED a base for equitable national tariffs

9. Key Government Objectives The viable National Red will support the current Key Government objectives: Universal access by 2012 Massive challenge for next 6 years Poverty alleviation FBE Employment opportunities Stimulate economic growth in rural areas ASGI-SA Support 6% growth Support BEE and BWO Social upliftment of standard of living Benefits of electricity Attract Investment Reliable and good quality supply

9. Example: Refurbishment - Industry Status Eskom Refurbishment – no backlog Eskom historical refurbishment & strengthening 5 years 2000 to 2004: R5,0bn Eskom (national RED) planned refurbishment & strengthening 5 years 2005/06 to 2010/11: R10,9bn Municipality Refurbishment - R9,3bn (estimated backlog)* Only R1,9bn - R5,6bn budgeted by municipalities NER 2004 determined that only 1/3 of municipalities making necessary provisions Conclusion: EDI requirements are better served by a national organisation *Source: EDI Holdings

10. Evolution of the National RED Start with Eskom Distribution as a base Restructuring in process for many years. Prolonged uncertainty has resulted in: staff (and industry) instability postponement of investment by industry high cost and rework An evolving industry model is required - avoid further delay create the Metro RED’s and the National RED as a pragmatic solution Proposed governance and ownership model: Create the National RED from Eskom Distribution as a base Due to its distributed national operations, Eskom Distribution is the most logical vehicle to form the base of the National RED Create a stable industry model to realize restructuring benefits including: Amalgamation of non-metro municipalities Infrastructure for ASGI-SA and economic growth Universal Access by 2012 May evolve to a wholly owned subsidiary of Eskom, or longer term, into a separate entity with alternative ownership

EDI Holdings must have a key role to facilitate multiple decisions: 11. Role of EDI Holdings Eskom believes that EDI Holdings is best placed to facilitate programme management of the restructuring, Eskom supports the Blueprint policy: “EDI Holdings’… purpose would be to ensure the successful implementation of government policy towards the EDI, and hence oversee and direct the reforms described in (the Blueprint).” Source: The Blueprint EDI Holdings must have a key role to facilitate multiple decisions: industry wide standards & shared services transfer principles compensation changes to legislation, etc.

12. Summary The proposed conceptual design of the national RED and 6 Metro REDs fully supports: Government requirements for EDI restructuring White Paper objectives for EDI restructuring The national RED will be an effective consolidation vehicle for non-metro municipalities Minimal restructuring effort is required to immediately address the problems of rural distribution The national RED will significantly contribute to meeting the target of universal access to electricity by 2012 The national footprint will provide the base for significant benefits through economies of scale and skill Municipalities will benefit through secure cash flows from asset compensation / lease The National RED is financially viable EDI Holdings is best placed to programme manage the restructuring

13. Conclusion Eskom is committed to the successful achievement of Government objectives Eskom will work with all stakeholders to make the National RED and the 6 Metro REDs successful