BUSA’s position on electricity distribution 26 July 2012

Electricity distribution: problem statement Electricity and energy security is vital for economic growth All aspects of the electricity chain have fundamental problems that are hurting business confidence, curtailing present production and job creation and hurting future investment prospects. 83% of SACCI local chambers indicated that electricity provision (not cost) is a concern and impacts on doing business Electricity distribution impacts on electricity generation. Efficiency losses mean more productive capacity is needed and more environmental impact for same level of GDP The electricity crisis also has broader social implications through lost opportunities and increased costs, impacting on job creation and government revenue

Electricity distribution: broader context The current crisis in electricity distribution is symptomatic of broader problems and issues A lack of maintenance of public sector assets A lack of new investment in the public sector A lack of skills and/or an inefficient or incorrect allocation of skills Lost institutional knowledge and the danger of further capacity losses (due in some cases to age of incumbents) Distribution is tied into local government finances, embedding conflicts of interests. Numerous objectives detract from the primary objective (energy security) and increases inefficiency

The problem has been chronic underinvestment: 1 Source: South African Reserve Bank

The problem has been chronic underinvestment: 2 Source: South African Reserve Bank

Current structure is not ideal Municipalities distribute a large portion of electricity generated Around 50% of distribution through municipalities, the rest is through Eskom Municipalities perform all three functions: asset management (principally new investment), network operation and maintenance, customer services (principally billing and enquiries)

Preferred structure Ideally there should be a separation of responsibilities – within distribution but also between transmission and generation It allows for specialisation and improved efficiency The lifeblood of an economy is competition and where this is possible should be encouraged It eliminates inherent conflicts of interest It provides opportunities for the private sector to participate in and to contribute to better energy security International best practice and experience

What about social and other objectives? Municipalities receive a large part of their revenue from distribution services Around 30% of revenue is obtained from this source There are clearly significant opportunities for cross subsidisation of other activities

Electricity and gas sales make up nearly 30% of revenue Source: StatsSA: Financial census of municipalities for the year ended 30 June 2011

What about social and other objectives? Municipalities receive a large part of their revenue from distribution services Around 30% of revenue is obtained from this source There are clearly significant opportunities for cross subsidisation of other activities However, social and other objectives can be met through a new model Clearly municipalities would have to be compensated for the loss of this source and the transfer of assets, mostly through grants, but indirect benefits could be considerable