National Electricity Regulator Parliamentary Portfolio Committee (NER) Annual Report 2004/2005 Presentation to Parliamentary Portfolio Committee (Minerals & Energy) 2 November 2005

PRESENTATION OUTLINE Profile of the National Electricity Regulator (NER) Strategic objectives Highlights Staff analysis Financial performance Conclusion

PROFILE OF THE NER NER is the Regulatory authority over the electricity supply industry Established in terms of Electricity Act, No. 41 of 1987 (as amended) The Board consists of Chairperson, CEO and 7 members The Board of the NER is the accounting authority in terms of the PFMA Staff during reporting period: 115

PROFILE OF THE NER (cont.) NER is listed as public entity in terms of schedule 3A of the Public Finance Management Act No. 1 of 1999 (as amended), (“PFMA”) NER is funded through levies imposed on licensed generators of electricity The budget is submitted to the Minister for Gazzetting and approval on an annual basis

PROFILE OF THE NER (cont.) New CEO was appointed in May 2004 Major challenge: to steer NER from from an electricity regulator to an energy regulator Minister extended term of current Board members to prepare for establishment of Energy Regulator

PERFOMANCE AGAINST OBJECTIVES 1. Ensuring effective & efficient regulation 143 municipal tariffs received and considered Evaluated & approved the Eskom tariff application Developed cross-subsidisation framework Independent audit of City Power Approved IPP NER commissioned an electricity industry risk asessment. One of the risks identified was a need for new generation capacity

PERFORMANCE AGAINST OBJECTIVES Ensuring effective & efficient regulation (cont.) NER Board approved a 4.1% increase to Eskom’s average price at a nominal rate of return of 11% - implemented on 1 January 2005 NER approved a general municipal tariff increase guideline of 4.3% based on the Eskom price increase, inflation and other cost drivers relevant for municipal distributors – implementation July 2005

PERFORMANCE AGAINST OBJECTIVES (cont.) Ensuring effective & efficient regulation (cont.) A compliance monitoring framework was developed and implemented for Distributors The NER commissioned an independent audit of City Power

PERFORMANCE AGAINST OBJECTIVES 1 Ensuring NER prepared & able to effectively regulate the future industry Participated in DME & EDI Holdings Working Groups A framework for EDI technical regulation developed Developed a web-based licensee information system to accommodate the new ESI structure planned activities executed

PERFORMANCE AGAINST OBJECTIVES 2. Ensuring NER prepared & able to effectively regulate the future industry (cont.) NER has developed a draft high-level view of the multi-year price path (MYPP) for generation, transmission and distribution Incentive Based Regulation (IBR) methodology has been developed for Transmission Published Second National Integrated Resource Plan (NIRP) to assist in decision-making with regard to the construction of new power stations in the future.

PERFORMANCE AGAINST OBJECTIVES 2. Ensuring NER prepared & able to effectively regulate the future industry (cont.) NER also decided to engage external auditors to audit the ten largest municipalities The following projects were completed in preparation for the first RED: Draft licences Guidelines for retail tariffs Guidelines for wholesale tariffs RED wholesale trading arrangements framework Cross-subsidy policy

PERFORMANCE AGAINST OBJECTIVES 3. Promoting appropriate procurement mechanisms & regulatory framework for Gx capacity Developed, compiled & published the NIRP 2 Actively participated in DME led competitive bidding process for new Gx capacity Developed a Cost Recovery Mechanism for costs associated with PPA between Eskom & IPP’s NER also participated in the drafting of the Request for Qualification on transmission connection and operating

PERFORMANCE AGAINST OBJECTIVES (cont.) 4. Developing & retaining requisite skills & competencies within NER International co-operation and partnership resulted in training of NER staff at University of Florida (PURC) Management attended a Supervisory effective course Received approval for NER/NARUC Regulatory Partnership Programme 6 Staff members attended regulatory course in Norway

PERFORMANCE AGAINST OBJECTIVES (cont.) 5. Improving and sustaining the good image of the NER Participated in the 2nd AFUR Annual Conference and General Assembly Participated in the 1st SAURA Executive Committee Produced publications: Lighting Up SA, Electricity Supply Statistics, NER Quarterly Journal

PERFORMANCE AGAINST OBJECTIVES (cont.) 6. Enhancing the integrity of the NER by improving internal management systems and procedures Developed a systems and information technology standards documents Adhered to all legislative reporting requirements Approved a Risk Assessment framework and strategy for internal risk Established an ORC: mitigating strategies & monitoring strategies for internal risks Establishment of an Internal Audit Unit Development of a fraud policy and establishment of a fraud hotline

PERFORMANCE AGAINST OBJECTIVES (cont.) 7. Effectively contributing to the socio-economic development programmes of government 66 CCF’s were established and 41 CCF’s were monitored 65 Customer education events were conducted Actively contributed to development of Free Basic Electricity Policy Actively participated in the Poverty Reduction Conference through better regulation Board approved Energy Efficiency and Demand Side Management (EEDSM) Regulatory Policy

PERFORMANCE AGAINST OBJECTIVES (cont.) 8. Establishing a single energy regulator using NER as a building block A project team on preparation for establishing ERSA NER Ad Hoc Board to oversee NERSA creation Developed a draft regulatory framework for piped-gas and petroleum pipelines Developed NERSA Strategic Plan and Business Plan Developed & implemented a capacity building & training programme Developed a change management & communication strategy NER commissioned a building enhancement project at the cost of R 4 million in preparation of NERSA

PERFORMANCE AGAINST OBJECTIVES 61 % planned activities executed Of the 65 strategic activities 51% on track Of 40 operational activities 73% on track Factors impacting on execution: ESI/EDI restructuring externally driven External participants’ slow response Challenges in the effective management of projects High turnover of experienced staff 1% planned activities executed

NER STAFF ANALYSIS (RACE) Blacks Whites (%) No. of employees (%) SA companies Senior Mgt. 77% 44% 23% 56% Professionals 81% 64% 19% 36% Technicians 91% 51% 9% 49% Clerks 94% 58% 6% 42% TOTAL 85% 80% 15% 20%

NER STAFF ANALYSIS (GENDER) Males Females (%) No. of employees (%) SA companies Senior Mgt. 53% 73% 37% 27% Professionals 49% 45% 51% 55% Technicians 52% 48% Clerks 22% 31% 78% 69% TOTAL 44% 60% 56% 40%

FINANCIAL PERFORMANCE Brief background Financial management and accounting of NER is governed by: PFMA, Treasury Regulations and Generally Accepted Accounting Principles (GAAP)

FINANCIAL PERFORMANCE 2. Budget overview Approved budget for 2004/05 was R 63 million Actual expenditure was R 59 million Surplus as at end of financial year was R 4 million. The Minister approved the utilisation of the above surplus funds for the establishment of NERSA

FINANCIAL PERFORMANCE 3. Budget variance analysis INCOME RECEIVED (R’000) BUDGET ACTUAL Levies 62 166 62 166 Interest 1 000 1 885 Total 63 166 64 051 EXPENDITURE (R’000) BUDGET ACTUAL Employees Costs 31 571 28 913 Operating Costs 21 482 20 587 Fees For Services 9 060 7 799 Capex 2 146 1 332 Board Members 1 450 1 317 TOTAL 65 709 59 948

FINANCIAL PERFORMANCE 4. Expenditure analysis Expenditure categories in relation to total actual expenditure Operating expenses =35% Employee costs = 48% Fees for services = 13% Capex = 2% Board Members fees = 2%

FINANCIAL PERFORMANCE 5. Audited Financial Statements (AFS) NER received an unqualified audit opinion from the Auditor General The audit report raised the following matters of emphasis: Revaluation of Land and Building Human Resources Management Financial Management Asset Management

FINANCIAL PERFORMANCE 6. Financial and asset management Development of efficient and effective systems of internal control is work in progress to implement corrective measures. Implementation of audit findings are being addressed and monitored by the Operation Risk Committee chaired by the CEO, and reported on to the Audit and Risk Committee of the Board to ensure compliance Internal controls on expenditure management have since been developed and approved by the Board to comply with section 51(1)(a)(i) of the PFMA

FINANCIAL PERFORMANCE 7. Operational results Net surplus of the NER for the year ended 31 March 2005 was R 4,123 million R 62 million was collected as levies indicating a 100% collection rate of levies imposed, with Eskom accounting for 98% of levies received R 1,8 million was income received from interest from call deposits Expenditure incurred of R 59 million was within the approved budget

FINANCIAL PERFORMANCE 7. Operational results (cont.) Fees for services included technical consultancy costs for projects to develop benchmark mechanisms in regulatory standards More than 50% of NER purchases are made through BEE companies

FINANCIAL PERFORMANCE 7. Operational results (cont.) Total assets have increased to R 44 million indicating an increase of 12% compared to 2004 The ratio of current assets to the current liabilities is 479% which indicates that NER is a viable entity as a going concern. Cash and cash equivalent of R 32 million consists of NER’s main bank account and deposits held at Reserve Bank in terms of Co-operation of Public Deposits (CPD)

FINANCIAL PERFORMANCE 7. Operational results (cont.) Operating expenditure includes rental of R 845,979 under operating leases for office equipment and the rest is made up of variable costs and notional depreciation charges 53% of capex was spent on acquisition of computer hardware and accessories, 30% for office equipment and 17% for computer software and licenses. Land and building is fully paid up and is now owned by NER with a carrying value of R8,1 million as at 31 March 2002.

FINANCIAL PERFORMANCE 8. The NER financial performance The NER financial performance can be summarized as follows: Income Statement YEAR ENDED 31 March 2005 31 March 2004 Variance R’000 R’000 Levies 62 166 63 509 (1 343) Expenditure 59 949 52 760 7 189 Surplus 4 123 11 995 (7 872) Capital Expenditure 1 333 3 666 (2 333)

CONCLUSION The NER: has met its strategic objectives as pointed out above has laid a good foundation for NERSA has set a good foundation for Multi-Year Price Determination (MYPD) and Multi-Year Price Path (MYPP) is managing the high staff turnover has fully utilized the budgeted funds has introduced a cash flow management risk strategy is aiming at a clean audited financial report

CONCLUSION (cont.) The NER: has established the Operational Risk Committee (ORC) has extended the mandate of Audit Committee to cover risk related issues, is contributing towards mitigating risks factors in conducting the NER business

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