Viability of National RED Presentation to Parliamentary Portfolio Committee on Minerals & Energy 21/23 June 2006

Background RED1 established as Municipal Entity (ME) by City of Cape Town (CCT) on 31 May 2005 Commenced operations 1 July 2005 Service Delivery Agreement (SDA) signed with CCT Operating and Transitional Plan for Transfer Agreements (OTPTAs) signed with Eskom and CCT Electricity Department Licence issued by NERSA Initial area of supply: CCT Metro area of jurisdiction Transfer of CCT Electricity Department and Eskom area within the jurisdiction of CCT Metro planned for 1 July 2006 10 May 2019

RED 1 Operating Arrangement CCT SDA RED 1 (Municipal Entity of CCT) Control over CCT geographic area and all customers OTPTA OTPTA CCT Electricity Department Eskom Distribution Portion within Metro Area of jurisdiction 10 May 2019

Lessons of RED1 Establishment (1) Lack of certainty about EDI model and lack of enabling legislation is frustrating the process of transferring CCT and Eskom operations to RED1 Legislative framework of Municipal Systems Act is a very stringent environment in which to establish a RED Difficult to get legacy entities to co-operate Eskom suspensive conditions not met Eskom due diligence CCT has yet to approve asset transfer framework Date of transfer seriously compromised Depends on goodwill of municipality CCT has followed a steep learning curve in dealing with a company of the size and nature of RED1 10 May 2019

Lessons of RED1 Establishment (2) A municipal entity is an extensively regulated governance vehicle – e.g. tariffs, budget approval process National Treasury has not yet prescribed an Asset Transfer Framework in terms of the MFMA The more municipalities involved with a RED, the greater the difficulties will be in obtaining consensus – in the case of a national RED, no single municipality will be the parent and some 187 municipalities would be involved 10 May 2019

Response to EDI Holdings Modelling (1) Results of viability modelling indicate clearly that original Blueprint model of 6 wall-to-wall REDs is the most viable and least cost approach, therefore most suitable industry end-state 6 Wall-to-wall RED model delivers a substantially higher income before tax over 5 years Metro REDs would be increasingly cash positive National RED would be increasingly cash negative and would operate at a loss without external assistance A very high tariff increase in the first year and CPIX + 1% thereafter required for national RED would create tariff imbalances amongst REDs Negative impact on economic growth in area served by national RED Negative impact on cost of doing business in South Africa 10 May 2019

Response to EDI Holdings Modelling (2) 6 Metro RED + national RED model does not leverage Eskom investment in boundary re-alignment R160m abortive expenditure No net benefit from investment to date in restructuring Continued presence of Eskom in Distribution sector as anchor to national RED is: Challenging to coerce municipalities, in a voluntary context, to transfer assets to a national RED if Eskom is the anchor distributor Anti-competitive Will result in a conflict of interests, particularly if metro REDs are obliged to purchase electricity from the national RED 10 May 2019

Response to EDI Holdings Modelling (3) If metro REDs are obliged to purchase from national RED: Cost of energy purchases will be higher Objective of minimising cost to end-user will not be met Opportunity for future competition between REDs will be severely compromised Failure to address objectives of EDI restructuring – optimising tariff structure 10 May 2019

Principles for Transfer (1) The model adopted for the EDI should support the national objective of closing the gap between the 1st and 2nd tiers of the economy by using urban areas as an anchor to support rural communities Should national government decide to proceed with the 6 Metro REDs + national RED model, the principles listed in the following slides should apply to transfer of business to the REDs 10 May 2019

Principles for Transfer (2) There must be only one wires service provider in the RED area of jurisdiction. All electricity distribution activities within the RED area of jurisdiction must be transferred to the RED. All customers within the boundaries of RED, except existing Eskom customers with annual consumption exceeding 100 GW.h, to be transferred to the RED. Contestable customers to be defined as those with an annual consumption exceeding 100 GW.h at one consolidated point of supply. All demand-side management (DSM) arrangements with non-contestable customers to be seated within the RED. All distribution network assets within the RED area of jurisdiction at 132 kV and below (e.g. busbars, transformers, switchgear, dedicated and non-dedicated lines, and all associated support elements such as fibre optic networks etc.) to be transferred to the RED. These assets are to include servitudes/rights of way and associated liabilities. 10 May 2019

Principles for Transfer (3) All other assets and associated liabilities linked to the customers to be transferred to the RED to be transferred in proportion. The infrastructure serving non-RED contestable customers must be transferred to the RED. All business processes and systems to transferred to the RED in proportion. Staff must follow function. All staff that spend 50% or more of their time on electricity business within the RED area as well as the proportionate full-time equivalent of other staff must be transferred to the RED. All relevant functions to be transferred in proportion. Where these cannot reasonably be transferred immediately, or transfer is impractical, transitional arrangements could be considered. All relevant contractual rights and obligations including customer contracts to be ceded to the RED. REDs to purchase direct from Eskom Transmission or a producer/generator under a whole sale pricing system (WEPS). 10 May 2019

Proposed Metro RED1 Area (1) Even if a national RED is established, abutting municipalities should be allowed to join a metro RED on considerations of operational logistics, geography and wires infrastructure Drakenstein and Cape Winelands District Council have, through agreement with RED1, indicated a willingness to consider joining RED1 As an example, the possible footprint of RED1, if a metro RED, is established on the basis of voluntary participation as shown on the next slide The financial viability of a national RED would be further compromised if all abutting municipalities were to exercise their option 10 May 2019

Proposed Metro RED1 Area (2) Based on optimizing distribution network Financial Constitutional choice Abutting municipalities 10 May 2019

RED1 Recommendations (1) RED1 strongly supports the model of 6 wall-to-wall REDS as recommended by the Blueprint RED1 recommends that the 6 Metro REDs + national RED model should not be adopted 6 Wall-to-wall RED model will result in the best balance of customer mix amongst REDs and a better balance in the urban/rural mix Form of legal entity to be reconsidered: REDs as public entities (PE) would be less constrained in ability to exploit business opportunities PE would be less subject to risks inherent in local government decision making 10 May 2019

RED1 Recommendations (2) Customers in all sectors, except Eskom contestable customers, to be transferred to REDs Any cross-subsidy to a national RED or to another RED (e.g. RED3) to be through a transparent mechanism, not hidden by forcing metro REDs to purchase from a national RED Consider changes to legislation to resolve conflicts: Municipalities have the right to choose not to transfer their distribution business to a RED Municipalities can choose to join a metro RED, a national RED, or none Difficult to achieve desired EDI restructuring in these circumstances It must be recognised that municipalities have a right to provide electricity to ALL customers within the municipal boundary regardless of economic sector – not just domestic and commercial 10 May 2019

RED1 Recommendations (3) Enabling legislation should be enacted urgently to overcome conflicts between the EDI restructuring Blueprint objectives, the Constitution and local government legislation: Address powers and functions of municipalities Facilitate achievement of EDI restructuring goals Participation is currently entirely voluntary Compel participation of municipalities and Eskom Define framework as basis for interaction between REDs and municipalities Define the form of entity (municipal or public) Address basis for transfer of assets including Eskom assets Principle that customers should not have to pay twice for assets must be entrenched 10 May 2019

Thank You 10 May 2019