Technical Portfolio Committee Update on the Inter-Ministerial Task Team (IMTT) on the Constitutional, Structural and Systemic Challenges in electricity reticulation. Technical Portfolio Committee 10 October 2017

PRESENTATION OUTLINE Purpose The Inter-Ministerial Task Team (IMTT) Background on the IMTT work The Constitutional authority of municipalities The Problem Structural Issues Systemic Challenges PCC Recommendations PCC Resolutions Recommendations

PURPOSE To present an update on the work of the Inter-Ministerial Task Team (IMTT) on the Constitutional, Structural and Systemic Challenges in electricity reticulation.

THE INTER-MINISTERIAL TASK TEAM Based on the principles of the Intergovernmental Relations Framework Act, 2005 (Act No 13 of 2005) an inter- Ministerial Task Team (IMTT) has been established on the Constitutional, Structural and Systemic Challenges in electricity reticulation. The IMTT comprises of the following members: The Minister for Cooperative Governance and Traditional Affairs (as Chairperson); The Minister of Finance; The Minister of Energy; The Minister of Public Enterprises; The President of SALGA; and The Chairperson of the Eskom Board

THE INTER-MINISTERIAL TASK TEAM CONT.. The IMTT was convened an number of times and work is currently progressing as detailed in the following slides. At the IMTT’s last meeting the President of SALGA was mandated to make a presentation to the President’s Coordinating Council (PCC) that was held in August 2017 as ne next level of the IGR process.

BACKGROUND ON THE IMTT WORK Since the demarcation of Local Government into wall to wall municipalities the distribution and reticulation of electricity has been largely characterised by two main service providers: ESKOM and the municipalities. These service providers distribute and reticulate electricity in accordance with their licenses which are issued by NERSA. There are however different interpretations and perceptions of legislation that governs electricity reticulation, distribution and supply. Guiding Principles: Eskom is an important national strategic asset and its financial viability is of paramount importance. Equally important is that municipalities are able to provide sustainable and affordable services and to collect revenue and be financially sustainable.

CONSTITUTIONAL AUTHORITY OF MUNICIPALITIES Municipalities have the executive authority in respect of and the right to administer the reticulation of electricity (Sect 156 and Schedule 4B of the Constitution) Sect 160(1)(a) provides that a municipal council makes decisions concerning the exercise of its powers and the performance of all the functions of the municipality However; “executive authority” is not defined in the Constitution Electricity Regulation Act, 2006 allows NERSA to issue licences for the distribution of electricity or the trading of electricity. Sect 14 provides that the Regulator may make any licence subject to conditions relating to the format of and contents of agreements entered into by licensees . Sect 28 provides that a municipality must comply with Chapter 8 of the Municipal Systems Act and this Act prior to entering into a Service Delivery Agreement (SDA) with a service provider. A SDA entered into by a municipality with an external service provider must comply with the Municipal Systems Act, the Municipal Finance Management Act and this Act.

THE PROBLEM Municipalities are concerned that their Constitutional authority is undermined by Eskom. They see Eskom as a service provider which provides a service (electricity reticulation) that a municipality must provide. It does so as a public company (regulated by company legislation) on the strength of a licence issued to it by NERSA; without reference to the Municipal Systems Act. In the absence of contracting and regulatory mechanism (SDAs) between Eskom and municipalities: Municipalities unable to levy surcharges in Eskom supply areas Municipalities unable to exercise credit control in Eskom supply areas There is a lack of tariff parity between municipal supply areas and Eskom supply areas There are conflicts over supply areas etc

THE PROBLEM CONT… The Lack of service delivery agreements therefore renders the municipality as a service authority less effective due to the loss of revenue, lack of credit control, public lighting issues, IDP alignment issues, reduced information sharing as well as mismatch in service and tariffs, amongst others. There are several structural and systemic issues arising from the current dispensation and these can be attributed to the escalation of Eskom Debt by municipalities.

STRUCTURAL ISSUES

STRUCTURAL ISSUE: PUBLIC LIGHTING Public lighting is part of the package of electricity reticulation services However, Eskom in its areas of supply does not provide public lighting (installation) and maintains it is a municipal function. Where a service provider supplies electricity, they should also provide lighting for public safety given that they use the same assets to provide the public lighting. Eskom at times delays the energising of streetlights that have been installed by municipalities, citing several issues like misalignment of specifications, standards and capacity which compromises public safety. Whilst municipalities install energy efficient lighting (through the Energy Efficiency Demand Side Management Grant) in Eskom areas, Eskom maintains a high flat rate tariff. IMTT view: The matter of street and public lighting will be further addressed in the Technical Committee as the Department of Energy has specific aspects it wants to address in this regard.

STRUCTURAL ISSUE: THE ROLE OF MUNICIPALITIES IN RENEWABLE ENERGY The role of municipalities in renewable energy requires a policy intervention in order to provide guidance on the matter. The City of Cape Town initiated legal proceedings against the Minister of Energy, challenging her refusal to approve the request by the City to buy renewable energy from independent power producers. IMTT view The matter should be considered together with the occurrence where private developments are developed independent of the grid are not connected to the traditional reticulation system.

STRUCTURAL ISSUE: AREAS OF SUPPLY NERSA currently implementing Geographic Information System (GIS) to review and update Schedule 1 (list of supply areas) of electricity distribution licenses for Municipalities and Eskom in Free State This process also aims to confirm by way of consensus, the current supply areas with corresponding polygons between Eskom and Municipalities Municipalities are concerned that NERSA is seen to be supporting Eskom in taking over municipal areas On face value, the process is an innocent administrative due diligence exercise, however: It exacerbates the stalemate between municipalities and Eskom in terms of municipal constitutional powers and the absence of an SDA Involves review of Eskom supply areas without resolving the executive authority of municipalities for reticulation in those areas NERSA to engage SALGA to resolve this process and not individual municipalities, to ensure a common approach This matter is still under discussion of IMTT where it was agreed that matter be addressed with NERSA

SYSTEMATIC CHALLENGES

SYSTEMIC CHALLENGES The Systemic challenges include the following: ESKOM credit control mechanisms for municipal bulk accounts are not aligned to the Local Government Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA) The need to rationalise of municipal tariffs. Notified maximum demand and related penalties. Reconciliation of municipal debt to ESKOM. The historical debt owed to and by municipalities. The unsustainability of current payment agreements between ESKOM and municipalities.

ESKOM BOARD’S CONCESSIONS TO ADDRESS SYSTEMATIC CHALLENGES The following matters were approved by the Board, for implementation from 1 July 2017: Reducing the interest rate charged on overdue municipal bulk accounts from prime plus 5% to prime plus 2.5%; Payment terms being extended from 15 days to 30 days for municipal bulk accounts; Payments received from municipalities being allocated to capital first then interest; The rationalisation of municipal tariffs from eleven to three has been approved by the ESKOM Board and will be submitted to NERSA. The IMTT discussed the concessions, but required ESKOM to indicate if the interest charged is calculated as compound interest or single interest. The view of the IMTT was that single interest needs to be charged. The writing off of historical debts of municipalities raised by SALGA was not addressed and thus needs a policy intervention.

SYSTEMIC CHALLENGE: NOTIFIED MAXIMUM DEMAND (NMD) Where municipalities exceed their NMD more than once in a given month, a penalty is levied over the next 12 months. Municipalities are required to pay the full arrears account in order to increase the NMD. In cases where a municipality is unable to pay their full arrears they continue to exceed NMD and pay penalties. Municipalities must be assisted with technical capacity to re-determine realistic Notified Maximum Demand. Upon conclusion of this process, ESKOM should permit the increase of the current NMDs of municipalities, irrespective of arrears. Further, Eskom needs to make provision for amending the NMD where there is roll out of electrification projects. Penalties should only be levied for the specific month in which the Notified Maximum Demand is exceeded and not for a 12 month period. IMTT did not resolve this matter and requested the Technical Team to investigate further and recommend possible solutions.

SYSTEMIC CHALLENGE: RECONCILIATION OF MUNICIPAL DEBT TO ESKOM No reconciliation of amounts due to ESKOM by municipalities has been undertaken. Prescription of older debt needs to be considered. Where interest forms a larger part of the outstanding amount, the principle of quantum duplum (interest charged may not exceed the capital amount due) should apply. National Treasury, COGTA and SALGA to formally assist municipalities undertake a reconsolidation of all amounts due to ESKOM to determine: the capital and interest due respectively, and the amount legally recoverable by ESKOM, taking into account prescription and the principle of quantum duplum. IMTT supports the reconciliation of accounts.

SYSTEMIC CHALLENGE: THE HISTORICAL DEBT OWED TO AND BY MUNICIPALITIES ESKOM and SALGA convened a meeting on 11 August 2017 to discuss the matter and try to resolve this aspect. ESKOM proposed interventions in terms of section 139(5) and (7) of the Constitution. SALGA was not supportive of this. The parties agreed to the following: That the R7.1 billion currently being owed to municipalities by national and provincial governments be recovered from National Treasury and be paid to ESKOM. That an independent company be appointed and funded by National Treasury, to do a full diagnostic of the 60 highest owing municipalities in order to determine affordable repayment arrangements for each municipality, and that affordable and sustainable agreements then be entered into between the municipalities and ESKOM.

UPDATE FROM PCC

KEY IMTT RECOMMENDATIONS TO THE PCC That the PCC notes that no resolution was found in terms of the constitutional challenges whereby the executive authority of municipalities for electricity reticulation is not recognised. That the PCC endorse the resolution of the IMTT that the High Court be approached for a declaratory to express itself on the two opposing views with regard to the constitutional challenges relating to electricity reticulation. That the PCC notes that the resolution of a number of the structural challenges are dependent on the resolution of the Constitutional challenges. That ESKOM align its credit control policies to that of municipalities to ensure that ESKOM supports and assists municipalities with credit control with the Eskom supply areas. That National Treasury undertake a comparative study on the debt owed to municipalities by national and provincial government and how this impacts on the most indebted municipalities in terms of bulk electricity accounts. That the historical debt of municipalities for bulk municipal accounts be written off.

PCC RESOLUTIONS The proposal to approach the Court to seek a declaratory order was not supported by the PCC. The reason is that Eskom is a Government entity and therefore, the executives of the relevant government departments and entities (i.e. the Ministers of Energy, Public Enterprises, Finance, COGTA and executives of SALGA and Eskom) should meet to discuss and take resolutions on the issues raised. That the Ministry of COGTA should convene this meeting and a report be provided before the end of October 2017. That Ministries of Finance, COGTA and executives of SALGA should engage further on the Municipal Funding Model. The resolution is being implemented; a IMTT meeting has been scheduled for the 17th October for further deliberation and processing.

RECOMMENDATIONS That the Portfolio Committee notes the update on the Inter-ministerial Committee work on the Structural and Systemic Challenges in electricity reticulation. That the Portfolio Committee notes the resolutions of the President’s Coordinating Committee on the Constitutional, Structural and Systemic Challenges in electricity reticulation.