CENTLEC (SOC) LTD (Addressing EDI Service Delivery Challenges) Centlec Delegation (SOC) LTD Joint Hearing between PC on Energy & PC on Cooperative Governance and Traditional Affairs 26 July 2012

Who are We and What's Our Story ? 2

Background Centlec (SOC) Ltd was established in April 2004 as a municipal entity wholly owned by the Mangaung Local Municipality. It provides an electricity distribution service in the Free State to 5 local municipalities (Mangaung, Kopanong, Naledi, Mantsopa and Mohokare) Other value added services provided by Centlec include:  Training and Development  Support to struggling municipal electricity distributors in the Free State  Embedded generation (Soon to be re-commissioned) Centlec has always been the greatest supporter of EDI restructuring objectives 3

Why was Centlec created? 4 1. To maximise shareholder value. 2. To strengthen the strategic and operational capacity of Centlec. 3. To position Centlec as the key player during the transitional period of the Electricity Distribution Industry (EDI) restructuring 4. To ensure good corporate governance 5. To ensure the financial viability of Centlec.

Cabinet Decision and its Implications On the 8th of December 2010, cabinet took a decision to immediately stop the restructuring of the EDI industry. IMPLICATIONS New industry leaders needed to address EDI challenges A new strategy and approach needed A new willingness and commitment by stakeholders to address EDI challenges is needed 5

EDI Objectives 6 To provide low cost electricity to all consumers, with equitable tariffs for each customer segment; To provide a reliable and high quality supply and service to all customers, in support of The government’s economic and social development plans; To meet the country’s electrification targets in the most cost-effective manner, and so ensure that electrification is contributing to social and economic development; To meet the legitimate employment, economic and social interests of all employees in the sector, and ensure their safety; and To operate in a financially sound and efficient manner, in order to provide a reliable and sustainable future for both consumers and employees. Even though the restructuring process by EDI Holdings has been stopped, the objectives that it was meant to address remain valid and urgent. These are:

Successes and impact to date 7

Successes to date  Reduce losses - In 1991 the losses in SFS towns 35% - now 12%  Increased delivery on electrification + cost benefit  R92,7m with 101,1% performance past 7 yrs  Collective bargaining power & economy of scale  2011 – own financial system (true financial impact, good governance, accountability, clean audit)  Collection rate 82,9%  Arrears collected R191m 8

Role of technology  Meter readings by cell phone – audit trail  Platform for customer information on cell phone  AMR meters for bulk customers  GIS visualisation – debt and meter type 9

Technical Training  Centre capacity – 70 at a time  Training completed

Technical Training Details  Financial Year Totals.doc Financial Year Totals.doc 11

Lessons learned 12

Lesson 1: No Constitutional change required 13  The Constitution does not say that a municipality itself must provide services; it gives municipalities the right to administer the matters assigned to them and then compels municipalities to ensure the provision of sustainable services. In other words, the municipality must take responsibility for the provision of services whether those services are provided by itself or on its behalf by another service provider.  MSA: S ection 76 provides municipal services through either an internal or an external mechanism and also municipal entities operating under the sole or shared control of a municipality. If the service is to be provided through an external mechanism, including provision of the service must be in accordance with a service delivery agreement concluded between the municipality and the external mechanism.

Lesson 2: Service Delivery Agreement Service Authority CENTLEC Service Provider Tariffs Electrification Maintenance & Refurbishment IDP Compliance Service Delivery Agreement (SDA) Service Provision Delivery Kopanong Naledi Mohokare Mantsopa LETSEMENG 14

Challenges 15

Capital Requirements  Electrification shortfall – INEP allocation for munics smaller than for Eskom  Infrastructure upgrades  Vehicles to render the service 16

Tax Exemption  Centlec applied for tax exemption – not granted yet  Impact – 30% tax - remove cash from community 17

Eskom vs munic supplies  Electrification in townships done by Eskom  Tariff in communities differs  Eskom 60,83c/kWh  Munic 82c/kWh  Service delivery standards differ  Eskom surcharge in winter months 235% 18

Performance evaluation by NT  MFMA requirements – performance of entity evaluated with munic  Capital requirements evaluated with munic  No mechanism for business case implementation 19

Eskom Bulk Tariffs  Average Purchase cost Mangaung – 54,08c/kWh  Average Purchase cost SFS  Naledi – 72,76c/kWh  Mohokare – 70,74 c/kWh  Kopanong – 65,37 c/kWh  Average purchase cost SFS – 69,62c/kWh  Average SFS purchase costs 28% higher 20

Proposed Solutions 21

Capital Requirements  Consider alternative funding models (ADAM supported)  MFMA requirements – performance of entity evaluated on its own  Capital requirements evaluated on its own  Create mechanism for business case implementation 22

Tax Exemption  Centlec to be exempted from tax - NT to intervene 23

Tariff Difference SFS towns  Apply Municipal Powers and Functions Act provision with surcharge of %; or  Transfer Eskom areas to munics without compensation (funded originally by Nat Gov) 24

Performance evaluation by NT  MFMA requirements – performance of entity evaluated on its own  Capital requirements evaluated on its own  Create mechanism for business case implementation 25

Way Forward 26

 Adopt Centlec model for country – its already working (Ord 8 of 1962 as amended 2004)  Implement model anchored to metro in each province  Address listed challenges (tax, capital, tariffs, supply areas) on national level 27

Pula !!! 28