Overview of NER and its Future Business Direction Presentation to Standing Committee on Minerals and Energy Parliament 09 May 2001

Agenda General remarks on regulation NER Vision and Mission ESI Developments –What the NER is going to focus on in future? NER Business Plan and Process –Focus Areas Implications for the NER Conclusion General remarks on regulation NER Vision and Mission ESI Developments –What the NER is going to focus on in future? NER Business Plan and Process –Focus Areas Implications for the NER Conclusion

Areas of Regulation: General Prices & tariffs Standards of service and quality of supply Health, environmental and safety standards Social & national objectives –e.g. electrification, energy conservation, regional and industrial development Prices & tariffs Standards of service and quality of supply Health, environmental and safety standards Social & national objectives –e.g. electrification, energy conservation, regional and industrial development

Complex institutional framework

Why regulate the South African ESI? MonopoliesProtect customers Single buyerProtect customers Ensure order in generation competition Wholesale competition Protect customers Ensure order in generation competition Retail competition Protect customers Ensure order in generation & retail competition

History of Regulation in RSA First regulators established in 1890’s ECB set up by the 1922 Electricity Act –Few powers over municipalities Legislation updated by the 1987 Electricity Act Following NELF process, NER established in 1995 as national regulator by amendment to the 1987 Act in 1994/95. First regulators established in 1890’s ECB set up by the 1922 Electricity Act –Few powers over municipalities Legislation updated by the 1987 Electricity Act Following NELF process, NER established in 1995 as national regulator by amendment to the 1987 Act in 1994/95.

NER Organisation Structure

Role of NER Approve tariffs Set and monitor quality of supply and service standards Arbitrate and mediate in disputes, including expropriation matters Mandate –Powers in Electricity Act –White Paper on Energy Policy –Mandate from Minister of Minerals and Energy Approve tariffs Set and monitor quality of supply and service standards Arbitrate and mediate in disputes, including expropriation matters Mandate –Powers in Electricity Act –White Paper on Energy Policy –Mandate from Minister of Minerals and Energy

NER Vision To be a world class regulator providing leadership to the electricity supply industry in support of sustainable growth and development

NER Mission To regulate the electricity supply industry in accordance with government policy and law, so as to meet the needs of existing and future electricity stakeholders in the most equitable, efficient, cost-effective and sustainable manner

Value Added by NER Assisting government with ESI policy development and legislation Investigations into the electricity distribution industry restructuring to accelerate rationalisation Approval of electricity price increases by suppliers (Eskom and municipalities) Allocation & management of Electrification Fund Assisting government with ESI policy development and legislation Investigations into the electricity distribution industry restructuring to accelerate rationalisation Approval of electricity price increases by suppliers (Eskom and municipalities) Allocation & management of Electrification Fund

Value Added by NER (contd.) Establishment of National Tariff System and move towards cost reflective tariffs Setting minimum standards of supply and service Dispute resolution (Customers/Suppliers) Data base and information resource Facilitating off-grid electrification pilots Establishment of National Tariff System and move towards cost reflective tariffs Setting minimum standards of supply and service Dispute resolution (Customers/Suppliers) Data base and information resource Facilitating off-grid electrification pilots

Corporate Governance Framework CG Handbook in place Board responsible for discharging responsibilities of the NER Management and staff support Board in execution of responsibilities Conduct of business of the Board in line with CG Handbook Board committees CG Handbook in place Board responsible for discharging responsibilities of the NER Management and staff support Board in execution of responsibilities Conduct of business of the Board in line with CG Handbook Board committees

Board Committees Policy Committee –Contributing and responding to changes in the ESI Finance Committee –Safeguard NER assets and maintain adequate accounting records Audit Committee –Monitor financial position of the NER –Develop and maintain effective systems of internal control HR Committee –Assist Board in discharging its responsibilities as employer Customer Services Committee –Assist Board with regard to quality and continuity of services and supply Pricing and Tariffs Committee –Assist Board with approval of pricing and tariffs regimes and increases Policy Committee –Contributing and responding to changes in the ESI Finance Committee –Safeguard NER assets and maintain adequate accounting records Audit Committee –Monitor financial position of the NER –Develop and maintain effective systems of internal control HR Committee –Assist Board in discharging its responsibilities as employer Customer Services Committee –Assist Board with regard to quality and continuity of services and supply Pricing and Tariffs Committee –Assist Board with approval of pricing and tariffs regimes and increases

ESI Developments Government considering ‘Pro-competitive Reform Programme' –Implications for regulation Government also considering establishing other energy regulators –Gas –Liquid fuels Critical to decide on regulatory organisation for RSA now Government considering ‘Pro-competitive Reform Programme' –Implications for regulation Government also considering establishing other energy regulators –Gas –Liquid fuels Critical to decide on regulatory organisation for RSA now

Eskom Transmission Eskom Generation IPP Imports Customers RED 2 RED 1 RED n Special Customers Internal Pool Eskom Enterprises Eskom Holdings

GenCo 2 GenCo 1 GenCo n Eskom holdings Eskom Enterprises IPP Imports Power Exchange RED 2 RED 1 RED n Special Customers State owned independent TRANSMISSION company (incl. SO) Customers

GenCo 2 GenCo 1 GenCo n Eskom holdings Eskom Enterprises Imports Power Exchange RED 2 RED 1 RED m Special Customers State owned independent TRANSMISSION company Eskom Generation Customers

How we went about developing our Business Plan Peer review of Internal Work Programme Prepared regulatory functions under various ESI restructuring scenarios Review of staffing requirements followed Also reviewed possible role in regulating natural gas Presentation today will focus on first stage of ESI reform expected to occur during business planning period Peer review of Internal Work Programme Prepared regulatory functions under various ESI restructuring scenarios Review of staffing requirements followed Also reviewed possible role in regulating natural gas Presentation today will focus on first stage of ESI reform expected to occur during business planning period

Strategic Focus Areas for 2001/2002 Generation Investment –Country level IRP –Licence new entrants –Economic regulation (PBR) Generation Operation –Monitor service adequacy and quality –Economic regulation (PBR) Transmission Investment –Review planning –Economic regulation (PBR) –Expropriation issues Generation Investment –Country level IRP –Licence new entrants –Economic regulation (PBR) Generation Operation –Monitor service adequacy and quality –Economic regulation (PBR) Transmission Investment –Review planning –Economic regulation (PBR) –Expropriation issues

Strategic Focus Areas for 2001/2002 Transmission Operation –Wholesale tariffs –Reliability/quality of service –Continue to accept existing Eskom grid code Wholesale Trading –Monitor internal pool –Monitor economic dispatch Systems Operation –Monitor Eskom internal pool operations –Move towards access rules (IRP) Transmission Operation –Wholesale tariffs –Reliability/quality of service –Continue to accept existing Eskom grid code Wholesale Trading –Monitor internal pool –Monitor economic dispatch Systems Operation –Monitor Eskom internal pool operations –Move towards access rules (IRP)

Strategic Focus Areas for 2001/2002 Distribution Retail –Adopt PWC recommended tariffs –Monitor and enforce existing supply and quality standards –Enforce existing retail terms of service –PBR/price moratorium –Accept govt. designation of REDs and licensees –Address additional revenue requirement for electrification –Monitor REDs financial viability –Customer services Distribution Retail –Adopt PWC recommended tariffs –Monitor and enforce existing supply and quality standards –Enforce existing retail terms of service –PBR/price moratorium –Accept govt. designation of REDs and licensees –Address additional revenue requirement for electrification –Monitor REDs financial viability –Customer services

Strategic Focus Areas for 2001/2002 Special Customers –Accept government policy Electrification –Possible future role in electrification –Off grid involvement –Where to allocate these costs in tariffs Special Customers –Accept government policy Electrification –Possible future role in electrification –Off grid involvement –Where to allocate these costs in tariffs

Additional Staffing Requirements Review & benchmarking of NER showed grossly under resourced Increased responsibilities demand additional HR Not a ‘business as usual’ Business Plan Appropriate skills must be in place Additional 33 staff needed for next year but insufficient budget for this Review & benchmarking of NER showed grossly under resourced Increased responsibilities demand additional HR Not a ‘business as usual’ Business Plan Appropriate skills must be in place Additional 33 staff needed for next year but insufficient budget for this

Budget Budget for 2001= R30 million Increase of 34% over 2000 Levy required for budget = R c/kWh Cost to middle income customers <1c/month Budget for 2001= R30 million Increase of 34% over 2000 Levy required for budget = R c/kWh Cost to middle income customers <1c/month

Conclusion NER focusing on priorities for a changing ESI Lot of work done in putting in place Business Plan NER will focus its efforts on governments priorities for the sector Insufficient budget to skill up totally, but best effort will be made NER committed to serve ESI and its stakeholders, especially customers. NER focusing on priorities for a changing ESI Lot of work done in putting in place Business Plan NER will focus its efforts on governments priorities for the sector Insufficient budget to skill up totally, but best effort will be made NER committed to serve ESI and its stakeholders, especially customers.

Comments on Gas Bill NER supports process to establish framework for natural gas industry –Major potential new primary energy source for power generation –Remote from the current energy sources and supports the transmission system –Promotes regional growth and integration –Very useful demand side management tool (can store gas, but not electricity) Supportive of the proposed new gas legislation NER supports process to establish framework for natural gas industry –Major potential new primary energy source for power generation –Remote from the current energy sources and supports the transmission system –Promotes regional growth and integration –Very useful demand side management tool (can store gas, but not electricity) Supportive of the proposed new gas legislation

Comments on Gas Bill NER supportive of establishing one energy regulatory authority Many benefits to doing this –Many similar regulatory principles –Share regulatory experiences –Blurring of industries –Reduction of costs NER is prepared to form part of new authority Support whatever decision government makes NER supportive of establishing one energy regulatory authority Many benefits to doing this –Many similar regulatory principles –Share regulatory experiences –Blurring of industries –Reduction of costs NER is prepared to form part of new authority Support whatever decision government makes