CITY OF EKURHULENI (EMM) challenges experienced and possible solutions relating to EDI JOINT PUBLIC HEARINGS BETWEEN THE PC ON ENERGY AND THE PC ON COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS TOPIC: POSSIBLE RESTRUCTURING OF THE ELECTRICITY DISTRIBUTION INDUSTRY Presented by: Fred Fryer 26 July 2012

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

1. Reduce unplanned interruptions, inclusive of copper and cable theft 2. Reduce overall purchases from Eskom to create space for new development, inclusive of a large scale, effective solar geyser rollout 4. Ensure revenue objectives are achieved with good metering and good revenue supportive processes 3. Find skilled resources and keep them (and the existing people) 5. Funding required to address the political mandates with respect to the reduction of connection backlogs 6. Find a solution with respect to Eskom supply areas inside EMM boundaries 7. Difference in tariff levels between a municipality and Eskom Energy Challenges

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

EKURHULENI ENERGY AT A GLANCE EMM has 48 bulk infeed points from Eskom The July 2011 account to Eskom was R890 million Bulk purchase account from Eskom in 2012/2013 will be R6,7 billion EMM predicted income from electricity sales is about R10 billion The City has the following numbers of electricity meters: Credit meters = Large meters = Prepayment meters = Total meters = Eskom supply areas inside EMM boundaries = meters Larger customer meters = +-278

EKURHULENI BULK PURCHASE AND SALES

The graph shows that electricity sales have generally declined, with a slight increase in 2011 This indicates a struggling economy or rising electricity prices forcing efficiency

DISCUSSION: 1.EMM total is 5,2% (see right hand side bar of graph) 2.Brakpan Depot has the highest losses, but is also the smallest of EMM depots (previous slide, 6% of EMM kWh units) 3.Non-technical losses can be reduced (consist of bypassed meters, illegal connections, billing errors, meter errors, etc)

DEMAND METERS – safeguarding income Snapshot of internet based automated meter reading in place for all demand metered customers

DEMAND METERS – safeguarding income Snapshot of internet based automated meter reading in place for all demand metered customers – graphical representation

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

WHAT IS THE PROBLEM? Electricity prices are soaring The value of electricity is, therefore, also rising Valuable assets become a target for criminal elements, who will generate illegal income to themselves The Electricity Distribution Industry must respond to this threat

15 SDBIP – 2011/2012 – 4 th QUARTER PLANNING STATEMENTPERFORMANCE INDICATOR TARGETS ACHIEVED TARGET 2011/20124 th QUARTER Reduce number of customers not purchasing (prepaid vending) over a 90 day period % of customers not purchasing over a 90 day period <10%6,8% Concern over the increasing number of tamper events that become evident Own staff and outsourced contracts ensure that this rate is “contained” as much as is possible ELECTRICITY METERS ARE UNDER ATTACK!

VANDALISM AND THEFT (1) The photo was taken in July 2012, in Villa Liza x2, Boksburg 6 prepayment meters in one pole top box, all bypassed, at least 4 meters destroyed A capital intervention is required involving protective structures and new meters The uncontrolled electricity consumption destroys transformer and cable insulation, even to the point that they catch fire

VANDALISM AND THEFT (2) Higher end customer meter tampered High level of professionalism by tampering person…

FACTORS AVOIDING UNNECESSARY COSTS Reduction in prepayment tampering customers with bypassed meters often use excessive amounts of electricity, EMM purchases each unit from Eskom at 51c in summer and 88c in winter. These units are not “sold” again, i.e. an ave of 60c per unit lost, with no income from that. If one considers an average of 10% technical and non-technical losses, the above figures are 57c and 98c respectively, averaging at 67c/kWh unit. Prepayment meter tampering reduction = lower consumption, lower Eskom (or bulk purchase) account, lower network stress, lower maintenance and standby, higher network reliability, higher income

20 Split prepayment meter, with metering element safely contained inside meterbox TYPICAL METERING USED Split prepayment meter keypad (or customer interface) installed in the house

PROTECTIVE STRUCTURES

PROTECTIVE STRUCTURE – SAFEGUARDING ELECTRICITY METERS FROM INTERFERENCE

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

EMM TOTAL COLLECTION RATE PER CCA REPORT - CONSUMER DEBTORS : 2011/2012 Jun-12May-12Apr-12Mar-12Feb-12Jan-12Dec-11Nov-11Oct-11Sep %97.19%94.80%97.24%91.78%91.08%87.28%95.00%97.32%91.07% EMM ELECTRICITY SUPPLY AREA COLLECTION RATE PER CCA REPORT - CONSUMER DEBTORS : 2011/2012 Jun-12May-12Apr-12Mar-12Feb-12Jan-12Dec-11Nov-11Oct-11Sep %101.8%98.4%101.7%96.0%94.4%90.1%97.6%100.0% EMM NOT SUPPLYING ELECTRICITY COLLECTION RATE PER CCA REPORT - CONSUMER DEBTORS : 2011/2012 Jun-12May-12Apr-12Mar-12Feb-12Jan-12Dec-11Nov-11Oct-11Sep %20.3%23.2%24.3%20.3%23.7%18.0%31.3%33.9%26.4% WHAT IS THE PROBLEM?

GENERAL OVERVIEW OF PROBLEMS EXPERIENCED IN ESKOM SUPPLY AREAS INSIDE EMM BOUNDARIES (1) EMM is unable to leverage payment for other services, by means of the control of electricity – residents, therefore, pay only for electricity (to Eskom) Ekurhuleni controls electricity theft in own supply areas by means of capex investment in “protective structures” and split prepayment meters – there are numerous requests by EMM residents to be supplied by Eskom (reason may be to avoid having to pay) EMM has areas where electricity networks are vandalized to a point where the network must be rebuilt, e.g. Langaville, Brakpan – costs are known to be at about R per stand (network rebuilt, protective structure, split prepayment meter)

GENERAL OVERVIEW OF PROBLEMS EXPERIENCED IN ESKOM SUPPLY AREAS INSIDE EMM BOUNDARIES (2) Creating a sustainable network may then be (if all Eskom supply stands need networks to be rebuilt): stands x R per stand = R2,3 billion (assuming no additional upstream capacity is required) Revenue is only likely to be generated sustainably, if the network is reliable and fairly resistant to tampering, i.e. after investment A cost benefit analysis should take into account avoided costs: Such as less energy purchased from Eskom when electricity consumption paid for, levels out at 300 to 350 units per month per customer And additional income: Such as when water consumption is paid for

GENERAL OVERVIEW OF PROBLEMS EXPERIENCED IN ESKOM SUPPLY AREAS INSIDE EMM BOUNDARIES (3) Prior to July 2012, Eskom and EMM tariffs for residential customers were not the same: The Eskom IBT was lower than the EMM IBT The differentiation in tariff levels created tension between the two sets of customers Since 1 July, the EMM and Eskom IBT’s are the same* * Change made to upper blocks to prevent windfall benefit to higher end customers EMM supplies FBE to Eskom customers valued at +-R60 million per annum

IBT EKURHULENIESKOM Notes VAT exclusive (c/kWh in 12/13 ) ONLY EMM PROVIDES AND PAY FOR 100 UNITS PER MONTH FREE BASIC ELECTRICITY IN BOTH EMM AND ESKOM AREAS A.1 Block (1-50 kWh) 60,83c same A.2 Block (>50 to <=350 kWh) 75,09c same A.3 Block (>350 to <=600 kWh) 111,42c same A.4 Block (>600 kWh for Eskom) Block (>600 to <=700 kWh for EMM) * EMM modification 122,21c same A.5 Block (>700 kWh for EMM only) * Block 5 acts as a theoretical “barrier” to prevent higher end customers from receiving a windfall benefit 200,00c SELECT TARIFF B AT 108,6c 122,21c (> 700 kWh per month customers should select Tariff B, which is R108,60c) EKURHULENI AND ESKOM RATES

SOLUTIONS TO BE EXPLORED (1) One solution may involve EMM to supply all customers within our boundaries This will be capital intensive Capital will have to be phased, skilled resources and material will not be available in one go Adding customers is a 41% increase in numbers Opex budgets may have to increase by a higher margin, given the level of interference with networks Other resources will have to increase (staff, vehicles, etc) As per the original Metro-RED concept, these resources could be taken over from Eskom? Complex barriers – licensed areas, employee + customer issues, more A second solution may involve cooperation between EMM and Eskom to also recover income from other services This will still be capital intensive Complex technical and other barriers…

SOLUTIONS TO BE EXPLORED (2) Execute EMM feasibility study Engage with National Government on: Eskom licensed supply areas inside EMM The investment that will be required (by Eskom) to hand over a commercially viable electrical network, to EMM The likely reaction by communities who may not have been paying for electricity for decades… Who will also realize that the bigger picture involves paying for other municipal services as well… Following success in terms of the above: Engage with Eskom on a suitable area to commence the take-over: based on the condition being acceptable Resolve institutional capacity matters, so that human resources are available to execute work in this area Opex budget to support work in this area

SOLUTIONS TO BE EXPLORED (3) Consolidate the learning process acquired through the first area taken over Commence with the second area And so forth

SUCCESS IS POSSIBLE Our experience in Langaville (and other areas) shows that creating a commercially viable area (i.e. electrical network restored and protected) can result in excellent payment levels in EMM Our experience indicate that a significant amount of work and other resources are required to reach the stage depicted in the next slide

LANGAVILLE IN EMM Langaville proper has active meters EMM electricity income was at a low of R2 300 per month for Langaville Average account of R1,13c per month Post intervention – income is R (or an average account of R138 pm, ave 250 units pm) The R138 per month is payable after 100 units FBE were received, which = R67

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

35 SERVICE DELIVERY BACKLOGS Units Cost Electrification Formal Households (still to be verified) R2 Billion Informal Households (estimated) 2.8 Billion Network Upgrade-R800 Million Street Lighting PolesR20 Million Highmast Lighting500 MastsR75 Million

CAPITAL BUDGET LightingR R R NetworkR R R RevenueR R R ElectrificationR R R Energy EfficiencyR R Corporate Other (Office Equipment / Vehicles)R R R TOTALR R R

2011/12 INEP FUNDED ELECTRIFICATION PROJECTS Current ProjectsSTANDSDoE FundingStatusComments Esselen Park Ext 2623R %Complete Eden Park ext 5 Electrification2450R %Complete Eden Park ext 4 Electrification199R %Complete Tinasonke Electrification719R %Complete Palm Ridge Electrification Phase 11799R %Complete Palm Ridge Electrification Phase 2849R %Complete Palm Ridge Electrification Phase R %Complete Winnie Mandela Phase 4140R %Complete Tswelopele Ext 51200R %Complete Gelusdal Ext R %Complete Enixiweni121R %Complete Chief Albert Luthuli Ext.2267R %Change Control Chief Albert Luthuli Ext.3281R %Change Control Edayeni90R % CompleteChange Control Chief Albert Luthuli Ext.5544R Contractor on siteChange Control Kwa-thema Ext. 3567R Contractor on siteChange Control Palm Ridge Electrification Phase 4B R %Complete TOTAL13699R

2012/13 INEP FUNDED ELECTRIFICATION PROJECTS Current ProjectsSTANDSDoE FundingStatus Palm Ridge Electrification Phase 4A 1779 R % Completed Palm Ridge 33/11/6.6kV, 2x20MVA SubBulkR Complete Daveyton 132/11kV, 2x40MVA SubBulkR % complete TOTAL1779R

2012/13 EMM FUNDED ELECTRIFICATION PROJECTS Current ProjectsSTANDSTotal cost per project Status Palm Ridge Electrification Phase 53321R Design Stage Mayfield Ext.62040R Design Stage Mayfield Ext.7800R Design Stage Mayfield Ext.81134R Design Stage Chief Albert Luthuli Ext.6964R Design Stage Juhn Dube500R Design Stage Chief Albert Luthuli Ext.5307R Construction Kwa-Thema Ext 3716R Construction Chief Albert Luthuli Ext 3 223R Construction Chief Albert Luthuli Ext 2 267R Construction Endayeni 90R Construction TOTAL10362R

40 UNIVERSAL ACCESS CHALLENGES Funding allocation Procurement Processes Reliant on Human Settlement plans Houses built in Phases Growing number of Informal Settlements Service delivery protests

Electrification – Esselen Park

OPERATIONS CLUSTER ENERGY DEPARTMENT

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

WHAT IS THE PROBLEM?

MUNICIPAL / ESKOM TARIFF GAP INDICATED

MUNICIPAL / ESKOM TARIFF GAP SOLUTION PROPOSED The previous graph showed the EMM – Eskom tariff gap This is 114c/kWh – 84c/kWh measured at a 30% load factor This is by far not the highest gap that one will encounter when repeating this exercise for other municipalities EMM envisions the solution as follows: In July 2012, NERSA allowed Eskom a 16% increase to “own” customers, and A 13,5% increase to Eskom’s municipal customers This has the effect of narrowing the gap between the Eskom line and the municipal line (previous slide) It is proposed that NERSA considers continuing this trend in future financial years

POINTS FOR DISCUSSION #Discussion 1Ekurhuleni Energy at a glance 2EMM revenue protection initiatives 3Eskom supply areas inside EMM boundaries 4EMM electricity connection backlog 5Difference in tariff levels – municipalities / Eskom 6Conclusion

CONCLUSION The City wishes to thank the PC on Energy and the PC on Cooperative Governance and Traditional Affairs for the opportunity afforded to make this presentation

Ngiyabonga