Programme Financial Implications for Municipalities Eskom’s view on how to establish the financial impact of restructuring - as input to the EDIH Finance Sectoral Committee - & related matters March 2005 For the Portfolio Committees of Provincial and Local Government & Public Enterprises

Programme Financial Implications Inevitable financial impact on split of current entity Overall municipality with zero surplus Economies of scale at risk: Shared overheads Joint purchasing power Portion of municipality with surplus ++ Portion of municipality with deficit - Services purchased from Municipality Financial surplus transferred

Programme Required Financial Analysis What is the current financial impact? Value of electricity surplus Value of shared overheads (economy of scale) Value of joint purchasing power (economy of scale) Design cross subsidies to alleviate financial impact Limit surcharge on electricity to maintain low cost Make other service charges cost reflective Create a mechanism to collect charges for payment to municipalities (including key customers) Use municipal ringfencing to identify financial impact

Programme Some Other Implications of REDs for Municipalities Some thoughts by Eskom Better service Local economic growth from improved service to consumers, managed electrification & implemented FBE Credit management - no cut-offs In future, municipalities cannot cut-off electricity to support payment for other services Pension & Benefit Funds - loss of members Changes in membership may impact investment portfolios Proposed RED efficiencies Aggressive cost saving in REDs may cut employment in rural municipalities

Programme RED support for National Govt. Objectives Objectives from Energy White Paper, including free basic electricity services Low cost equitable tariffs to all regional consumers Enhanced regional quality of supply Electrification & FBE Regional employee opportunity Financial viability RED controls regional tariff strategy & NER price applications RED identifies entire regional backlog & plans upgrades RED obtains NER approved tariffs to finance upgrade plans RED plans & manages projects within Govt. subsidies RED creates entire regional workforce plan & facilitates secondments to implement entire regional priorities. RED performs financial planning for entire regional viability

Programme No impact of REDs on Eskom FBE service Source: MD’s Report to DME, January 2005 Municipal contracts Eskom has contracts with 57% of municipalities Agreements expire every 12 months - complex renewal process Municipalities identified customers Eskom verified & configured customers Difficult to identify Eskom customer from municipal data FBE claimed by customers in November 2004 Eskom Actions Improve placement of vending stations Automatically issue FBE tokens to qualifying customers Enhance communication Propose a perpetual agreement

Programme Progress on Implementation: Key issues Agree s.197 issues & approach with organised labour10. People issues Provide training, organisation, communication, etc.9. Change management Provide RED financial competency & infrastructure8. Full financial functions Convert 187 distributors to RED systems7. RED systems Secure service contracts with Eskom & municipal parents 6. Inherited parent contracts Identify backlog. Obtain NER support for revenue requirements & financial resources 5. Capital & operations backlog within viability Provide effective processes & systems for volumes4. Billing & collection Support tariff affordability & municipal viability3. Subsidies & municipal levies Complex contracts worth R100bn - with tax implications2. Transfer schemes Objective: lowest cost of capital across the ESI & municipalities 1. Valuation, compensation & RED capital structure