Portfolio Committee on Minerals and Energy Public Hearing on RED1 Progress, the current situation and the Way Forward Presentation to Minerals and Energy.

Portfolio Committee on Minerals and Energy Public Hearing on RED1 Progress, the current situation and the Way Forward Presentation to Minerals and Energy Portfolio Committee, Parliament, Cape Town Wednesday, 14 February 2007 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Overview of presentation
History of Restructuring Objectives of Restructuring RED1 Establishment RED1 Governance RED1 Strategic Goals and Strategies RED1 Supply Area – Pre 25 October 2006 RED1 Transition Agreements RED1 Planning for Transfer Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Overview of presentation … cont.
RED1 Stakeholder Engagement RED1 Stakeholder Engagement: The City of Cape Town position Recent developments: The City of Cape Town’s position Recent developments: Cabinet’s 25 October decision Issues arising from recent developments: RED1’s income Issues arising from recent developments: Special Combined Company and Board Meeting Challenges, Successes, Values and Lessons Learnt Conclusion Way Forward Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

History of Restructuring
Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

History of Restructuring
Background National Government decided in May 2001 to restructure the Electricity Distribution Industry (EDI) into six Regional Electricity Distributors (REDs) President Mbeki announced in 2004 that the first RED would be established on 1 July 2005. RED 1 was elected the first RED to be established, with the City of Cape Town as core RED 1 has now been operating for just over 18 months. Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Objectives of Restructuring
Energy White Paper Objectives EDI Restructuring Blueprint Objectives Ensure electrification targets are met Achievement of government’s electrification programme Universal access to electricity for all South Africans Provide low-cost electricity Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices Facilitate better price equality Improve the financial health of the industry Future REDs to operate on a sustained, financially viable basis as independent businesses Foster proper co-ordination of operations and investment capital Improve quality of service and supply Acceptable and sustainable levels of supply security and quality Attract and retain competent employees Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan Planned and managed transition Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Establishment Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Establishment Sponsors Committee, as project governance, and RED Committee, as project implementer, established by EDI Holdings, CCT and Eskom City of Cape Town (CCT) followed required legislative prescription prior to choosing the RED as the vehicle of electricity service provision: Municipal Systems Act (MSA) – Sections 78 and 80 Municipal Finance Management Act (MFMA) – Section 84 Registered by EDI Holdings as company – 02 November 2004 Established as a Municipal Entity by City of Cape Town – 31 May 2005 Commenced Operations – 01 July 2005 First phase - transfer of CCT electricity business and Eskom business within the Cape Town metro area Further phases were to follow pending final decision by Cabinet on EDIR end-state Licensed by NERSA Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Establishment (…continues)
Various agreements concluded: Service Delivery Agreement (SDA) between CCT and RED 1 Operating and Transitional Plan for Transfer Agreements (OTPTAs) with both the City’s Electricity Directorate and Eskom RED 1 Board appointed Business Plan and Budget Approved (RED1 Board and City) Transfer of CCT Electricity Department and Eskom Metro Portion planned for:- March June 2006 November December 2006 June 2007 Date for transfer consistently moved by City Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Governance Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Governance Seven independent non-executive Board Members
P Nzimande (Interim Chair); M Kalawe; N Walaza; L Mayekiso; J John; Prof A Eberhardt (resigned 08/2006) Four Board Committees: Finance and Procurement Strategy and Operations Audit and Risk Human Capital and Remuneration Company Secretariat appointed Internal Audit functions sourced from City’s Internal Audit Unit External Audit: Auditor General of SA Executive Management appointed CEO, COO and CFO Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Business Plan Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Mission, Vision & Values
"To enhance the lives of our people and drive our economy by providing affordable electricity and related services in an efficient, reliable, safe and sustainable manner" Vision "To lead the South African journey towards the provision of world class consolidated electricity distribution and related services" Values To effect sound corporate governance To excel in customer relations To lead decisively but with humility and resilience To encourage and value learning, initiative and creativity To be committed to the transformation of our society To embrace diversity, recognise strengths and develop potential and skills Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Operational Strategy and Budget to drive achievement of goals
Strategic Goals Goal 1 Reliability of Supply at Affordable Cost Goal 2 Protection of Lower Income Earners Goal 3 Developing Human Capital Goal 4 Sustained Financial Viability Goal 5 Planned & Managed Transition Goal Branded Customer Service Operational Strategy and Budget to drive achievement of goals Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Operational Strategies
Strategic Operational Plan Business Re-engineering Network refurbishment and growth Maintenance plans Rationalised tariff for CCT customers FBE Agreements signed with both CCT and Eskom 2010 Energy requirements Operational Accountability and Monitoring System Quality of supply measurement Business process monitoring Integrated Recovery Plan (Outages) 90 day plan Demand Side Management Campaign NERSA Audits - March 2006 State of the network and assets Power outages Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Other Business Strategies
Human Capital Strategy Compensation Framework Harmonised Conditions of Service HR policies Employment Equity Plan Performance Management Due diligence on CCT staff No Eskom due diligence to be undertaken until suspensive conditions met Systems Strategy Blueprint developed Implementation approved by RED 1 Board and CCT Benefit: For first time CCT Electricity Department fully ring-fenced - Finance - Human Resources - IT - Legal - Business Operations Transfer of Business Strategy Integration & Transformation Strategy Change Management Strategy Branding & Marketing Strategy Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED1 Supply Area – Prior to 25 Oct 06
Cape Town Metro Initial area of supply is the area of jurisdiction of the City of Cape Town Final area of supply to include abutting municipalities? MOU with Drakenstein Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Transactional Nature of RED1
SDA signed between the RED & CCT Operating agreements (OTPTA) in place between the RED1, City of Cape Town and Eskom whilst finalising transfer of business arrangements License issued by NERSA Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED 1 Transaction Agreements
CCT All Agreements and Nersa Licences expired on 31 December 2006 SDA RED 1 (Municipal Entity of CCT) Control over CCT geographic area and all customers NERSA Licence OTPTA OTPTA CCT Electricity Department Eskom Distribution Portion within Metro Area of jurisdiction Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Transaction agreement linkages
All agreements were subject to resolutive conditions Conditional to ensure transfer of businesses Agreements were inter-linked Agreements expired 31 December 2006 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

SDA – OTPTA – LICENCE Conditions
SDA Conditions (31 Dec 06) OTPTA Conditions RED1 Tariff Harmonization Plan FBE agreements OTPTA Conditions (31 Dec 06) NT Asset Transfer Framework Electricity Act approval Competition Act approval Regulatory provisions for staff transfer Eskom Suspensive Conditions (to be resolved by DME) Licence Conditions (31 Dec 06) City Transfer (City OTPTA) Eskom Transfer (Eskom OTPTA) SDA’s with other municipalities Fulfilling conditions is dependent on number of parties: NT, DME, DPE,DPLG, SALGA CCT, RED1, Eskom Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Planning for Transfer Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED1 preparations for transfer
Draft Asset Transfer Framework developed Principles for Wires and Retail transfer developed RED1 SAP solution and systems strategy Human Capital Strategy Regulatory provisions for staff transfer Transfer, Placement & migration strategy New Conditions of Service developed Retirement Fund arrangements Engagements with regulatory and other state agencies Nersa National Treasury, DME, DPE, DPLG, etc Stakeholder engagements Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Retirement Fund arrangements for RED1 employees
RED1 Pension Fund registered All City of Cape Town and Eskom staff to join Pension Fund on date to transfer Defined Contribution Fund Rules allow for other 6 REDS to be participating employers Fund is suitable for either ME or PE RED (no rule changes needed) Rule amendment to make the fund dormant given RED1 uncertainty Municipal Category (a) tax status needs Income Tax Act amendment – employer, not fund issue RED1 Pension Fund to be deregistered if entity wound-up Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Wires Assets to be Transferred to RED1
Total value of assets to be transferred - RAll distribution network assets 132 kV and below to be transferred Dedicated, and Non-dedicated lines All fibre optic networks used for operation of RED1 infrastructure Systems & data (including SCADA) supporting these networks Technical service depots within RED1 boundaries Staff currently employed in supporting these networks Stock – pro rata relative to assets transferred Mechanical plant, fleet and technical support elements pro-rata basis Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Finalizing the transfer
RED 1 Due Diligence Asset Schedule Staff Liability Schedule Contracts to be ceded No Eskom due diligence until Eskom suspensive conditions met National Treasury Asset Transfer approval (still not finalised and approved) Eskom Suspensive Conditions (no longer valid given 25 October 2006 cabinet decision) All conditions precedent in all transaction agreements to be met before transfer Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Stakeholder Engagements

Stakeholder Engagements
Parliament National Departments Provincial Government City of Cape Town Abutting Municipalities SALGA Metropolitan Forum Eskom NERSA Business Organised Labour Customers CCT Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Recent developments: The City of Cape Town’s position … 1 August 2006
Background: the City of Cape Town’s August 2006 “preconditions” to transfer included – That Cabinet must approve the “6+1” model Promulgation of asset transfer framework in terms of the MFMA As an implicit precondition, that RED1’s status as a municipal entity must not change Staff consultation and consent by each member of staff Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Agreement with City, in September 2006, that,
Recent developments: The City of Cape Town’s position … 2 – September 2006 Agreement with City, in September 2006, that, Transaction agreements be extended RED1 apply for licence extension EDIR licence condition dates be extended Extension contemplated from 31 Dec 2006 to 1 July 2008 Planned City transfer - 1 July 2007 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Recent developments: Cabinet’s 25 October decision
Key points: End-state structure for the restructured EDI is the six wall-to-wall RED model REDs should be public entities, not municipal entities Nersa should have regulatory jurisdiction over the whole of the Electricity Supply Industry (including municipal supply areas) Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

City Mayco resolutions of 08 November 2006
Recent developments: The City of Cape Town’s Council position … November 2006 City change of mandate City Mayco resolutions of 08 November 2006 City requests licence to be transferred back to it SDA and OTPTA be allowed to lapse City to engage with EDIH about future of RED1 Senior Counsel opinionto be sought Mayco mandate confirmed by Council on 7 December 2006 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Recent developments: The City of Cape Town’s Council position … 4 – 04 December 2006
The City’s position – As contracting party: The Council meeting on 07 December resolved to allow the agreements between RED1 and the City to lapse As service authority: The City applied to Nersa to have the distribution licence transferred from RED1 back to the City and opposed RED1’s application for an extension of the licence Nersa Public hearings held on 07 December 2006 On 14 December 2006 NERSA awarded licence to the City for period of 6 months As shareholder: The City will need to decide what to do with RED1 as a company Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Recent developments: The City of Cape Town’s position
City’s key objective is to run the Electricity Service as a department of the City Council. This will take the EDIR 10 years back The future of RED1 – Agreements with the City lapsed on 31 December 2006 Licence issued to City on 14 December 2006 City as the sole shareholder to wind up RED1 City may use RED1 as a vehicle for its own corporatisation strategy (divorced from the nationally-driven EDIR project) City may offer its shares in RED1 to EDI Holdings as a potential buyer The RED1 Board must approve the transfer in terms of article 26 of the Company’s Act EDI Holdings must consider commercial risks of taking over RED1 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Issues arising from recent developments: RED1’s income … 1
Past income There are management fees owing to RED1 by the City of Cape Town RED1 (or its liquidator, if it is wound-up) has the power to recover payment of those fees Likely outcome is that the City will have to provide security for RED1’s debts as part of a voluntary winding-up process, rather than pay funds over to RED1 RED1’s Board has still not been paid since their term of office commenced 18 months ago on 01 July 2006 RED1 Staff salaries have not been paid since January 2007 (even through staff have valid contracts) City thus in breach of employment contracts Potential constructive dismissal claims by RED1 staff Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Issues arising from recent developments: RED1’s income … 2
Future income with the SDA and OTPTA lapsing on 31 December 2006, RED1 will not be paid a management fee beyond that date (all outstanding claims prior to 31 December 2006 are still owed to RED1 by the City) These amount to R5.2m as verified independently by the City’s own Internal Audit Unit RED1 continues to have obligations beyond that date (eg in respect of creditors, salaries and rental) If RED1 is wound-up through a voluntary winding-up, then its shareholder will be required to put up security for continuing obligations for a 12 month period Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Issues arising from recent developments: Special Combined Company and Board Meeting
The Executive Mayor requested the RED1 Board to convene a Special Combined Company and Board meeting on 25 January 2007 to obtain: Directors’ statement on the affairs of RED1 Impact of Cabinet’s decision on EDI restructuring Way forward for RED1 The RED1 Board presented an: Overview of RED1’s establishment and its activities over the past 18 months Steps taken to effect the transfer of assets and staff Recent developments Current financial position of RED1 Future of RED1 The RED1 Board requested the City to review its decision to wind up RED1 The City negotiate with national government, through EDI Holdings an alternative solution within the broader EDI Restructuring context. Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

The RED1 Special Combined Company and Board meeting resolved that:
Issues arising from recent developments: Combined Special Board and Company Meeting – 25 January 2007 The RED1 Special Combined Company and Board meeting resolved that: The City:- pay RED1 the amount owing to RED1 ito the OTPTA over the past 18 months pending an independent verification exercise by the City’s Internal Audit Unit continues to process all payments on behalf of RED1, including staff salaries and outstanding creditors inform RED1 by no later than 28 February 2007 as to the outcome of the discussions between EDI Holdings and the City regarding the future of RED1 discussions between the City and EDI Holdings have deadlocked – therefore no longer an option option is now to wind-up RED1 Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

In light of the above, RED1 to:-
Issues arising from recent developments: Combined Special Board and Company Meeting – 25 January 2007 In light of the above, RED1 to:- Commence retrenchment consultations with staff Terminate all contractual obligations of RED1 The RED1 Board submit a further report to the CCT on options to the City in deciding on the future of RED1 The options are:- (1) Transfer of shares to EDI Holdings on terms to be agreed (2) (a) Voluntary winding-up in solvent circumstances (b) Voluntary winding-up in insolvent circumstances (3) Winding up by court order in solvent circumstances (4) City retains RED1 as a shell company Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Current position of RED1
RED1 has no ongoing source of income RED1 has no operational basis for continuing Staff salaries for January 2007 have still not been paid despite an undertaking from the Executive Mayor on 23 January 2007 that the salaries be paid and any other amount owed to RED1 be paid over once verified Both these directives from the Executive Mayor and the City manager have been ignored The only option now is to wind up RED1 This can be done on a solvent basis if the City pays RED1 the money it owes the company or insolvent basis if the City does not pay what is owing RED1 has requested an urgent meeting with the City to resolve the impasse on non-payment of salaries and outstanding creditors Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Challenges, Successes and Lessons to date

Challenges RED 1 has in many respects been the pioneer of the EDIR process as the Presidential pilot RED 1 created with enabling legislation not in existence RED 1 has worked within a stringent regulatory legislative regime. MSA; MFMA; Electricity Regulation Act; Companies Act; King 2. City of Cape Town learning curve to work with a company as municipal service provider Eskom Suspensive Conditions not being met (no longer relevant in light of Cabinets’ decision on the EDI Restructuring) and the OTPTA having lapsed on 31/ Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Successes Being able to meet the target set by the State President in very strenuous circumstances Being able to create the start of RED 1 without the necessary enabling legislation and within the constraints of highly regulatory environment Being able to create the first RED in the face of these massive challenges. RED1 has achieved the following- Electrification into Eskom areas in support of the City’s electrification objectives and targets Biggest-ever capital budget spend (95.4%) Provision of free basic electricity in Eskom areas Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Successes Progress towards the harmonisation of conditions of service
The establishment of the REDS Pension Fund The development of a harmonised tariff framework The development of change management programmes to ensure that the people, systems and culture of the entity are service and delivery orientated Negotiated national government support and funding for crucial projects such as the 2010 world cup, electrification and green energy projects Demonstration model for the restructuring process which up until 2005 was at a conceptual phase Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Lessons learnt Negotiation between parent entities must be at advanced stage before creation of the company, thereby enabling much smoother transfer of businesses Strategy to be aligned between National Government Departments as well as with Local Government entities and Eskom prior to start of restructuring process Negotiations with ESKOM at National level (and not at Eskom Regional level) Creation of an entity such as RED 1 should not be done close to either National or Local Government elections Restructuring time should minimised to contain the strain on budgets and staff morale. Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Lessons learnt … 2 Implement a more effective communication strategy to staff and other stakeholders Challenge of dual authority between municipalities & NERSA needs to be resolved Clarify mechanisms for municipal regulation via SDA Municipal control of budget growth, revenue, tariffs could undermine the objectives of restructuring EDIR legislation must be in place if restructuring is to succeed Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Lessons from RED1 as a municipal entity
Valuable lessons can be learnt from RED1 as a Municipal Entity The City exercised its sole shareholder status by prevailing in the following: RED1 budget Non payment of the RED1 management fee to RED1 ito the OTPTA (Operating Agreement) Not approving the tariff proposals determined by the RED1 Board Not submitting the Framework for the transfer of staff and assets Non payment of RED1 staff salaries for January 2007 Non payment to RED1 creditors Non payment of RED1 Board of Directors fees Informing RED1’s lessor that the City will take over RED1’s lease and pay the rental Reduction of RED1’s office space to 3 offices and charging RED1 a rental Non processing of RED1’s PAYE All these activities were done in contravention of the MFMA and the Municipal Systems Act Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Conclusion The City of Cape Town has resolved not to participate in the EDI Restructuring because:- It does not support 6 wall-to-wall REDs as Public Entities The negative financial impact the REDs process will have on the City’s Finances, even though a surcharge (surpluses) have been guaranteed Below is an illustration of the surcharges and shared services costs guaranteed to the City of Cape Town Surpluses guaranteed over the next 3 years:- Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

City Shared Services Cost
Surcharge and Shared Services Costs guaranteed to the City of Cape Town City Surcharge City Shared Services Cost CITY TOTAL Eskom Surcharge Eskom Shared Services Cost ESKOM TOTAL TOTAL 2006/2007 R R R R R R 2007/2008 R R R 2008/2009 R R R Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

The Way Forward RED1 has laid a solid foundation for the transfer of the City and Eskom’s electricity businesses into RED1 The EDI restructuring will only succeed if municipalities and Eskom are compelled to participate EDI restructuring bill must be legislated urgently to govern the restructuring process The EDIR process will only succeed with a constitutional amendment In relation to RED1: RED1 be converted and/or established into a public entity amalgamating Eskom and non-Metro Municipalities Though not optimal, it is financially viable National Government, via EDI Holdings continue to engage the City of Cape Town to participate in the EDIR DME together with EDI Holdings and the RED1 Board intervene to resolve the current impasse with the City of Cape Town Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

RED1 thanks the Parliamentary Portfolio Committee, our National Government, Parliament and our strategic partners for the support and encouragement over the past 18 months! Vision – “To lead the South African journey towards the provision of world class consolidated electricity distribution and related services 13 December 2006

Portfolio Committee on Minerals and Energy Public Hearing on RED1 Progress, the current situation and the Way Forward Presentation to Minerals and Energy.

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Portfolio Committee on Minerals and Energy Public Hearing on RED1 Progress, the current situation and the Way Forward Presentation to Minerals and Energy.

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Presentation on theme: "Portfolio Committee on Minerals and Energy Public Hearing on RED1 Progress, the current situation and the Way Forward Presentation to Minerals and Energy."— Presentation transcript:

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