1. National RED
Presentation to the Portfolio Committee on Minerals and Energy
June 2006
by Eskom Holdings Limited

2. Contents
Background
EDI Restructuring Blueprint Objectives
Movement towards 6 Metro REDs and 1 National RED
Advantages of a National RED
Compliance with Government requirements for restructuring
National RED aligned to Blueprint objectives
The National RED is financially viable
Benefits to Municipalities
Key Government Objectives
Evolution of the National RED
Role of EDI Holdings
Summary
Conclusion

3. 1. Background
Cabinet decision Sep 2005:
“6 metro REDs to be set up as soon as possible after the local elections”
“Eskom to play a critical role in the national RED”

4. 2. EDI Restructuring Blueprint Objectives
The 5 key objectives of EDI restructuring are:
Low cost electricity
Reliable & high quality supply & service
Electrification targets
Meet legitimate employment, economic & social interests of all employees
Operate in a financially sound & efficient manner

5. 3. Movement toward 6 Metro REDs and 1 National RED RED Formation Principles
Transfer to metro REDs Eskom business within metro boundaries
Metro RED’s to be formed as municipal entities under local government legislation
National RED to be formed from non metro munics and Eskom Distribution
Metro RED’s and National RED will have critical mass to achieve restructuring objectives
National RED a credible consolidation vehicle for non-Metro municipalities
Minimum changes to network configuration, to avoid costs & disruption to customers
Tshwane
Johannesburg
Ekurhuleni
eThekwini
Nelson Mandela Bay
Cape Town
The names of the six new Distribution regions are listed at the top of the picture i.e. RED 1 (Western)

6. 4. Advantages of a National RED
Credible consolidation vehicle for municipal electricity undertakings
- immediately address weak rural distribution
- leverage on Eskom experience of TBVC and SGT incorporations
- equalise the financial impact of restructuring through inclusion in the national rate base
Use the Eskom national footprint as the basis of the National RED
- enhanced economies of scale through proven technology, business processes & scaleable IT solutions
- improved service delivery through customer focused value chains
- sustained industry skills in various centres of excellence
- national planning and infrastructure development
earlier progress - limited dependence on RED creation and related cost
- a base for equitable national tariffs
Support free basic electricity & universal access to electricity by 2012
- proven Eskom track record particularly in rural electrification
- economies of scale with respect to planning, project management & national infrastructure development
- delivery of national electrification infrastructure
- government interaction on electrification funding and reporting limited to a single service provider (national RED) as opposed to multiple municipalities
Staff Related Benefits
Limited staff transfer : stability for industry employees
Low impact of harmonization of different C.O.S.

7. 5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring
National RED
Restructuring in accordance with the Constitution
Enhance municipal responsibility for service delivery
Transfer Eskom business in metro boundaries for integrated metro service delivery
Provide a full service under a standard agreement (in line with regulatory requirements)
Support municipal obligation for social & economic development
through strong role in integrated development planning, electrification & FBE
Municipal finances not adversely affected
Metro REDs will gain additional revenue from transfer of Eskom businesses within their boundaries
Municipalities to be compensated through interest bearing financial instruments or lease payments

8. 5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring (continued)
National RED
Aggregate personnel cost must not increase
Using the 6 Metro REDs and the National RED as consolidation bases for the industry, ±70% of the industry employees (Eskom Distribution and Metro’s) will not be adversely affected by transfers (as a result of restructuring). Resulting in:
Limited changes in conditions of service, pension funds, job content and grading, etc.
Stability to the bulk of the workforce and thus the industry
Transfers to be limited to essential direct staff only
No additional funds or taxes to fund restructuring
There is no immediate need for National RED to create a new legal entity, avoiding the financial implications of transferring assets, staff, business operations and data.
Economies of scale to support benefits realisation

9. 5. Compliance with requirements of Intergovernmental Committee on EDI Restructuring (continued)
National RED
Expedite Delivery
Metro’s electricity distributors can easily absorb the Eskom businesses within their geographic and jurisdictional boundaries, avoiding unnecessary delays
Eskom Distribution division can be used to immediately amalgamate non-metro municipalities
Both Metro’s and Eskom are largely kept bundled in current form, thus allowing them to immediately deliver on key outputs

10. 6. National RED aligned to Blueprint Objectives
Proposed RED structures
Low cost equitable tariffs
Enhance economies of scale & skill through maximum industry consolidation
facilitate the implementation of equitable national tariffs
quality of supply & financial viability
Maintain investor confidence
Eskom based National RED access to capital markets
Quality of Supply
Enhance service delivery
by transferring Eskom business in metro boundaries for integrated metro service delivery
by providing national capability for rural distribution
Minimise extent of National RED creation process
to accelerate amalgamation

11. 6. National RED aligned to Blueprint Objectives (continued)
Proposed RED structures
Electrification
Support social & economic development
through strong role in integrated development planning, electrification & FBE
Staff career opportunity
Through consolidation, enhance national opportunity for all industry staff
Financial Viability
Minimise financial impact on municipalities
through fair compensation for assets transferred
lease income where assets are not transferred
Appropriate compensation for municipal surpluses
Maintain investor confidence
Eskom based National RED access to capital markets
Suppliers to keep current Key Industrial Customers
Minimise transfer of staff to limit impact of harmonization of C.O.S.

12. Current Dx base excl. metros
7. The National RED is financially viable with current industry structures maintained
All amounts are in R millions (2004)
Current Dx base excl. metros
National RED
Revenue
17 655
18 695
Sales Revenue
11 905
13 441
Network cost (wheeling and subsidy)
3 771
3 621
Elec & Rural Subsidy (Key Industrial Customers)
1 060
1 000
Elec & Rural Subsidy transferred to metro REDs
Incl in sales revenue
-287
Elec & Rural Subsidy (Metro RED contribution)
920
c/kWh
7 240
6 088
Gross Profit
10 416
12 608
Operating Expenses
8 922
11 010
Bad debt
239
578
Service Charges
617
591
Other
8 066
9 841
Net Income before Tax
1 494
1 597
Financial modelling indicates:
National RED is financially viable
Key Assumption: maintain current industry structures
Maintain regulated subsidies
Maintain regulated network service charges
No worse than current losses
No worse than current bad debts
No long-term municipal (service) support
Failure of Assumptions would imply
High Metro RED profits based on retention of rural subsidies
High tariffs for rural customers
Failure of objective for equitable tariffs
Incentives contrary to ASGI-SA for rural development
Financial support from National Treasury

13. 8. Benefits to Municipalities
MUNICIPAL REQUIREMENT
NATIONAL RED OFFERING
Financial Position not adversely affected
Through fair asset compensation (sale or lease), plus appropriate compensation for surpluses
Effective and efficient electricity service provision
Effective service provision based on NERSA regulatory standards
Delivery on Electrification and FBE targets based on contractual agreements
Equitable electricity tariffs
Low equitable tariffs in the long term due to enhanced business efficiencies through consolidation and economies of scale
The viable National RED a base for equitable national tariffs

14. 9. Key Government Objectives
The viable National Red will support the current Key Government objectives:
Universal access by 2012
Massive challenge for next 6 years
Poverty alleviation
FBE
Employment opportunities
Stimulate economic growth in rural areas
ASGI-SA
Support 6% growth
Support BEE and BWO
Social upliftment of standard of living
Benefits of electricity
Attract Investment
Reliable and good quality supply

15. 9. Example: Refurbishment - Industry Status
Eskom Refurbishment – no backlog
Eskom historical refurbishment & strengthening
5 years 2000 to 2004: R5,0bn
Eskom (national RED) planned refurbishment & strengthening
5 years 2005/06 to 2010/11: R10,9bn
Municipality Refurbishment - R9,3bn (estimated backlog)*
Only R1,9bn - R5,6bn budgeted by municipalities
NER 2004 determined that only 1/3 of municipalities making necessary provisions
Conclusion: EDI requirements are better served by a national organisation
*Source: EDI Holdings

16. 10. Evolution of the National RED Start with Eskom Distribution as a base
Restructuring in process for many years. Prolonged uncertainty has resulted in:
staff (and industry) instability
postponement of investment by industry
high cost and rework
An evolving industry model is required - avoid further delay
create the Metro RED’s and the National RED as a pragmatic solution
Proposed governance and ownership model:
Create the National RED from Eskom Distribution as a base
Due to its distributed national operations, Eskom Distribution is the most logical vehicle to form the base of the National RED
Create a stable industry model to realize restructuring benefits including:
Amalgamation of non-metro municipalities
Infrastructure for ASGI-SA and economic growth
Universal Access by 2012
May evolve to a wholly owned subsidiary of Eskom, or longer term, into a separate entity with alternative ownership

17. EDI Holdings must have a key role to facilitate multiple decisions:
11. Role of EDI Holdings
Eskom believes that EDI Holdings is best placed to facilitate programme management of the restructuring,
Eskom supports the Blueprint policy:
“EDI Holdings’… purpose would be to ensure the successful implementation of government policy towards the EDI, and hence oversee and direct the reforms described in (the Blueprint).”
Source: The Blueprint
EDI Holdings must have a key role to facilitate multiple decisions:
industry wide standards & shared services
transfer principles
compensation
changes to legislation, etc.

18. 12. Summary
The proposed conceptual design of the national RED and 6 Metro REDs fully supports:
Government requirements for EDI restructuring
White Paper objectives for EDI restructuring
The national RED will be an effective consolidation vehicle for non-metro municipalities
Minimal restructuring effort is required to immediately address the problems of rural distribution
The national RED will significantly contribute to meeting the target of universal access to electricity by 2012
The national footprint will provide the base for significant benefits through economies of scale and skill
Municipalities will benefit through secure cash flows from asset compensation / lease
The National RED is financially viable
EDI Holdings is best placed to programme manage the restructuring

19. 13. Conclusion
Eskom is committed to the successful achievement of Government objectives
Eskom will work with all stakeholders to make the National RED and the 6 Metro REDs successful