1. National Electricity Regulator Business Plan for 2003/4 Presentation to: Parliamentary Portfolio Committee on Minerals and Energy March 2003

2. Agenda Introduction Background to NER Value added by NER
Developments in the electricity industry
NER Business Plan and Focus Areas
Conclusion

3. RESIDENTIAL AGRICULTURAL
The Supply Chain
PRIMARY ENERGY
SUPPLY
SUPPLY
SIDE
GENERATION
TRANSMISSION
&
DISTRIBUTION
MARKETING, SALES, &
CUSTOMER SERVICE
DEMAND
SIDE
RESIDENTIAL AGRICULTURAL
INDUSTRIAL
KEY CUSTOMERS
COMMERCIAL

4. Role of NER Protect interests of electricity customers
Ensure efficient electricity supply industry
Ensure lowest cost electricty prices
Ensure acceptable quality of service and supply
Ensure long term provision and development of electricity services
Ensure fair play amongst suppliers – level playing field

5. How NER fulfills this role
Regulates prices of monopoly elements
Sets quality of supply and service standards and monitors compliance
Mediates and arbitrates within the electricity industry
Oversees Integrated Resource Planning
Maintains industry information for regulatory purposes and dissemanation
Will promote competition in line with government policy

6. Value Added by NER
Supporting government with policy development and drafting of legislation
Member of team investigating generation and transmission restructuring to establish competition and a market
Member of team investigating the electricity distribution industry restructuring to accelerate rationalisation of distributors
Approval of electricity price increases by suppliers (Eskom and municipalities)
Benefit to customers in lower prices
Finalisation of electricity pricing policy

7. Value Added by NER (contd.)
Requiring licensees to move towards cost - reflective tariffs
Setting minimum standards of supply and service
Benefit to customers
Dispute resolution (Customers/Suppliers)
Data base and information resource
Allocation of electrification funds and supporting DME with establishment of INEP
Building HR capacity in utility regulation in South Africa
Candidate Regulator’s programme

8. Developments in the electricity industry
Distribution
Establishment (over a transition period) of six regional electricity distributors (REDs)
Merging of Eskom and municipalities
NER responsible for regulation of REDs
Generation and Transmisison
Restructuring Eskom into competing generating companies (to establish a competitive generation market)
Privatisation of 30% of generation, and IPPs for new capacity
Creation of a separate transmission company
Setting up of an electricity market to foster competition

9. Restructuring of ESI and EDI (cont.)
Implications for the NER's regulatory responsibilities:
Empowerment of the NER, through appropriate legislation, to manage the needed transition while protecting consumer rights
Accommodation of legitimate interests of (existing and future) private participants
The regulatory and tariff environments are the legislative responsibility of the NER, and it must ensure that appropriate laws and regulations are in place when change takes place

10. Results of restructuring the ESI
Achieves government’s policy goals
Competition results in improved efficiency and lower prices than would have been the case
Less market power to control prices
Significant BEE is achieved
Fiscal revenue for debt reduction
Considerable inward investment
Private sector participation attracts international strategic investors
Ease of regulation
Benefits to electricity consumers

11. Business Planning BUSINESS PLAN AND BUDGET STRATEGIC PLAN
Covers the period 1 April 2003 to 31 March 2004
Sets out the priorities for the 2003/04 period
Emphasis on undertaking its core regulatory responsibilities effectively and putting in place a regulatory framework for the reformed electrciity indistry
STRATEGIC PLAN
Covers the period 2003 to 2006 (part of the Business Plan)
Provides a medium term planning horison to ensure that its resources are effectively applied to regulate an evolving industry

12. Business Plan: Focus Areas and Key Activities
Support for Government’s ESI restructuring process
High level participation in committees overseeing EDI/ESI restructuring
Participate in EDI/ESI Working Groups through the secondment of professional staff

13. Business Plan: Focus Areas and Key Activities
Generation
Strategy to ensure new generation investment based on the national integrated resource plan (IRP)
Broadening of IPP policy and licensing framework to include renewable IPP’s and demonstration plants
Complete compliance-monitoring framework for generation (including non-grid)

14. Business Plan: Focus Areas and Key Activities
Wholesale Trading and Market Operation
Oversee and ensure the WEPS preparation for implementation
Develop a regulatory framework for transition to wholesale market (including vesting contracts)

15. Business Plan: Focus Areas and Key Activities
Transmission and Systems Operations
Develop and implement the framework for economic regulation of transmission
Develop a compliance-monitoring framework for transmission

16. Business Plan: Focus Areas and Key Activities
Distribution and Retail
Commence with the development of detailed conditions of the REDs licences, consistent with the regulatory framework of REDs as proposed in the Cabinet Blueprint Report
Establish standards and compliance monitoring systems and routines for non-grid operators as well as to develop a compliance-monitoring framework for distribution

17. Business Plan: Focus Areas and Key Activities
Contestable and Special Customers
Develop a licensing framework for contestable customers
Commence with the revision and implementation of the pricing policy for special deal customers consistent with the policy framework for REDs

18. Business Plan: Focus Areas and Key Activities
International, Regional and National Regulatory Issues
Continued support for AFUR activities in line with NEPAD objectives, as well as RERA
Develop a framework for providing regulatory consultancy services on a cost recovery basis

19. Business Plan: Focus Areas and Key Activities
NER Capacity Building
Develop a comprehensive human resource development strategy that will enable the NER to meet its needs in preparation for the developments in the electricity industry

20. Business Plan: Focus Areas and Key Activities
NER Strategic Positioning
Develop criteria to measure its performance so as to meet the expectations of stakeholders
Conduct an intensive positioning exercise in terms of its role and value-addition to its stakeholders
Develop a stakeholder communication and management strategy

21. Business Plan: Focus Areas and Key Activities
Special activity
Commence with the development of a regulatory framework for renewable energy

22. Business Plan: Process Followed
Board provided strategic direction
Turned strategic direction into 3-year Strategic Plan
Developed 1-year Business Plan based on first year in Strategic Plan
Board approved first draft of Strategic and Business Plans
Compiled budget
Final approval by Board of Strategic and Business Plan with budget

23. Budget for 2003/4: Summary Budget requested = R63,7 million
Increase of 24,7%
Mainly due to:
New staff appointments (13)
Capital payment of new building
Increased involvement in regional and continental regulatory initiatives
Funding litigation of current court cases
CAPEX requirements
Computers and furniture
Travel costs

24. Budget for 2003/4: Summary (cont.)
Increase in budget due to – (cont.)
Increase in consultant fees
Once-off implementation of IDMS
Outsourcing of stakeholder management and communication
Appointment of Special Advisors
Candidate Regulator training programme

25. Levy: Summary Payable by customers 0.03320 c/kWh
Via generators
c/kWh
Cost to average domestic households
= 16c/month
May change subject to budget approval

26. Conclusion
NER focusing on priorities for a changing ESI as determined by Government
Lot of work done in finalising ‘relevant’ Business Plan
NER will focus its efforts on government’s priorities for the sector
Insufficient budget to ‘skill up’ totally, but we have nearly achieved our target for a competent regulator
NER committed to serve ESI and its stakeholders, especially customers

27. ADDITIONAL SLIDES

28. Monopoly Model

29. Single-Buyer Model

30. Wholesale Competition Model

31. Retail Competition Model

32. Why regulate the ESI? Monopolies Protect customers Single buyer
Ensure order in generation competition
Wholesale competition
Ensure order in generation & distribution competition
Retail competition
Ensure order in competition
Protect some distribution customers

33. ESI market reform: International Experience
A transition process from single buyer to wholesale competition, to retail competition,
monitored by a regulator
Monopolies
Single Buyer?
Wholesale Competition
Retail Competition

34. Drivers for change
Maximise financial and economic returns to the state
Fiscal revenue, debt reduction
The need to demonstrate economic efficiency
Allocative efficiency, next investment in generation capacity
Driving operational costs down
Widened resource availability and technological change
Competitive imports from SAPP
Natural gas from Namibia and Mozambique and CCGTs
Information and computer technologies
Opportunity for BEE
International environmental concerns
Need for improved customer service and choice

35. But protect… Electrification programme
Cross-subsidies for poor (but more transparent)
Internationally competitive electricity prices
Management, technical and R&D competencies in electrcuiity industry
Security of supply
Potential for demand-side management and energy efficiency investments
National regulatory oversight and control
Globally competitive business for the African Renaissance

36. 1998 White Paper on Energy Policy
Introduce competition to the industry, especially the generation sector
Give customers the right to choose their electricity supplier
Permit open, non-discriminatory access to the transmission system
Encourage private sector participation in the industry
Eskom will have to be restructured into separate generation and transmission companies
Government intends to separate power stations into a number of companies

37. East Rand Port Elizabeth Cape Town Johannesburg Pretoria
RED 6
Customers (000’s)1008
Load (TWh)28
Electrified (%)60
Customers (000’s)1006
Load (TWh)29
Electrified (%)73
RED 2
RED 4
East Rand
Bloemfontein
Pietermaritzburg
Witbank
Durban
Port Elizabeth
Cape Town
Johannesburg
Pretoria
Calvinia
Upington
Vryburg
Prieska
Rustenburg
Kroonstad
Lichtenberg
Pietersburg
Kimberley
Nelspruit
Lydenburg
Harrismith
De Aar
Newcastle
Bergville
Richards
Bay
Ulundi
Umtata
East London
Graaf Reinet
Victoria West
Customers (000’s)720
Load (TWh)31
Electrified (%)70
Customers (000’s)683
Load (TWh)37
Electrified (%)60
RED 5
Customers (000’s)857
Load (TWh)14
Electrified (%)81
RED 1
Customers (000’s)1400
Load (TWh)29
Electrified (%)56
RED 3

38. Phase I: Eskom Corporatisation Immediate - 2003
Formation of Eskom Holdings Limited with subsidiaries
Generation, Transmission, Distribution and Enterprises
Ringfence clusters of generators into divisions of generation for internal competition
Transmission ringfences operations into wires and system operations
Transform EPP into SAPEX to allow progress to power exchange
All sales through SAPEX (mandatory) but CFD in place between Generation and Distribution to guarantee minimum revenue
Ringfencing of Eskom Distribution into proposed REDs continues, and municipalities continue to ringfence their electricity businesses away from other municipal activities

39. Municipal Distributors
Eskom Holdings
Eskom Generation
Clusters
Eskom Enterprises
Eskom Transmission
SAPEX Wires SO Trader
Eskom
Distribution
Municipal Distributors
Customers

40. Phase II: Corporatisation of generation and independent power exchange 2002/3
Eskom Generation creates separate generation companies (GenCos) following portfolios
Separate Independent Power Exchange established
Under State ownership
Mandatory competitive pool
All sales through IPE but CFDs in place between Gencos and REDs/contestable customers, with progressively reducing minimum revenue guarantees
REDs established at distribution level

41. Contestable Customers
Eskom Holdings
GenCo1
GenCo2
GenCon
Eskom Enterprises
Independent
Power Exchange
State Transmission Co
Trader Wires SO
RED1
RED2
RED6
Customers
Contestable Customers

42. Phase III: Private sector and competition 2003/4…
Transmission company separated from Eskom Holdings and put into state-owned company
IPE continues, but now operated as MMM and minimum revenue guarantees phased out
Opportunities for BEE to buy mothballed power stations (about 10% of Eskom’s capacity)
Additional sale of one or more generation clusters (portfolios) of up to 20% of Eskom’s capacity
Private sector encouraged to invest in new capacity
Eskom to be left in the end with a 70% share of the market

43. Genco A RED1 RED2 RED6 Eskom Holdings EskomGenCo Eskom GenCo Trader
Power
Exchange
Eskom Enterprises
State Transmission Co
Wires SO
RED1
RED2
RED6
Customers
Special Customers

44. Regional Regulatory Issues
All SADC countries see benefit from establishment of regional regulatory association (RERA)
Not constrained by the different stages of regulatory development at national level
Only deal with regional issues
Will not interfere with national mandates
Designed to fill existing regulatory gaps
Learn from other SADC initiatives
TRASA