1. Portfolio Committee on Minerals & Energy Presented by: Councillors Ian Neilson & Lionel Roelf Date: Wednesday, 28 February 2007 City of Cape Town Perspective - Progress with RED1 & Way forward for REDs

2. Background The necessary legislative procedures for appointing an external service provider to provide a municipal service were completed. Council “mandate” on 31 May 2005 that “the City of Cape Town acquires ownership of the Municipal Entity, RED ONE (Pty) Ltd.” RED1 was formally established on 1 July 2005, City holds the only shares, the City currently holds 5 shares. RED1 is a municipal entity operating as the service provider to the whole municipal jurisdictional area previously served by the City of Cape Town electricity undertaking and Eskom. The City of Cape Town is the parent entity, exercising the Service Authority role, as outlined in section 82 of the Municipal Systems Act. The relationship with RED1 is formalised in a Service Delivery Agreement, as required by Section 82 of the Municipal Systems Act.

3. Functional Arrangements of RED1 RED1 entered into Operating and Transitional Plans for Transfer Agreements (O&TPTA) with the Cape Town Electricity Undertaking and Eskom Western region to service the full Cape Town jurisdictional area; RED1 obtained an electricity distribution licence from the NER to service the City jurisdictional area to 31 December 2006. RED1 obtained all funding from the City. This funding was in the form of a management fee for the oversight of the electricity distribution taking place within the full jurisdictional area of the City of Cape Town, The funding agreement was contained in an addendum to the O&TPTA, which came to an end at 31 December 2006. City was/is the agent of RED1 in handling the daily operational financial affairs.

4. Mandate up to Cabinet Decision On 28 August 2006, at a joint meeting of the Mayor, Mayoral Committee Members, City, RED1 and EDI Holdings Official, Madam Mayor outlined the City’s requirements for the establishment of RED1. These were as follows: The establishment of a Metropolitan Electricity Distributor (MED) is supported - Cabinet pronouncement on the 6 +1 proposal needs to be finalised; The MED must be a municipal entity wholly owned by the City; There must be a proper orderly process with all assets and staff transferred concurrently; This transfer will be done within the requirements of a nationally approved Asset Transfer Framework; An Asset Transfer Agreement and Staff Transfer Agreement (Union agreement) must govern the transfer; This transfer must happen completely in concert with the transfer from Eskom; There must be the necessary consultation with the staff members (S81 (2) (c) of the Municipal Systems Act.

5. Cabinet Decision – 25 October 2006 Cabinet approved the proposal to create six Regional Electricity Distributors (REDs) which will be established as public entities under the auspices of the Electricity Distribution Industry (EDI) Holdings (Ltd). These entities will be accountable to the Ministry of Minerals and Energy. The next steps will include the drafting of legislation and business plan for the establishment of the REDs.

6. Council Resolution of 7 December 2006 Contractual arrangements with RED1 will terminate on 31 December 2006 if the conditions precedent are not met; Seek Senior Counsel advice on the impact of the Cabinet decision on the Constitutional obligation of the City to provide electricity, and the legal obligations of the shareholder to RED1; Approach NERSA regarding the transfer of the distribution and supply licence; Communicate with all Electricity Department staff informing them that the provisions of the Operating and Transitional plan for Transfer Agreement and any related dual reporting lines cease and revert to single City reporting lines from 1 January 2007; Negotiate the lease to accommodate some of the Electricity Department staff members; Pending legal advice, facilitate any transfer to EDI Holdings that may be required; The Executive Mayor be mandated to call a general meeting of RED 1, which will include a Special Company meeting, in terms of the Company Act, and a special board meeting of the RED 1 Board, where the Executive Mayor, or her delegee, may convey and instruct the board on the way forward as determined by the shareholder; The Council remains open to negotiation with National Government over the restructuring of the electricity industry.

7. Electricity Licence The City applied to NERSA to take back the Electricity Distribution and Supply Licence as from 1 January 2007. The basis of the City’s application was as follows: The City is the service authority for Electricity Reticulation and thus the City determines which service provider will provide the service on behalf of the City. Although every effort has been made to effectively get RED1 up and running as a service provider to the City, it appears that national policy and legislation is lagging and, until further clarity is obtained, the City needs to retain full control of the electricity service, particularly as the roles and responsibilities of the REDs have not been clarified; The City cannot afford negative publicity for no apparent reason when electricity has always been handled efficiently and effectively in an economically sustainable manner with competence by the City; The substratum agreements come to an end as at 31 December 2006 and in the circumstances there will be no legal framework within which RED1 can fulfill the Service Provider role required to adhere to the electricity supply and distribution licence conditions; The City retains the Constitutional obligation to provide electricity and must take responsibility for electricity reticulation so as to ensure uninterrupted delivery of the service in the best interest of the local community. The Regulator has the responsibility to ensure that the City is appropriately licenced for the discharge of its constitutional obligations.

8. Way Forward with RED1 The City as sole shareholder in RED1, requested a Special General Meeting to consider the statement of the affairs of RED1 by the directors; The City, as sole shareholder, had to evaluate the proposals put on the table by RED1 and the funding available after the verification review in order to determine the ultimate way forward. The favoured route by the Board was that the City negotiate the transfer of RED1 shares held by the City to EDI Holdings on terms and conditions to be agreed. EDI Holdings would only take over RED1 if the City undertook to fund the RED1 liabilities and its employees’ salaries; The City is mindful that it is the custodian of public funds and must comply with the MFMA in its shareholder relationship with RED1. At a Mayoral Committee Meeting on Friday 23 February 2007, it was determined, in principle, the only option available to the City, as shareholder, at this time was to voluntarily wind up RED1 at the request of the shareholder as effectively RED1 has ceased to carry on business.

9. Way Forward for Electricity Restructuring (1) The City maintained its stance that a public entity is not a viable means for the provision of a municipal service – now supported by the Senior Counsel opinion received by the City: “The Cabinet’s proposed restructuring of the electricity distribution industry [as outlined in the Cabinet press statement of 26 October 2006] would be subversive of the powers and functions reserved to municipalities in terms of the Constitution. A national public entity, unlike a municipal entity, is not amenable to the executive authority and administrative control of a municipality. The implementation of the policy would be in breach of obligations imposed on national government in terms of S 151 (4) of the Constitution.”

10. Way Forward for Electricity Restructuring (2) A municipality has executive authority in respect of, and has the right to administer- The local government matters listed in Part B of Schedule 4 and Part B of Schedule 5[1][1] Schedule 4, Part B refers to “Electricity and Gas Reticulation” What is meant by “Electricity & Gas Reticulation”? The Constitution does not explain, but the Structures Act does: A municipality has the powers and functions assigned to it in terms … of the Constitution[2];[2] When split between a district and a local municipality, the district has the following functions and powers … Bulk Supply of electricity, which includes for the purposes of such supply, the transmission, distribution and, where applicable, the generation of electricity.[3][3] [1][1] Section 156 (1) (a) of the Constitution of the Republic of South Africa, Act 108 of 1996 [2][2] Section 83 (1) of the Municipal Structures Act, Act 117 of 1998 [3][3] Section 84 (1) (c) of the Municipal Structures Act, Act 117 of 1998 Constitutional & Legislative Obligation on Local Government

11. Way Forward for Electricity Restructuring (3) Service Authority Obligation on Local Government The responsibilities of the Service Authority are outlined as follows: regulating the provision of the service in terms of agreed performance indicators and an approved performance management system; management of the contract for the delivery of the service (Service Delivery Agreement); performing its functions and exercising its powers in terms of Ch 5 of the Municipal Systems Act (chapter dealing with IDP); controlling the setting and adjustment of tariffs within a tariff policy determined by the municipal council; exercise service authority (executive authority, per the Constitution) so as to ensure uninterrupted delivery of the service in the best interest of the local community.[1][1] [1] Section 81 (1) (a) – (e) of the Municipal Systems Act, Act 32 of 2000

12. Conclusion The City of Cape Town has been a dedicated supporter of the electricity restructuring process; and The City remains a dedicated supporter! The City will continue to give input into legislative procedures & supporting regulations. Don’t lose sight of foundation of electricity restructuring: Better service delivery to a wider range of clients/customers in the most effective, economical and efficient manner possible

13. Let us work together for a better city Enkosi Thank you Dankie