1. Annual Report, Financial Performance and Eskom Price Review 2005 PRESENTATION BY THE NATIONAL ELECTRICITY REGULATOR (NER) TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON MINERALS AND ENERGY Annual Report, Financial Performance and Eskom Price Review 2005 Parliament, Cape Town 20 October 2004

2. PRESENTATION OUTLINE Vision, Mission, Mandate, Strategic Objectives and Structure – Smunda Mokoena Achievements 2003/04 – Mr Kabelo Mothobi Financial Performance 2003/04 – Mrs Nomonde Mapetla Overview of the Eskom Price Review (EPR) 2005 – Naresh Singh Policy Considerations on EPR – Smunda Mokoena Conclusions – Smunda Mokoena

3. VISION “ To be a world-class leader in energy regulation”

4. MISSION “ To regulate the energy industry in accordance with government laws, policies, standards and international best practices in support of sustainable development”

5. MANDATE OF NER Established in 1995 in terms of the Electricity Act, 1987 ( Act No 41 of 1987) as amended Further derived from Government policies and Ministerial directives Provides advice and makes recommendations to Government on policy, legislation and regulations Takes proactive regulatory actions in response to the changing environment in electricity industry Funded from: license fees, donations, levies or contributions received from any person, institution, government or interest on investment

6. STRATEGIC OBJECTIVES Ensuring the effective and efficient regulation of the existing electricity industry Ensuring that the NER is appropriately prepared and able to effectively regulate the future reformed electricity industry Promoting appropriate procurement mechanisms and regulatory frameworks for new generation capacity Developing and retaining requisite skills and competencies within NER

7. STRATEGIC OBJECTIVES (cont.) Improving and sustaining the good image of NER Enhancing the integrity of the NER by improving internal management systems and procedures Effectively contributing to the socio-economic development programmes of government Establishing a single energy regulator by using NER as a building block (which will incorporate gas and petroleum pipelines regulation, in addition to electricity regulation)

8. NER STRUCTURE - BOARD Appointed by the Minister of Minerals and Energy Nine (9) members – Eight (8) part-time and one (1) full- time members Chairperson is a part-time member and CEO a full-time member Terms of office of current part-time members end on 31 May 2004 or immediately thereafter

9. NER STRUCTURE - STAFF Staff Complement: 110 Staff Strength: 101

10. ACHIEVEMENTS 2003/04 Mr Kabelo Mothobi

11. ACHIEVEMENTS Approved the price increases applied for by Eskom and municipalities. Issued a proposed license for an independent SAPEX for the Eskom power pool. Amended the Eskom transmission license. Conducted compliance-monitoring inspections at randomly selected suppliers. Continued with the implementation of customer education and community outreach programmes.

12. ACHIEVEMENTS (cont.) Presented a proposal for new generation capacity to the Minister. Completed an industry risk assessment and a draft mitigation strategy. Conducted NER financial and business risk assessment and developed risk mitigation plan. Implemented the world-class Rate of Return methodology Broadened the independent power producer (IPP) policy and licensing framework to include renewable IPP’s and demonstration plants.

13. FINANCIAL PERFORMANCE 2003/04 Mrs Nomonde Mapetla

14. FUNDING Levies Interest Basis of levies Impact on each household

15. INCOME STATEMENT OVERVIEW Income R63.5m (Levies) Expenditure R52.8m (71% performance) Surplus R11.9m (Mortgage Interest & Salaries) Expenditure increase R14.5m Staff numbers increasing Commitments to NEPAD through SADC, RERA and AFUR

16. CASH FLOW Capex R3.7m Payment of building mortgage bond R8.5m Remaining cash (Depreciation and working capital: creditors )

17. AUDITOR – GENERAL’S REPORT Emphasis of matter Internal Control (Creditors payments) Outsourced Internal audit : Insufficient auditing Materiality and Significance Frameworks

18. OTHER Risk Management process initiated Internal control “effective” but requiring improvement Losses (note 18) Uncompetitive Accommodation Action taken

19. OVERVIEW OF THE ESKOM PRICE REVIEW 2005 Naresh Singh

20. NER MANDATE ON ELECTRICITY PRICES Section 4 (1) (a) of the Electricity Act, 1987 (Act No. 41 of 1987 as amended (1994, 1995)) states that “The Regulator may determine prices at and conditions on which electricity may be supplied by a licensee.” BUT WHY? To ensure that the benefits of competition are present even in a monopolistic environment.

21. BACKGROUND TO ESKOM’S APPLICATION Annually Eskom applies to the NER for the adjustments to the prices at which they supply electricity; Three such applications are received from Eskom – Gx, Tx and Dx; Customers only see the Dx price – Gx and Tx prices are used for internal trading within Eskom; The prices are adjusted with effect from 1 January each year; The EPR is only about the size of the cake and not how the cake will be shared amongst customers – Sharing the cake is determined by the tariff structures. This is a separate process within the NER.

22. THE METHODOLOGY APPLIED The ROR methodology is applied to arrive at the appropriate price adjustment for Eskom customers The ROR methodology calculates the required revenue of the regulated entity The required revenue is equal to the costs to supply plus a fair rate of return on the rate base

23. TABULAR FORM Rate base (assets)XXX Rate of returnX % Operating income (profit)XX XXX ExpensesXXX Clawback- X XXX Required revenueXX XXX Compare to previous year% increase in revenue Adjust for volumes% increase in price

24. PROCESS FOLLOWED WITH THE 2005 EPR As early as January 2004, bi-weekly meetings were held with Eskom officials to plan for the 2005 process – meetings were held right up to June 2004; Rules were reviewed to take into account new developments/issues – further research was conducted to ensure the rules were still relevant; Eskom submitted its applications on 6 August 2004; A consortium of consultants has been engaged to assist with the review; A team of reviewers was identified to ensure that all work that is produced is of excellent quality, A communication strategy has been developed to ensure that all key stakeholders are informed about the process and its outcome

25. PROCESS FOLLOWED WITH THE 2005 EPR (cont.) Weekly meetings were held to brief the CEO and Executive Managers on the progress to date; Meetings are open for board members to attend at their discretion; Workshops have been held with board members to ensure their early involvement in the process; During the process Eskom has been invited to clarify issues and motivate to various teams working with the application;

26. GOVERNMENT POLICY ISSUES ON EPR AND CONCLUSIONS Smunda Mokoena

27. POLICY CONSIDERATIONS ON EPR 2005 Eskom’s role in providing future generating capacity Impact of new capacity on tariff levels Possibility of long-term price agreement Eskom’s credit rating Eskom’s financial year-end Inflation targeting

28. The final determination of Eskom’s revenue requirement and price level is based on an appropriate balance of the industry objectives, consumer interest, prevailing economic environment and Government objectives.

29. CONCLUSION