EDI Holdings and National Electricity Regulator South Africa: Annual Reports 2008/09

Meeting report

The Committee nominated Mr S Radebe (ANC) to preside as Acting Chairperson

Electricity Distribution Industry (EDI) Holdings: 2008/09 Annual Report
Mr Dumi Nkosi, Chairperson, EDI Holdings, offered a brief reminder of the purpose of the company, which was to restructure the electricity distribution industry and invest in the creation of six wall-to-wall public Regional Electricity Distributors (REDs), anchored in metropolitan municipalities. This was guided by the White Paper on Energy for South Africa (1998), the Blue Print on EDI Reform (2001) and subsequent Cabinet decisions.

He noted that Office of the Auditor-General (AG) had issued an unqualified audit report for EDI Holdings.
Annual financial statements were presented in terms of Generally Recognised Accounting Practices. The  Board had formulated necessary policies and monitoring procedures to ensure that business was in compliance with relevant legislation. These were carried out largely by a number of subcommittees, on which a representative of the Board would sit.

He said that EDI Holdings maintained a world class system of corporate governance, subscribed to the principles of good governance, and endeavoured to observe these principles in all dealings with stakeholders. Furthermore, EDI Holdings submitted regular compliance submissions to regular authorities, and had complied with corporate governance, shareholder, statutory and treasury requirements.

The previous Chairperson, Ms D Mokgatle, stepped down during this period, but a smooth transition prevented any harm to EDI Holdings' strategic direction. National and provincial elections, however, did have an effect on the industry, particularly the unprecedented changes at the political level which led to a change in leadership. National and provincial elections were expected to have a disruptive effect so this was a necessary reality to which the company must adapt.

He said that significant highlights in performance included the company's development of a Strategic Implementation Plan to guide restructuring, and important contributions to policy and legislative matters such as the 17^th Constitutional Amendment Bill, RED Establishment Bill and Asset Transfer Regulations. Nonetheless, the company's central responsibility remained the intensification of RED readiness preparations, and active participation in multi-stakeholder efforts to find solutions to national energy challenges, particularly those experienced at the beginning of the 2008 calendar year. EDI Holdings had signed the Accession to Cooperative Agreements and commenced with ring-fencing and Municipal Systems Act (MSA) Section 78 processes,  had developed a rescue plan for ailing EDI infrastructure, and reached agreements with organised labour on issues of transfer, migration, and placement of employees affected by restructuring.

Ms Phindile Nzimande, Chief Executive Officer, EDI Holdings, continued the presentation. EDI’s mandate could be divided into four key pillars. Firstly, it existed to provide industry leadership in guiding and influencing the restructuring process. Secondly it was mandated with the establishment of viable REDS. Thirdly it played an oversight role in ensuring efficiency improvements of the REDs, and fourthly, it was the central advocate of the restructuring process.

Financial highlights for the financial year included an11% favourable budget variance on Corporate Budget and a 15.7% budget variance on the Restructuring Budget, leading to a slight surplus.

EDI had made progress in RED creation in a number of ways. It had finalised a draft Business Case which would be refined prior to submission to the National Treasury, had structured a transaction to transfer distribution business from current asset owners to REDs, and had progressed in the Strategic Implementation Plan and developed a Transition Path, detailing, amongst other issues, the need for industry consolidation and stabilisation prior to transfer to REDs. 143 out of 187 municipalities had signed the Accession to Cooperative Agreements. EDI had approved funding for ring-fencing and MSA Section 78 processes for 103 municipalities, 56 of which had commenced ring-fencing of their electricity distribution businesses.

In terms of industry leadership she noted that the company developed operational and functional models for Wires Blueprint, Retail BluePrint, BP&S Blueprint, the Human Capital Design and Finance Function Design. Furthermore, a rescue plan for ailing EDI infrastructure had been developed and approved by the Board and matrices for national goals had been established.

In terms of the company's advocacy function, she noted that a refined communication and stakeholder strategy was developed and approved by the board, that negotiations with unions produced a Transitional Labour Relations Structure dealing with transfer, placement and migration issues, and that all stakeholders, including policy makers, current asset owners, the media and public had been kept informed of the process.

She said that generally the company had achieved everything it had set out to accomplish, but had not been able to meet its target of establishing six REDs by 2009 due to factors beyond its control. A notable challenge was the voluntary nature of the process in the context of continued stakeholder ambivalence, with no municipalities proactively approaching the company. Delays in the proposed 17^th Constitutional Amendment, which would have given government the powers to intervene had further slowed the process by preventing the commencement of negotiations with asset holders, which hinged on the amendment. Furthermore, there had been concerns that the RED Bill, as initially drafted, was unconstitutional, and required serious modification.

She noted that in terms of staff and transformation, the company was somewhat behind its gender target of a 66% female staff composition, with only 54 members of staff (57% )being female. It had yet to meet its target for disabled employees, with none employed thus far, due largely to the inaccessibility of the main building to the disabled. In terms of racial composition, however, transformation targets had been met. Out of ninety-four employees, only twelve were White, five were Asian, seven were Coloured, and seventy were African.

She added that the company did have a corporate social responsibility component, having gone into partnership with the Refilwe Orphanage Care Centre, and had donated a number of uniforms.

Mr Jobo Moshesh, Acting CFO of EDI Holdings, presented the company's annual financial statements. He first noted a discrepancy in the report, on page forty-nine two columns had been left unmarked, the column on the left should have had the heading 2008, and the one on the right 2009. He reiterated that the company had been given a clean financial audit by the Auditor-General The total operational budget allocation of R69.2 million was fully expended for the financial year under review, and underpinned by effective internal control systems and procedures. EDI was effectively running two budgets, the first being the operational budget which was funded by the fiscus, which covered administrative costs, and the other was the restructuring budget, covering RED implementation, which was funded by the industry through electricity levies on customers.

He noted that the company's net assets and liabilities had decreased from R270 million to R254 million. Non-current assets had increased marginally from R6.8 million to R8 million, but this belied a 19% reduction in asset worth due to depreciation. The bulk of the overall decrease from the previous year could be found in current assets, where there was a decrease by R26 million due to the utilisation of funds received from Eskom during the Medium Year Price Determination (MYPD) restructuring. It was also noted in terms of current liabilities that the company received an ongoing R118.6 million grant from government. There was a surplus of R2.1 million at the end of the year. Though the company had less expenditure than budgeted for, there had been an increase in revenue.

By way of conclusion, Ms Nzimande noted that the company expected a favourable outcome in terms of the 17^th Constitutional Amendment, was to intensify its RED readiness and preparations to ensure the signing of further Accession to Cooperative Agreements, and would intensify its stakeholder engagements.

Discussion
Mr E Nchabaleng (ANC) commended the presenters on the clean audit and its endeavours to establish REDs and asked what the Committee could do to help it in meeting its objectives.

Mr Nkosi said that one potential intervention would be for the Committee to speak to the Portfolio Committee on Justice to ensure that the 17^th Constitutional Amendment was enacted to create an enabling environment, and to establish municipal support for the programme.

Mr E Lucas (IFP) asked how EDI Holdings were to acquire assets and employees to get to a stage where these could be transferred.

Ms Nzimande said that company had made some proposals for transfer from current to future asset holders and employers, notably a share-holding transfer arrangement, but this may not be appropriate in all instances. The company had not explored all available options yet, but expected these would be arrived at through negotiations with participant parties.

Mr Lucas then asked how tariff increases would affect the company.

Ms Nzimande said that the company was actively monitoring the impact of raised tariffs, and although a preliminary report had been made, it would like to include more municipalities before any conclusions were drawn.

Mr J Selau (ANC) asked what exactly the obstacle to the 17^th Constitutional Amendment was.

Ms Nzimande noted that obstacles to the Amendment were largely internal to government, with other pieces of legislation taking precedence, and that engagement with the Portfolio Committee on Justice might help ameliorate this matter.

Mr Selau then asked how the company justified spending less this year, and asked whether this had correlated with a decrease in delivery.

Ms Nzimande said that the surplus was not generated due to any lack in delivery.

Mr Selau then asked whether the company had any vacancies, and how it had planned to fill them.

Ms L Moss (ANC) further asked why, if there were any vacancies, a disabled person could not be hired.

Ms Nzimande said that the company and Human Resources in particular had been pushing hard to resolve unmet quotas. However, many vacancies had arisen out of restructuring within the company, including a disabled post, and the company was still unclear about which positions were going to remain after the adjustment. Nonetheless this had had no real affects on productivity.

Ms Moss then asked why the disabled employee left.

Ms Nzimande said it had to do primarily with the inaccessibility of the company's Tswane offices, but that company was looking to make the necessary adjustments.

Ms Moss then asked for clarification exactly what 'specialist skills' category meant in the staff report.

Ms Nzimande said that specialist skills referred to those offering professional services for the company, such as lawyers, accountants, and human resources.

The Acting Chairperson asked how often the subcommittee meetings were held.

Mr Nkosi said the Board sat quarterly every year and had additional meetings for specific issues. Company reports were made every three months, which were then passed through the sub-committees before reaching the Board for ratification.

Mr Moshesh added that these committees were particularly essential to ensuring oversight over ethical adherence to codes of conduct in finance and procurement across the company supply chain.

The Acting Chairperson then noted that last year only 143 municipalities had signed up to the programme, and asked why there had not been any progress.

Mr Nkosi said the core objective of the EDI was to restructure, and the company was worried about the lack of progress. However, he said that the company, whilst preparing adequately for restructuring, did not have the mandate to force municipalities to sign.

National Electricity Regulator of South Africa (NERSA): Annual Report 2008/09
Mr Smunda Mokoena, Chief Executive Officer, NERSA, began by giving a brief introduction to NERSA as a regulatory authority. It was a juristic person, with a mandate to regulate the electricity, piped gas and petroleum pipe-line industries. It was established on 1 October 2005 and began regulation of piped gas and petroleum pipeline industries on 1 November 2005. The regulation of electricity was taken over from the previous National Electricity Regulator (NER) on 17 July 2006.

He went on to explain the general structure of the industry. It consisted of 9 regulator members, five of which were full time, four of whom were part-time, all of which were appointed by the Minister of Energy. The Chairperson and Deputy Chairperson were both part-time. Full-time regulator members included the CEO and three members responsible for electricity, piped-gas and petroleum pipeline regulation. There were nine Subcommittees, either with industry specific regulatory, cross-cutting policy, or governance points of focus.

He said the Secretariat was comprised of four divisions, each with a number of departments, and five specialised support units. The total staff complement as of March 2009 was 149. The revised staff complement as of 1 April 2009 was 168.

NERSA's strategic objectives were to implement relevant energy policy, law, regulations and rules efficiently and effectively, and to establish the credibility, legitimacy and sustainability of NERSA as an independent and transparent energy regulator.

In measuring NERSA's performance against its objectives, he noted that of the original 437 planned activities by NERSA 73, or 17% were removed by the Energy Regulator prior to the end of the 2008/09 business year. The reasons included processes dependent on other role-players that were outside NERSA's control. Other reasons were re-prioritisation, an unexpected mid-term application by Eskom for a price increase for the MYPD for 2008/09, a second application by Transnet for tariff increases, and human resources constraints. Of the remaining 364 activities, 243 (67%) were executed as planned.

Highlights for the year included the approval by the Energy Regulator of the report on the inquiry into the national electricity supply shortage and load shedding from November 2007 to January 2008, NERSA's co-hosting of the Electricity Distribution Maintenance Summit in June 2008, permission given to Eskom to hike tariffs by an additional 13.3% on top of the 14.2% approved on 20 December 2007, and the approval of 147 municipal tariff applications for implementation from 1 July 2008.

NERSA participated in government's National Electricity Emergency Programme, completed the Stage Five Analysis of the third National Integrated Resource Plan (NIPR3), and gave approval to the National Energy Regulator's Multi-Year Price Determination Rule Change. It had granted the first electricity trading licence to Amatola Green Power, and the Sappi generation licence and associated Power Purchase Agreement. In the Piped Gas Industry Regulation environment, 84 licences were approved, of which 29 were awarded to Sasol Gas to operate existing distribution facilities in Gauteng, the Free State and Mpumalanga, and to trade in these areas, one to Spring Lights Gas in KwaZulu-Natal, 13 construction licence applications were granted and 2 transmission pipeline construction licences were granted.

In monitoring the piped gas industry, he noted that the Energy Regulator discontinued certain indices and approved alternatives in calculating the Sasol Volume Weighted Average Gas Price. Without delving into numerical detail, it was noted that the agreement was reached with Sasol to supply South Africa with 120 GWh. NERSA also calculated and published the maximum and minimum prices and discounts for customers for 2007/08 after extensive stakeholder consultation. NERSA also continues to monitor the joint-venture pipeline and associated tariffs of ROMPCO and Sasol.

Highlights in the Petroleum Pipeline Industry included the fact that NERSA had granted construction licences to the Airports Company of South Africa (ACSA) for the creation of storage facilities at Durban's King Shaka International Airport and Oliver Tambo International Airport. It also granted a construction licence to Sasol Oil for a pipeline to transport petroleum components from the Sasol Secunda to Natref refinery. In total, 37 operation licences were granted, being 12 for storage facilities, 15 for airport storage facilities, one for Natcos pipeline system in Durban, one licence to BPSA for the operation of a pipeline between the Sapref refinery to Durban International Airport, and eight operation licences to smaller petroleum resellers.

He said the first operation licences for marine loading facilities were granted to BP, Shell and Engen for three facilities in Durban harbour, and to BP, Shell, Sasol, Total, and Engen jointly for the single Buoy Mooring facility offshore Durban.

NERSA also approved the Energy Regulator's petroline tariffs for the next five years, the second amendment to the Tariff Methodology for the Petroleum Pipelines Industry, and the Transnet Pipelines tariff for the 2008/09 financial year.
He said there was also approval of the National Energy Regulator's initiative to commission a report to benchmark NERSA against international best-practices. NERSA had also implemented Regulatory Reporting Manuals for licensees to avoid unnecessary submissions.
Organisational highlights included the development of an IT master plan to give effect to a data warehouse and business intelligence system, the approval of the Rules and Procedures meetings of NERSA, outstanding elements of the Operations model, and NERSA's revised Secretariat Regulator.

He further noted that NERSA received an unqualified audit by the Auditor-General, and that NERSA had completed and received approval for its submitted Strategic Plans, as well as its 2007/08 Annual Report and quarterly performance reports.

He then made note of a series of delays and backlogs. These included delays in the publication of Electricity Supply Statistics due to lack of information from licensees, delays in the final stages of the NIPR3 due to the resignation of the project leader and modeller at the consultancy, the incompletion of the Sasol Gas and Transnet Pipelines' Licence due to outstanding information, and the persistence of general backlogs in petroleum operating licences.

In terms of the staff complement, he noted that of 143 posts, 117 were filled, leaving 26 vacancies. Staff movements included fourteen resignations, and twenty-four recruitments. Similarly to the experience of EDI Holdings in recruitment of the disabled, NERSA had made little progress in this regard, and was slightly below the national targets in terms of gender.

In its financial performance, NERSA was governed by the Public Finance Management Act (PFMA), National Treasury Regulations, Generally Accepted Accounting Practices (GAAP) and prescribed standards of Generally Recognised Accounting Practices (GRAP). NERSA's approved budget from 1 April 2008 to 31 March 2009 was R149 539 429, but actual expenditure for this period was R119 730 327. The company's deficit at the end of the financial year was R3 382 087, and income with interest amounted to R6 318 000.

Section 13 of the National Energy Regulator Act stated that all direct costs of the three regulated industries must be retrieved through levies. Common costs were shared by each industry, with the electricity industry carrying 60%, the piped gas carrying 16% and the petroleum pipeline industry carrying 24% of the cost burden.

It was further noted that the ratio for current assets to current liabilities was 8.4:1, which indicated that NERSA was a viable entity. Operating expenditure included rental under operating leases for office equipment, variable costs and notional depreciation charges. 36.1% of capital expenditure was spent on computer hardware and accessories and 11.9% on office equipment, computer software licences and motor vehicles. NERSA had also fully paid for its land and building sites, which had a value of R38.5 million.

Although NERSA received an unqualified audit opinion from the Auditor-General, the audit did raise an emphasis on irregular expenditure. This referred firstly to historical contracts and initial non-compliance with the latest stipulations of the National Treasury, but these were all declared.

He concluded by noting that NERSA was making a contribution in meeting government's target of establishing 10,000 GWh of renewable energy by 2013 through REFIT, that NERSA's main efforts had been in piped-gas regulation and petroleum pipeline licensing regulation, that tariff methodologies for regulation of the three industries had been developed and reviewed, and that NERSA was adopting best regulatory practices through international benchmarking.

Discussion
Mr J Schmidt (DA) noted that on page 18 of the report it was stated that NERSA part-time regulatory members had reached the ends of their terms of office, and asked whether they had been replaced.

Mr Mokoena said that the part-time member's contract expired on 30 September, but in the absence of a suitable replacement, the Minister had reappointed the members until the end of December, by which time a candidate should had been found.

Mr Schmidt then asked for clarification on the output of a Bellville power station which had been approved by NERSA to produce 5 160 mega-watts, but which Eskom had stated would only produce 4 000 mega-watts.

Mr Mokoena said he would need to check the wattage of the station, as he was unsure, and data may have been updated.

Mr Schmidt then said that in relation to municipal tariff structures, that it was reported last year that about 1 600 different tariff structures operated. He said that in Bloemfontein, one municipality had fifty-two different tariff lines, and there were other cases where within a single municipality different towns received markedly different tariffs, and that this was unacceptable.

Mr Mokoena said that the great variation in municipal rates was one of the core motivating reasons for the restructuring of the industry, and NERSA was attempting to provide benchmarks and guidelines for municipal tariffs.

Mr Schmidt then asked how NERSA was planning on dealing with the twenty or so municipalities that had not yet applied to NERSA, as these municipalities were effectively running illegal tariff lines.

Mr Mokoena said that he had mentioned only those who had failed to apply in this financial year and it was likely that they would apply in the next financial year.

Mr Schmidt then said that on page 38 of the Annual Report it was stated that NERSA would be working on power failures, but it seemed that Eskom was ambivalent about this. There were many people offering a variety of power-saving measures, but Eskom had not been receptive. He therefore asked whether and how NERSA would force Eskom's hand to consider these offers.

Mr Schmidt then said that although NERSA claimed to be monitoring Eskom's coal supply, and although Eskom had promised to sign long-term supply contracts, currently 40% of its supply contracts were short-term.

Mr Mokoena said it was unusual that so few agreements had not been made, particularly in a context where Eskom had applied for a tariff increase, although this was late. The regulators had little power to enforce signing, but were trying to monitor the situation.

Mr Schmidt said that he was worried that most of NERSAs vacancies were in electricity, which should be its greatest concern at this stage.

Mr Mokoena said these were specialist areas, and NERSA was trying to attract candidates for the posts.

Mr L Greyling (ID) said he was interested in the Multi-Year Price Determination process, informed by the third National Integrated Resource Plan. It was stated that there was a high-level resignation rate in the latter, which effectually meant a delay in the former, and he asked for elaboration on this.

Mr Mokoena said the resignation was from a position which dealt primarily with long-term forecasts, so the resignation would affect the focus, but would not impact immediate activities.

Mr Greyling said that there were public worries about the National Integrated Resource Plan and its ability to reach its targets for renewable energy, and asked for comment.

Mr J Schmidt (DA) said that even if Eskom was granted its 45x3 tariff increase application, feed-in tariffs for renewables were restrained by the reality that they were still much higher than what Eskom offered.

Mr Mokoena said that in South Africa, the renewable energy base was unfortunately very low. However, this was a policy matter based on long term-projections. However, he did say he felt that it was likely that as time went on, the true-cost of renewable technology would be revealed, and prices would decrease.

Mr Greyling said that it was unlikely that the REFIT would see much progress due to high cost-recovering mechanisms and non-cooperation from Eskom. He asked how far these cost-recovering mechanisms would reach.

Mr Greyling then expressed concern about the current situation, whereby certain money for the REFIT would come from the fiscus, but said that there would be a cap on the uptake of projects, and asked how these would be determined.

Mr Mokoena said NERSA was attempting to address this issue through the MYPD drafting.

Mr Greyling then asked what the policy for municipality tariff rates were, and how NERSA would prevent municipalities from issuing tariff increases in addition to national hikes.

Mr Mokoena noted that mark ups to tariffs were based on the average Eskom price, which gave NERSA the ability to prescribe tariff guidelines to municipalities, who then must apply to NERSA for any further hikes.

Ms N Mabedla (ANC) asked what the reasons behind the fourteen resignations and one dismissal were, and whether or not there was a retention policy in place.

Mr Mokoena said resignations were largely due to offers for greater pay and advancement at commercial institutions.

Mr Lucas asked whether NERSA's power-sharing agreement amounted to power-saving initiatives.

Mr Mokoena said power-conversation measures were largely tied to budgetary issues. He added that NERSA was attempting to address this issue through the MYPD.

Mr Greyling then said that he had been having trouble in acquiring the details of Eskom's contracts with energy intensive users and asked whether NERSA had access to this data, and whether it could be shared. It was particularly pertinent in regards to reports that consumers were effectively subsidising the prices received by energy intensive users.

Mr Mokoena said the negotiated pricing agreements were based primarily on a percentage, usually 5 to 7% of volume. There were standard prices based on the exchange rate, but these fluctuated with commodity markets.

Mr Greyling said that might be true, but large users accounted for about 24 Gwh a year, which was a sizeable amount being expended outside of debates on renewable energy. It was essential that pricing information be made available. Furthermore, he said it was NERSA’s duty to encourage a practical renewable energy strategy.

Mr Mokoena said NERSA was privy to pricing agreements, and was aware of the technical details. However it did not have jurisdiction over setting the terms of these agreements. He further asked why renewable energy sources of less than one mega-watt had been excluded from NERSA's programme, when many households would be willing to buy into renewable energy sources at such smaller and affordable levels.

Mr Mokoena said that for these to be viable, there needed to be an appropriate competitive environment, which did not exist for small-scale renewable sources at the moment.

Mr Nchabeleng then asked about regulatory expenditure, noting the reports that about R16 million had been spent. He asked why this was so.

Mr Mokoena said that in terms of security of supply, NERSA's role as regulator forced it give priority to larger, often more costly, projects, such as provision of storage facilities.

Mr Nchabeleng also asked why NERSA ignored Treasury regulations and action was taken in response.

Mr Mokoena said the irregular expenditure did not amount to a serious problem as all information was disclosed, the amount quantified, and NERSA was immediately and voluntarily brought into compliance.

Mr Selau then asked whether there were any applications that NERSA rejected.

Mr Mokoena said NERSA had rejected applications, and cited an example of an application for exclusive distribution services in Saldahna Bay that was rejected.

He then asked whether 'benchmarks' and 'best-practice' measures amounted to real practical changes, or simple rhetorical commitments.

Mr Mokoena said that benchmark guidelines for best practice were based on international studies, but that these must of course be contextualised to South Africa. NERSA had established a framework for application in this regard.

Ms F Mathibela (ANC) then said that free electricity for the poor often only included the poorest of the poor, and asked whether NERSA had any plans to ensure electricity and paraffin for the general poor.

Mr Mokoena said that paraffin prices were not within NERSA's mandate and that in terms of electricity, it could only implement government policy in this regard, and could not make these decisions independently.

The meeting was adjourned.