Data Gathering and Costing Rate Design
3. CHAPTER 3: RESEARCH METHODOLOGY
3.5. Introduction
This research would not make any sense if one did not consult with the various EDI restructuring bills and proposals available in the industry. It is interesting to note that the restructuring process has been looming for almost a decade now as is mentioned in earlier documents on the electricity industry. The most prominent of these being the Energy White Paper compiled in 1998 by the DME for industry use and understanding. This document stipulates the important processes and challenges currently facing the industry as well as the vision (way forward) for the years to come. The document suggests a "turn- around" strategy for the industry, moving away from the Apartheid era and mending any discrepancies that the current industry has to manage without putting any blame, the aim is for a better future for the electricity industry as a whole, which should contribute to the wellbeing of the country's economy.
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"Energy is the life-blood of development" and "South Africa is a country endowed with abundant energy resources"14 these were the words proudly expressed by the former Deputy Minister of Minerals and Energy (Mr S Shabangu) and the Minister of Minerals and Energy (Dr P M Maduna) respectively. Indeed this is a land rich in natural resources that should be utilized sensibly to preserve our environment. These energy sources include; fossil fuels such as coal, uranium, liquid fuels and gas. Proper utilization of these sources can help uplift the socio-economic development of the country as well as providing the necessary infrastructural economic base for the country to become an attractive host for foreign investments in the energy sector. In terms of improvement, energy can help to address the poverty facing the previously disadvantaged in this country (especially those living in the rural areas) and increasing access to basic needs so as to allow people the freedom of self-development. This leads to the issue of sustainable development and how each citizen of this country should be equipped to sustain their family efficiently through better energy use in the future.
To reinforce the latter, the former minister also declared, in the Energy White Paper (1998) that "Government is committed to the promotion of access to affordable and sustainable energy services for small businesses, disadvantages households, small farms, schools, clinics, rural areas and wide range of other community establishments".
Following such a pledge, Eskom had to ensure that its future policies and procedures are in line with government's obligations. However, the above-mentioned commitments by government cannot be done until the EDI is reformed. Therefore, Eskom Distribution realized the importance of meeting the customer needs, ensuring that they are catered for by availing electricity to all citizens at affordable prices and at the same time increasing the standard of living for all citizens. The latter was a highly socialist viewpoint and it would be interesting to see how feasible this is in light of the new restructuring bill - demanding cost-reflective tariffs.
14 Department of Minerals and Energy. White Paper on the Energy Policy of the Republic of South Africa.
1998.
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The following is a detailed account of some of the challenges facing the distribution pricing business area that need to be addressed with the restructuring of the EDI. Before making the final proposals to address the problem, Cabinet consulted with some stakeholders and finally adopted the Electricity Restructuring Interdepartmental Committee's (ERIC's) recommendations in spring of 1997 and incorporated them into the June 1998 "Draft Energy White Paper". The following concerns were raised:
• Approximately 40% of all homes in South Africa, and the majority of schools and clinics do not have access to electricity.
• The many distributors (Eskom plus Municipalities) are causing an imbalance in the EDI system mainly due to the fact that many Municipalities are not financially viable, resulting in low efficiencies, high costs and wide disparities in tariffs (that is thousands of tariffs nationwide). The aim of rationalization is thus to drastically reduce the number of distributors.
• The EDI continues to experience high levels of non-payment (via domestic customers) coupled with electricity theft, resulting in increased arrears and payment defaults.
• Electricity is used inefficiently and ignorantly, thus customers are wasting these scarce energy and capital resources.
• Despite all the above-mentioned challenges, South Africa has to maintain the competitive advantage of low, stable and cost-reflective electricity prices as well as achieve environmental sustainability. This because of the government's goals to maximize the potential for adequate, reliable, and low cost electricity to serve the people and industries in the country. Thus, the objective is to improve social equity by specifically addressing the energy requirements of the poor.
Following the proposal made by the cabinet (ERIC report, 1996), the South African government approved the restructuring of the EDI through the EDI Holdings Company in the interim before financially viable, independent regional electricity distributors (REDs) are in place. The ERIC report (1998) also proposed that these REDs be subsidiaries of the EDI Holdings Company until they are independent. However, this transition is not without complexity as it requires that the Eskom Distribution division be separated
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completely from Eskom Holdings and be merged, with municipalities to form the six independent REDs.
The above proposal lead to the splitting of the transition process into phases15. Phase 1:
Establishing the EDI Holdings Company and the subsequent appointment of the Board and key officials (see Figure 8) - as discussed, EDI Holdings Company will oversee the separation of the Distribution group from Eskom, parallel to the alignment of its operations (as well as Local Authorities') to align with the predetermined REDs. Phase 2 Ring fencing of the Distribution business. This includes the transfer of municipal electricity distribution - this is where Eskom's Distribution operations, assets and activities, as well as those of Local Authority in the REDs will merge and became subsidiaries of the Holdings Company (see Figure 9). At the end of this stage, the staffing of the RED management board should have begun as well as the finalization of the initial regulatory environment for the REDs. Phase 3: RED establishment: The disbandment of the EDI Holdings Company and the formation of independent REDs - once the amalgamation of local authorities and Eskom Distribution have proceeded and the REDs are healthy and viable, the Holdings Company will be disbanded and each RED allowed to mature independently (Figure 10). This is coupled with the phased transfer of businesses to the REDs. Following their establishment, the REDs would remain under the control of the Holdings Company for a further 3 or more years, and weaker REDs will receive transitional financial support. All six REDs are meant to achieve financial dependence well within 5 years after their establishment.
15 Electricity Restructuring Inter-Departmental Committee (ERIC), October 1996, Meeting South Africa's Electricity Distribution Challenges, Preliminary Report on the Restructuring and Financing of South Africa's Distribution Industry.
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EDI Holdings Model Phase 1
National Government
ESKOM
Local Government
Service Authority as per Constitution
ESKOM Enterprises
Generation Transmission
V
National ED I Holdings Company
R R R R
n
Regional areas with:-- Eskom Distribution merged with municipalities on the one hand , - licensed distributors and municipalities grouped on the other hand
Figure 8: Phase 1 - Establishment of the EDI Holdings Company
EDI Holdings Model Phase 2
National Government
ESKOM
Service Authority as Local
G o v e r n m e n t ^-' per
Constitution
V
ESKOM Enterprises
Generation Transmission National ED I
Holdings Company
R E D RED RED RED
Figure 9: Phase 2 - Transfer of municipal electricity distribution
EDI Holdings Model End State Model
National Government
ESKOM
Local Government
Service Authority as per Constitution
ESKOM Enterprises
Generation Transmission
Board Board Board Board Board
RED RED RED RED
Figure 10: Phase 3 - Depicts the possibility of the disbandment of the EDI Holdings Company in the future followed by the formation of REDs
(Source for figures 1, 2, 3: Calls for Proposal: The Electricity Distribution Industry Restructuring Project)