Data Gathering and Costing Rate Design
3. CHAPTER 3: RESEARCH METHODOLOGY
3.6. The South African Electricity Sector
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)
The relevance of the previously mentioned objectives to Pricing is "the wide disparity in the prices paid by the various customer categories" (Energy White Paper, 1998) that cannot be fully explained by the costs associated with serving these categories. The Energy White Paper (1998) also imply that "without explicit or transparent funding mechanisms there is a great risk that in times of tight resources many distributors will not be able to fund their targets. Moreover, because electrification is a national objective, cross-regional subsidation should be considered as an equitable way to fund the electrification program." One should also bear in mind that without alternative funding (from Government, private investors, IPPs) and pricing mechanisms, the EDI will experience financial bankruptcy as well as substantial increases in the tariff (James,
1996).
This directs one to the issue of building capacity in the tariff and cost of supply design activities of the distribution business - one of the key objectives mentioned in the DME project proposal (1999). In terms of the audience who will be responsible for this function in the future REDs, the suitable persons should have a great understanding of the EDI market and industry and it is imperative that through that understanding, one builds a good understanding of their customers and customer base. One should also be aware of their customer's capabilities, their specific needs and what they can afford.
3.7. The EDI - past, present and the future...
"Electricity supply throughout the world is undergoing a revolution", Guernsey and Company, 1994 echo's the discussion in the literature review chapter. It is not surprising that electricity utilities world-wide experience the same pressures originating from global markets and new government legislation where foreign investment is suddenly welcomed into the countries to help fund power sector expansion and development as well as the possibility of innovation through "fresh and unbiased eyes". Most importantly, this new way of tackling industry irregularities, forces utilities such as Eskom to see themselves as (taxable) businesses - that will be without any governmental support in the future and should thus act accordingly with respect to global alignment.
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In this respect, the Multi Market Model (MMM) approach that has been suggested for the South African market (discussed in the previous chapter), aimed at increasing competition amongst the future regional electricity distributors (REDs) where customers will have the freedom to choose their supplier (s) in future. The author is however, skeptical of the probability of the proposed MMM model in the South African context - this point will be elaborated later during the discussion chapter. On that note, one would like to put on the socialist's hat and board a journey of discovery to unravel this issue (pertaining to the tariff designing aspect) and see how tangible it can be in the future...
3.8. "The EDI Challenges - the drive for the South African restructuring"
In order to set the scene for this research chapter, I would like to review the South African EDI market with a brief overview of the existing status quo of the EDI and the challenges currently facing the industry. This is to aid in linking this chapter back to the literature review chapter as well as have more elaboration in terms of the Pricing matters that are of focal point.
According to the ERIC report (1996), the distribution of electricity is currently undertaken by Eskom, about 240 local municipalities, now much less, and thirteen other (private) distributors. The municipalities collectively service about 60% of total customers directly, and about 40% of total sales volume. These municipal or local authorities generally supply to customers in their local government areas. However, these municipal distributors differ significantly in customer density, size and type of customer base, geographic spread, financial base and effectiveness.
The latter discrepancies posed a huge crisis in this industry and need to be addressed promptly; these include (DME Calls for Proposal, December, 1999):
• The vast numbers of municipalities drive the fragmentation of the EDI.
• This leads to substantial differences in the financial condition of municipal distributors, therefore unsustainable as a business.
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• The increasing number of municipalities and customers unable to pay Eskom and so are the incidences of poor quality of supply and service.
• Disparities in prices paid by the various customer categories and the cost of serving these categories.
• Economies of scale, skill and specialization, which are not applied by smaller distributors - unregulated.
• The uneven distribution of electrification needs across regions with some distributors not being able to fund their electrification targets and thus placing the national electrification programme at risk.
Furthermore, various institutions such as the EDI Holdings Company and the NER through the Discussion Document (1996) have taken some approach towards the "future"
objectives subsequent to the restructuring and in light of the above challenges:
• Introducing competition into the industry
• Giving (large) customers the right to choose their electricity supplier (s) (sic: this would be what is know as "the multi market model" (MMM));
• Ensure agreed to electrification targets are met,
• Provide low-cost electricity,
• Facilitate better price equality,
• Improve the financial health of the industry,
• Improve quality of service and supply,
• Permitting open, non-discriminatory access to the transmission system;
• Encouraging private sector participation in the industry (sic: public-private partnership)
• Attract and retain competent employees (sic: via Tariff Design workshops).
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3.9. Electricity Distribution industry and its relation to Electricity