Electricity Restructuring Dynamics - The Cape Town Experience

The Association of Municipal Electricity Undertakings (Southern Africa)

AMEU Technical Convention, Gallagher Estate, JHB

17October 2006

ContentsBackground

Various Dynamics:

S78 process

REDs vs MEDs

Ringfencing

Municipal vs Public

Social vs Profit Motive

Service Authority vs Shareholder

Conclusion

Constitutional Obligation on Local GovernmentA 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] 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];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]

[1] Section 156 (1) (a) of the Constitution of the Republic of South Africa, Act 108 of 1996[2] Section 83 (1) of the Municipal Structures Act, Act 117 of 1998[3] Section 84 (1) (c) of the Municipal Structures Act, Act 117 of 1998

Constitutional Obligation on LG (cont.)

What happens if there is an “external service provider”?… the municipality remains responsible for ensuring that that service is provided to the local

community … [1]

Where “local community” or “community” is defined as follows: In relation to a municipality, means that body of persons comprising - a) The residents of the municipality;b) The ratepayers of the municipality;c) Any civic organisations and non-governmental, private sector or labour organisations or

bodies which are involved in local affairs within the municipality; andd) Visitors and other people residing outside the municipality who, because of their

presence in the municipality, make use of services or facilities provided by the municipality,

And includes, more specifically, the poor and other disadvantaged sections of such body of persons[2].

[1] Section 81 (1) of the Municipal Systems Act, Act 32 of 2000[2] Section 1 of the Municipal Systems Act, Act 32 of 2000

What is “Electricity Reticulation”?

… Supply of electricity, which includes for the purposes of such

supply, the transmission, distribution and, where applicable,

the generation of electricity to residents of the municipality;

ratepayers of the municipality; any civic organisations and non-

governmental, private sector or labour organisations or

bodies involved in local affairs; and visitors and other people

residing outside the municipality who, because of their

presence in the municipality, make use of services or facilities

provided by the municipality, with special emphasis on the poor

and other disadvantaged sections …

High Level Overview - Establishment

1. The necessary legislative procedures for appointing an external service provider to provide a municipal service were completed.

2. RED1 was formally established on 1 July 2005.

3. The City currently holds 5 shares.

4. 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.

5. The City of Cape Town is the parent entity, exercising the Service Authority role, as outlined in section 82 of the Municipal Systems Act.

6. The relationship with RED1 is formalised in a Service Delivery Agreement, as required by Section 82 of the Municipal Systems Act.

High Level Overview – Operating Procedures1. RED1 has entered into Operating and Transitional Plans for

Transfer Agreements with the Cape Town Electricity Undertaking and Eskom Western region to service the full Cape Town jurisdictional area that RED1 has a licence from the NER to service.

2. Two members of staff were initially appointed as RED1 staff members.

3. RED1 currently obtains funding from the City. This funding is 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.

High Level Benefits of Setting up RED 1

Nyanga transfer of customers has been approved. This was a group of customers in the middle of a Cape Town Supply Area that stayed with Eskom on the amalgamation of Black Local Authorities with existing municipalities. These customers have now been transferred to Cape Town.

In order to accelerate service delivery, the City will fund the Thabo Mbeki area electrification and the Gugulethu Substation, which has spare capacity, will supply the electricity. This is a co-operative agreement between the City and Eskom brokered by RED1.

Section 78 [1] Costly Process

InvestigationsReviewsPublic notificationSeeking views of local community and organised local government

Long ProcessIncluding Section 84 of Municipal Finance Management Act (90 days)Soliciting views and recommendations of NT, Prov. Treasury, National & Prov. Dept. of Local Government, MEC for Local Govt

[1] Section 78 of the Municipal Systems Act, Act 32 of 2000

Nail-biting exercise – or dictated outcome?

RED vs MED Revised Blueprint plan – 6 wall to wall REDs

Cabinet Decision of 14 September – 6 MEDs & 1 National RED

Cabinet Decision of 18 October - ???

Nail-biting exercise – or dictated outcome?

Trigger for a new S 78?

Greater area pre-empting individual municipal S78 outcomes?

RED vs MED (cont.)

If a RED, how are governance issues covered?Parent municipalities that have shared control of a ME MUST enter into a mutual agreement determining and regulating:

Exercise of shareholder, contractual or other rights and powers;

Exercise their powers and functions ito the MSA and the MFMA;

Monitoring and Annual review, after setting up annual performance objectives and indicators;

Payments of monies;

Resolution of disputes between municipalities;

Termination, disestablishment, etc. [1]

[1] Section 86F of the Municipal Systems Act, Act 32 of 2000

Municipal Forum

RingfencingWidely divergent views

Common vision?

Same objective

Differing views

Protecting different interests

“Parent-child” relationship

Municipality and ME are mutually dependentNo one party should be advantaged or disadvantaged

Municipal vs Public EntityPFMA been in existence longer than MFMA

PFMA regulations in place

MFMA Framework not yet in place

Local Government significantly more regulated

Municipality always retains the responsibility to ensure service delivery [1]

[1] Section 81 (1) of the Municipal Systems Act, Act 32 of 2000

Social vs Profit MotiveME is a Private Company

Governed by Company’s Act

Board of Directors

Private Sector usually = PROFIT MOTIVE

Local Government = large SOCIAL BIASLocal Government must balance social vs economic development

Municipality definition of Community emphasises “the poor and other disadvantaged sections” [1]

[1] Section 1 of the Municipal Systems Act, Act 32 of 2000

Service Authority vs ShareholderMunicipality legislated to play two different roles

SDA = Service Authority (SA) Role?Shareholder Compact = Agreement to allow SA to take up monitoring & management role, holding Board accountable against specific performance targets, without claim of conflict of interest or self-dealing

Ringfencing for external SP EXCLUDES SA roles & responsibilities

Municipality always retains the Service Authority role [1] [1] Section 81 (1) of the Municipal Systems Act, Act 32 of 2000

Service Authority Role of Local GovernmentThe 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] Section 81 (1) (a) – (e) of the Municipal Systems Act, Act 32 of 2000

ConclusionWalking into the unknown –

Electricity Regulation Amendment Bill withdrawn;

New Cabinet decision tomorrow (18 October 2006);

Little legislative foundation for restructuring.

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

Conclusion

Let us work togetherfor a better city

EnkosiThank you

Dankie

Presentation prepared by: Louise Muller