1 Progress on SALGA & Eskom Partnering Agreement & Signing and Implementation of SDA Between Eskom and Municipalities Nhlanhla Ngidi : Municipal Infrastructure and Services : Electricity and Energy CONTENT 1.Progress made on SALGA/ Eskom Partnering Agreement 2.Progress made on Credit Control and Surcharges in Eskom Supply Areas 1. Progress made on SALGA/ Eskom Partnering Agreement The SALGA/ Eskom partnering agreement officially signed at the SALGA National Executive Committee (NEC) Lekgotla 29 th - 30 th October 2014 Metro Mayors, the Deputy Speaker of the National Assembly, Deputy Ministers of Cooperative Governance and Traditional Affairs (CoGTA), as well as Senior Eskom Executives and Board members attended this session As an effort to implement the Partnering Agreement, the two parties have established a Programme Management Office (PMO) comprising SALGA, Eskom and municipal officials to operationalize the work-plans. In terms of skills training, municipalities will benefit from Eskoms College and Leadership Institute. Background SALGA and Eskom have committed to engage in a process of active partnering for the purpose of: Establishing a cooperative and collaborative working relationship; Bringing about the long term sustainability of electricity reticulation; and Addressing both electricity distribution industry issues in general, and the specific operational challenges impacting delivery of electricity to end users. Objectives It is envisaged that the Training Programme will in the main cover the following critical areas: Tariff Setting, Determination and Billing, Credit Control and Debt Management; Financial Management Customer Services and Management; Network Planning, Design, Optimization and Strengthening (There is a lack of Network Planners and Designers in Municipalities); Identified training Requirements Electrical Engineering Protection Philosophies; Maintenance Planning, Plant Management, Coordination and Execution HV Regulations; Quality of Service; Quality of Supply (Power Quality Management); Quality Management; Engineering Project Management (At all levels from Planning to Execution). Identified training Requirements Cont: Provision of technical training to municipal staff officials; Building of skills capacitation; Enable Improved municipal Revenue collection; Proper management of non-technical losses through proper meter audits; and Identification of illegal connections and the reduction of unsafe installations Moving towards tariffs that are cost reflective Fewer tariff structures between all municipalities (Harmonization) Envisaged Outputs (36) municipalities identified for the roll-out of the SALGA/Eskom Municipal Training Programme To be conducted through the Eskom Leadership Academy (EAL). Four municipalities per province (for all provinces) 36 is a pilot number to test if this can be rolled out at a biggest scale Duration To Start January 2016 Selection of Course Recipients The Eskom Challenges: One of the key issues facing Eskom is the long outstanding municipal debt which amounts to well over R9 billion. Municipal arrear debt is spiraling out of control and has impacted Eskoms investment rating and ability to remain sustainable. Municipalities make up about 42% of Eskoms electricity sales. Municipal arrear debt has increased from R2,3 billion in March 2014 to R4,3 billion in March The top 20 defaulting municipalities make up approx. 80% of the outstanding debt. Progress To Date Contributing Factors to Municipal Debt Inadequate skills/ resources in Municipalities Separation of financial and technical duties within Municipalities, High turnover in management and key staff and prolonged acting positions in Municipalities Skills competency Poor management of revenue management processes Municipal Billing system not always functional Losses and ineffective revenue collection. Implementation of credit management policies/ procedures Penalties when exceeding Notified Maximum Demand (NMD) due to bad load management Revenue Management Cash flow forecasting and management Municipality electricity revenue not ring-fenced Ineffective sales forecasting and budgeting processes Eskom billing dates vs Municipal billing dates to their customers Cash Flow Dependency on grants from National Treasury unding to settle outstanding municipal debt. Funding Misalignment of tariffs (Eskom vs. Municipality). Municipality tariff structure not always cost reflective Inadequate capacity within municipalities regarding electricity tariffs practises and philosophies Tariffs Municipal Arrear Debt Root causes are systemic in nature and cannot be tackled alone by Eskom to reduce municipal debt Key Focus Areas for now will be: Revenue Improvement Billing Management Credit Control and Debt Management Customer Database Management Skills Development at a Management Level Therefore it has been agreed that Proposed Priority Focus Areas 1.Revenue Improvement 2.Credit Control and Debt Management The details of the above focus areas include : No. Credit ManagementDebt ManagementTariffs 1.Customer SegmentationDefaulting CustomersTariffs Types per Customer Segment 2.Meter ManagementCredit Control Implementation Municipal Tariffs 3.Measurement and BillingFinancial Risk Assessment Management of Notified Maximum Demand 4.Energy Losses Management Cash FlowsLegal and Regulation 5.Performance Management Capacity and Competency Development 6.Capacity and Competency Development Policies and by-laws 2. Progress made on Credit Control and Surcharges in Eskom Supply Areas 25 27 August NCOP Resolutions Municipality What the law says The Constitution assigns municipalities executive authority and right to administer electricity reticulation within their municipal area The Systems Act authorises municipalities to provide electricity reticulation themselves (through an internal mechanism) or through an external mechanism such as ESKOM by entering into a service delivery agreement (SDA) 16 Service delivery agreement 17 Municipalities have executive authority for electricity reticulation Municipalities also have the authority to: Adopt bylaws Give effect to their tariff policy Impose surcharges on service fees where services are provided on behalf of the municipality Exercise their credit control policy (disconnect services where there are arrears) This authority provides municipalities with a firm base for generating revenue from electricity user fees 18 But municipalities constitutional right is currently restricted No service delivery agreement as required by the Local Government Systems Act exists between municipalities and Eskom - this is inconsistent with the Constitution and must be corrected Such an agreement would regulate the distribution and sale of electricity by Eskom within municipal areas of jurisdiction The constitutional powers of local government cannot be removed or amended by national legislation (such as ERA) NERSA also has no authority to override the provisions of the Systems Act 19 Lack of SDAs = loss of regulatory and financial control The lack of service delivery agreements with Eskom has resulted in municipalities losing regulatory and financial control over electricity reticulation to the prejudice of many of their residents Surcharges cannot be charged in Eskom supply areas - thus municipal supply areas subsidise services for residents and businesses in Eskom supply areas There is a lack of tariff parity where tariffs in the municipal supply areas include not only the costs of purchasing electricity from Eskom, but also additional costs associated with the service Credit control policies cannot be implemented in Eskom supply areas and thus revenue collection in these areas is lower 20 NERSA License Condition Eskom reticulates electricity to its customers entirely on the strength of the licence issued by NERSA The licence issued to ESKOM does not require Eskom to provide the service in terms of a service delivery agreement In the absence of an SDA as required by the Systems Act, the licence is unconstitutional and defective NERSA is empowered by the Electricity Regulation Act to issue an electricity distribution license with conditions It is also empowered to amend conditions if necessary the licence conditions need to include the requirement of an SDA 21 SDA would facilitate Expenditure more fairly distributed over all consumers. All consumers contributing to all services rendered by a municipality. Improved credit control of municipal services Reduction of the massive R100billion municipal debt Reduction of the debt owed to Eskom Greater financial sustainability for municipalities and the electricity industry Municipality Remedies SALGA seeks We want to achieve the outcome required by the Constitution, the Municipal Systems Act, the PFMA and the ERA which require a service delivery agreement between municipalities and Eskom The service provided by Eskom within a municipal area would thus be performed on behalf of the municipality concerned 22 Service delivery agreement Remedies SALGA seeks We are seeking solutions through cooperative governance : Requesting ESKOM to sign a SDA to ensure compliance with the provisions of the PFMA, the Municipal Systems Act and other applicable legislation, including the ERA Requesting NERSA to: enforce the regulatory framework in the ERA, including compliance with the Systems Act attach a condition to Eskoms licence, that where Eskom reticulates electricity within a municipal area, it may only do so in terms of a service delivery agreement with that municipality 23 NCOP RESOLUTIONS AUGUST 24 Resolution Action to be taken 1.The amendment of the provisions of section 76 and 78 of the Systems Act to simplify the process required to assess the most appropriate service provider to deliver municipal services 2.That NERSA: a.enforce the regulatory framework in the ERA, including compliance with the Systems Act b.attach a condition to Eskoms reticulation licence to determine that Eskom may only reticulate electricity within a municipal area in terms of a service delivery agreement with the relevant municipality c.That ESKOM commit to support all municipalities in credit control and to sign SDAs with municipalities 1.SALGA to make specific proposals to COGTA 2.COGTA to prepare draft amendments 3.NCOP to do oversight 4.NERSA and Department of Energy to recognise the requirements of the Systems Act 5.Department of Energy to ensure recommendation is implemented 6.ESKOM to commit to assist municipalities with debt collection 7.COGTA and Department of Energy to ensure implementation 16 September 2015 Working Session Resolutions 16 September Working Session between all Stakeholders Meeting took place at SALGA with the attendance of SALGA, AMEU, DPE, NERSA, ESKOM and Treasury Aimed specifically concentrating in identifying workable solutions to addressing the two questions below: What mechanisms or arrangements need to be put in place so that municipalities can exercise their credit control policies in Eskom supply areas? How can municipalities bill the surcharge to those consumers who fall within the Eskom supply area? 26 AMEU Presented its Position Paper Highlights The concerns from Municipalities regarding the issue at hand include the following: - Is Eskom engaging with municipalities in good faith? Do all stakeholders have a full understanding of the constitutional rights of municipalities as electricity service authorities and the legal requirements arising from these rights? What is the best way to resolve the impasse between Eskom and municipalities in the best interests of the industry, the economy and the country? Who is benefiting most/least from the current situation? 27 AMEU Presented its Position Paper The AMEU position paper proposed the following:- NERSA to include an SDA with municipalities as a prerequisite part of the Eskom tariff approval. Start the process of consolidation of electricity service delivery within the municipal area of jurisdiction (with a joint project team). 28 Eskom Presented its Position An SDA Unintended Consequences Legislative and statutory implications: Changes to Eskom Condition of License will be required All Eskom Supply agreements will have to be changed Failure could lead to challenges in terms of Consumer Protection Act Increased litigation- disconnections will be challenged- who will run with litigation and cover legal expenses ? 29 Eskom Presented its Position An SDA Unintended Concequences Operational Implications (Cost, Time & Revenue) A magnitude of new tariffs since each municipality might require different charges and levies IT-systems to accommodate all of these different tariffs Loss of Revenue for disconnecting customers for non- electricity related debt Potential escalation in Eskom Debt levels Potential impact on Eskom Credit Ratings Cost and the compensation there off by Municipalities (connection and disconnection) Budget and planning (and subsequent price increases) will be impacted/dictated by municipal council decisions 30 Eskom Presented its Position An SDA Unintended Concequences Reputation and Image Customers response to paying an additional levy on top of the perceived high prices Other Stakeholder Involvement: NERSA will have to approve all these various tariffs NERSA reputation at stake when they now allow additional charges onto the Eskom customers Public consultation process to be followed Impact on the economy if it is additional revenue to municipalities inefficient costs 31 Eskom Presented its Position Eskoms Conclusion and Way Forward on their presentation was: Credit control measures and raising surcharges on behalf of municipalities may not be possible; The unintended consequences will need to be reviewed in the interest of the customer and the country at large; and Follow up conversations will be needed with critical stakeholders 32 Resolutions of the Session were: Two (2) Work Streams will be formed to deal with Legal and Technical issues on credit control, surcharges and SDAs. National treasury will be responsible for this action. A set of principles on how to address the challenges facing the EDI will be developed as part of this process. National treasury will be responsible for this action. It was agreed that National Treasury will provide leadership in terms of the challenges raised terms of Levying of Surcharges, Credit Control & Debt Management, and Service Delivery Agreements (SDAs). 33 Resolutions of the Session were: National Treasury will develop Terms of Reference (ToRs) to inform the different Work Streams that will examine all issues and come up with an Action Plan to resolve the EDI challenges. National treasury will be responsible for this action. NERSA to provide Guidelines on Regulatory matters. Cogta to conduct further research and discuss the legal interpretation of the all applicable pieces of legislations. COGTA to lead a process to address the legislative issues so that government provides leadership on the interpretation thereof. 34 Million Dollar Question? If SDA can be signed tomorrow, how are you as a municipality going to implement it? How are you going to levy surcharges in Eskom Areas & How do you see Eskom including this in its business model SHO