Chairperson, Portfolio Committee on Minerals and Energy


Chief Executive, Eskom Holdings


Submission on the viability of the establishment of a National RED/ 7th RED



1.       Introduction

This memo documents Eskom’s submission to the Portfolio Committee on Minerals and Energy for public hearings on “the viability of the establishment of a National RED/ 7th RED”. 

2.       Summary Submission to the Portfolio Committee

The national RED, complementing metro REDs, is the most appropriate approach to meet national objectives for electricity distribution. 

We believe that the national RED, using Eskom Distribution as a base and with a continuation of existing policy support, has unique capacity to deliver all national restructuring objectives in the non-metro areas, and notably the Government’s electrification target of universal access by 2012.    The national RED will supply stability until these objectives have been met.

Furthermore, viability of the national RED is assured when based on the national infrastructure of Eskom’s non-metro Distribution business, excluding key industrial customers, and a national policy environment which maintains existing industry arrangements.  

Eskom’s actions in support of the national RED will be subject to approvals required by the Public Finance Management Act.  Proposals affecting employees will be subject to the Labour Relations Act and other legislation.

3.       Background

The Cabinet stated on September 14, 2005 that: “…six metro REDs to be set up as soon as possible after the local government elections, and that other areas would be covered under separate local REDs or a national RED.  Eskom will continue to play a critical role particularly in the national RED”.  

The purpose of the national RED is to deliver national restructuring objectives, particularly in rural distribution.  A primary role will be to meet the Government’s electrification target of universal access by 2012 in the non-metro areas.   

The national RED will be the base into which non-metro municipal distributors can amalgamate on a voluntary basis, where approved by “section 78” studies, to form a consolidated electricity distribution industry with Eskom non-metro business and achieve the objectives of restructuring.  The national RED will interact with municipalities through a standardised agreement.

Eskom supports the Government statement of September 14, 2005.

Although we agree that the voluntary nature of EDI restructuring does not preclude the concept of “local REDs”, Eskom believes that there is little justification for local REDs.  Eskom supports national consolidation of the non-metro industry, to minimise change and to support the aggressive timing targets announced by Government, with maximum focus on achieving restructuring objectives.

4.       Blueprint Objectives for EDI Restructuring

Eskom supports and works according to the stated objectives for EDI Restructuring in the Blueprint:

  1. To provide low cost electricity to all consumers, with equitable tariffs for each customer segment;
  2. To provide a reliable and high quality supply and service to all customers, in support of the government’s economic and social development plans;
  3. To meet the country’s electrification targets in the most cost-effective manner, and so ensure that electrification is contributing to social and economic development;
  4. To meet the legitimate employment, economic and social interests of all employees in the sector, and ensure their safety; and
  5. To operate in a financially sound and efficient manner, in order to provide a reliable and sustainable future for both consumers and employees.


Electricity Distribution Industry, Restructuring Committee (EDIRC) Blueprint Report, Compiled by the Department of Minerals and Energy

Reform of the Electricity Distribution Industry (EDI) in South Africa: Strategy and Blueprint, Introduction and Summary, January 2001

These issues have remained valid.  Today there are also additional key national goals in free basic electricity, infrastructure required to support economic growth, and enhanced maintenance expenditure to avoid disruption to the economy. There is an urgent need to address all these issues.

Eskom believes it is time to decide the direction of the industry based on the capacity of metro REDs and a national RED to meet the national objectives and goals stated above.

5.       Movement toward 6 metro REDs & the national RED: formation principles

Eskom supports the DME proposed formation principles of the national RED:

  1. Transfer to metro REDs Eskom customers within metro boundaries (excluding key industrial customers), associated staff and networks on a basis to be agreed – e.g. service agreement, lease or sale
  2. Metro REDs will be formed as municipal entities under local government legislation, either as legal entities or as metro departments.
  3. Form the national RED in the initial phase from non-metro municipal distributors and the existing Eskom Distribution Division (excluding Eskom’s key industrial customers defined as customers consuming more than 100GWh of electricity or more at a single contiguous site).

Metro REDs and a 7th national RED are appropriate solutions to the key national issues of today.  Metro distributors and the national RED will have critical mass which should be exploited to meet the restructuring objectives.  The national RED, created from Eskom’s Distribution Division excluding metro area business and key industrial customers, will be a credible consolidation vehicle for non-metro municipal distributors.  It will have ready capacity to assist the amalgamation of ringfenced non-metro electricity distributors into the national RED.

There will also be minimum change to current network configuration, to avoid costs and disruption of service to customers.  The organisation of the national RED in the non-metro areas will follow the existing electricity network configuration as defined by Eskom technical service centres and municipal distributors, and changes will be minimised. 

Due to its distributed national operations, Eskom Distribution is the only logical vehicle to form the base of the National RED, as a division of Eskom.  The Business Model of the national RED will encourage all municipal distributors to join.

6.       Advantages of a 7th “national RED” over previous regional model

Metro electricity distributors, as metro departments or existing entities, can rapidly provide a consistent service in the major population centres without delays of “s.78” studies required by the Municipal Systems Act. 

In addition, Eskom believes the 7th “national RED” has the following advantages over the previous regional 6-RED model:

Use the Eskom national footprint to support the national RED

1.       Eskom Distribution will support enhanced economies of scale through its national technology, business processes and scaleable IT solutions.  Notably, the national RED can support non-electricity municipal services by providing nationally effective billing, call centre and collection processes, supported by national technology.

2.       Customers will experience improved customer service through customer focused value chains initially developed within Eskom.

3.       Scare skills can be concentrated and sustained in national centres of excellence within the national RED, as currently occurs in Eskom Distribution.

4.       Eskom can provide its regional and national Distribution capacity to address the issues of national non-metro distribution planning and infrastructure development.

5.       There will be earlier progress due to limited dependence on RED creation and related costs.

6.       A single legal entity will facilitate a base for equitable national tariffs with minimised cash transfers between legal entities.

Staff related benefits to the national RED

7.       The national RED provides greater stability for metro and Eskom industry employees by reducing the interchange of staff between entities.

8.       Also by minimising the interchange of municipal and Eskom staff, the industry reduces the impact of harmonization of different conditions of service, which would threaten higher costs to consumers.  The majority of industry staff are employed by metro distributors and Eskom. The previous regional model forced a maximum interchange of staff with likely harmonization issues.  The separation of metro REDs from Eskom’s non-metro business significantly reduces this interchange of staff.

Credible consolidation vehicle for municipal distributors

9.       By using existing entities, the industry can immediately address weak rural distribution and avoid delays due to new entity set-up, reduce overall cost of restructuring, and reduce impact on customers.

10.   The national RED can leverage Eskom’s experience in “TBVC” and “SGT” distributor incorporations.

11.   The 7th “national RED” provides a mechanism to equalise the financial impact of restructuring for equitable low cost supply to rural customers included in a national rate base.  Equitable tariffs are created through a managed subsidy in regulated national tariffs, and low cost is supported by economies of scale in a national RED.

Support for free basic electricity and universal access

12.   The 7th “national RED” will maintain a national capacity with a proven Eskom track record, particularly in rural electrification, to achieve electrification targets, notably the President’s commitment of universal access by 2012.

13.   Economies of scale will be supported by national planning, project management and national electrification infrastructure development.

14.   National capacity will be available for delivery of a national electrification infrastructure.

15.   Government and stakeholder interaction on electrification funding and progress reporting will be facilitated by a single service provider, as opposed to multiple municipalities.

7.       National RED alignment to national objectives

7.1.        Compliance with Government Requirements

Eskom recognises Government requirements for restructuring:

1.       Restructuring must be in accordance with the Constitution, taking into account that responsibility for reticulation is a municipal function.

2.       Financial state of municipalities currently performing the electricity function must not be adversely affected.

3.       Aggregate personnel costs must not increase in a way that undermines the objective of a single/ uniform public service.

4.       No additional funds or taxes (fiscus and/or local government) without the approval of Cabinet.

5.       Ensure service delivery, especially in rural areas, and provide the basis for achieving universal access by 2012.

Eskom believes that there is alignment to these Government requirements:

Government Requirements

National RED

Restructuring in accordance with the Constitution

Enhance municipal responsibility for service delivery

  • Transfer Eskom business in metro boundaries for integrated metro service delivery
  • Provide a full service to enhance rural municipal capacity under a standard agreement (in line with regulatory requirements)

Support municipal obligation for social & economic development

  • through a strong role in integrated development planning, electrification & free basic electricity

Municipal finances not adversely affected

Minimise financial impact on municipalities

  • Metros will gain additional revenue from transfer of Eskom business within their boundaries to the metro REDs
  • Municipalities will be compensated for assets through interest bearing financial instruments of lease payments, securing municipal income

Aggregate personnel costs must not increase

Separate consolidation of metro REDs and national RED will avoid staff transfers for 70% of the industry employees in Eskom Distribution and metros, and avoid adverse consequences as a result of restructuring for these staff.  Minimised staff transfers will result in:

  • Limited changes in conditions of service, pension funds, job content & grading
  • Stability for the majority of workforce and hence of the industry

Transfers will be substantially limited to essential direct staff only.

No additional funds or taxes to fund restructuring without Cabinet approval

Reduce costs since there is no immediate need for National RED to create a new legal entity, avoiding the financial implications of transferring assets, staff, business operations and data.

Organise and manage for economies of scale to support benefits realisation.

Expedited Delivery

Metro REDs do not need to create new legal entities prior to absorbing the Eskom businesses within metro geographic and jurisdictional boundaries, avoiding unnecessary delays

Eskom Distribution Division can be used to immediately amalgamate non-metro municipal distributors - to minimise restructuring effort and timelines

Both Metro’s and Eskom are largely kept bundled in current form, thus allowing then to immediately deliver on key outputs.

7.2.        Blueprint Objectives

Eskom believes that the concept of the national RED is aligned to Blueprint objectives as follows:

Summary Blueprint Objectives

National RED

Low cost equitable tariffs

Enhance economies of scale & skill through maximum industry consolidation

·         facilitated implementation of equitable national tariffs

·         quality of supply & financial viability

Maintain investor confidence 

·         Initial Eskom-based national RED access to capital markets

Quality of Supply

Enhance service delivery

·         by transferring Eskom business in metro boundaries for integrated metro service delivery in metro boundaries

·         by providing national capability for rural distribution

Minimise extent of national RED creation process

·         to accelerate amalgamation


Support social & economic development

·         through strong role in integrated development planning, electrification & free basic electricity

Staff career opportunity

Through consolidation, enhance national opportunity for all industry staff

Financial Viability

Minimise financial impact on municipalities

·         by securing municipal income through asset compensation

Maintain investor confidence 

·         through Eskom-based national RED access to capital markets

·         current suppliers to keep current key industrial customers

Minimise transfer of staff

·         to limit impact of harmonization of conditions of service

8.       Financial Viability

Eskom’s financial model shows the national RED as viable.

Eskom has prepared financial modeling of alternative scenarios for the national RED.  Our model for the viability of the national RED shows the following data:

·         The current base of Eskom Distribution, excluding metro redistributors

·         Less: transfer of current Eskom customers to metro REDs

·         Add: assumed gain of all customers from amalgamation with non-metro municipal distributors.

The key assumptions are as follows:

Policy support -

1.       The national RED will benefit from wheeling charges to metro REDs from Transmission at the current regulated tariff.

  1. The existing subsidy to rural customers will be continued through charges on urban customers, primarily customers of the metro REDs.
  2. The national RED will not be subject to long term service charges from municipalities which effectively constitute long-term compensation for stranded costs.

Existing industry experience for energy losses and bad debts is maintained -

  1. Energy losses in national RED will remain at the current level of disclosed energy losses by municipal distributors averaged with Eskom’s current loss rates.
  2. Bad debts will continue at current levels as indicated by municipalities, and averaged with current Eskom bad debts levels.

The result is a viable national RED as follows:

In this model we have shown the components of net income which depend on:

·         Normal tariff sales revenue

·         Electrification and rural subsidies between customer categories

·         Network service charges for direct Eskom key industrial customers and redistributors

·         Purchases which account for energy losses

·         Bad debts

·         Service charges

On this basis, the national RED has a net profit before tax of R1,6 billion (8,5% of revenues), which is a manageable financial situation, even if assumptions cannot be met in the early years of operation during and immediately after phased amalgamation with municipal distributors.

The conclusion is that the national RED is viable.  The following current industry structures should be maintained:

  1. Maintain regulated subsidies: Equitable low cost tariffs, especially for rural areas are dependent on continuation of existing subsidies paid by urban and industrial customers.  Such subsidies are aligned to existing tariff structures approved by the regulator.  The national RED will provide a national structure for the collection and allocation of equitable subsidies across all customers.
  2. Maintain regulated network service charges: The national RED will maintain the current regulated tariff for network service fees to deliver energy from the Transmission network, via national RED assets, into the metro networks.
  3. No worse than current losses: The national RED will at least maintain the average of existing municipal energy losses and the favourable Eskom experience of energy losses.  Consumers will benefit from extending Eskom’s loss management capacity into municipal supply areas.
  4. No worse than current bad debts: The national RED will at least maintain the average of existing municipal debt collections and the favourable Eskom experience of bad debts.  Consumers will benefit from extending Eskom’s successful collection processes into municipal supply areas.
  5. No long-term municipal (service) support: The national RED will compensate providers of assets but viability will be judged prior to a policy decision on whether electricity is charged with subsidies for other municipal services.

The modeling indicates that with the above assumptions, a national RED to manage non-metro distribution will be viable.

Failure of the above assumptions would imply:

1.        High Metro RED profits based on retention of current rural subsidies

2.        High tariffs for rural customers due to loss of existing subsidies

3.        Failure of objective for equitable tariffs

4.        Incentives contrary to ASGI-SA for rural development

5.        Financial support from National Treasury.

9.       Benefits to Municipalities

Eskom believes municipalities will enjoy the following benefits:

  1. Municipal financial positions will not be adversely affected due to fair asset compensation (sale or lease to the national RED), plus appropriate compensation for surpluses
  2. Effective and efficient electricity service provision, based on NERSA regulatory standards, with electrification and free basic services targets based on contractual agreements with the national RED.
  3. The municipal economy and citizens will be supported with low equitable electricity tariffs, due to business efficiencies through consolidation and economies of scale, and the application of equitable national tariffs in the national RED as a single legal entity.

10.   Key Government Objectives

Eskom believes the national RED will be a critical agent to support key Government objectives, including:

1.       Universal Access  by 2012 - this national project will be a massive challenge for the industry with an estimated 3,5 million households without access to electricity at present, and probable increases to 2012 due to population growth, migration to cities and consequent splitting of households

2.       Poverty Alleviation - multiple Government initiatives, including:

·         Free Basic Electricity which requires a technology solution when combined with prepaid electricity

·         Employment opportunities which can be supported by the distributed technology of the national RED, and the drive for local content in procurement for which the national RED will have an established policy of support

·         Stimulation of economic growth in rural areas, a proven area in which electricity can play a major role

3.       The Accelerated Shared Growth Initiative for South Africa (“ASGI-SA”), which is required to support 6% economic growth and to support Black Economic Empowerment and empowerment for Black Women-Owned Organisations.

4.       Social upliftment of standard of living created by the benefits of electricity, notably in rural and informal settlements

5.       Attraction of foreign direct investment outside the metro areas through managed quality of supply on a national basis.

As an example: we note the following information on asset infrastructure refurbishment:

Eskom - own data

Municipalities - Source: EDI Holdings

Eskom’s Backlog on Refurbishment - nil

Historical investment by Eskom:

·         5 years 2000 to 2004: R5,0bn

Municipal Backlog on Refurbishment - R9,3bn (estimated)


Planned investment by Eskom (national RED):

·         5 years 2005/06 to 2010/11: R10,9bn

Municipal budgets: R1,9bn – R5,6bn

In 2004, the NER determined that only 1/3 of municipalities were making necessary provisions




We conclude that the EDI requirements are better served by a national organisation.

11.   Evolution of the national RED

The national RED should evolve from Eskom Distribution as a base.

Eskom notes that restructuring in process for many years - even prior to the Energy White paper of 1998.  This prolonged uncertainty has resulted in:

·         Staff (and industry) instability

·         Postponement of investment by industry

·         High restructuring cost and rework following action to implement previous policies.

Eskom believes an evolving solution is required: avoid further delay by creating the Metro RED’s and a national RED as component parts of a pragmatic joint solution that is responsive to an evolving industry. 

This is achieved in Eskom’s proposed governance and ownership model:

·         Create the national RED as a division of Eskom

·         Due to its distributed national operations, Eskom Distribution is the most logical vehicle to form the base of the National RED

·         Create a stable industry model to realise restructuring benefits including amalgamation of non-metro municipalities, infrastructure for ASGI-SA and economic growth, and Universal Access by 2012

·         The ownership and governance model may evolve to a wholly owned subsidiary of Eskom, or longer term, into a separate entity with alternative ownership.

Eskom believes the industry needs direction, not an end state.  The amalgamation of the national RED with municipal distributors is not a short term exercise - this is demonstrated by the issues in incorporation of TBVC and SGT distributors.  We believe the requirements of the industry after amalgamation are unknown - but will surely be different to the requirements of today.

The national RED and metro REDs will provide certainty of direction which industry employees need to achieve restructuring objectives.

12.   Role of EDI Holdings

Eskom believes that EDI Holdings should continue and complete its facilitation role as programme managers of restructuring. 

Eskom supports the Blueprint statement:

“EDI Holdings would be established as a 100% central government owned company. The Board of Directors would be appointed by the Minister of Minerals & Energy. Its overall purpose would be to ensure the successful implementation of government policy towards the EDI, and hence oversee and direct the reforms described in this report.”

EDI Holdings must have a key role to facilitate the multiple decisions required for the EDI: industry wide standards, shared services for maximum economy of scale, transfer principles for assets, customers and employees, compensation, changes to legislation, etc. 

13.   Summary

In summary Eskom supports the following conclusions:

  1. The proposed conceptual design of the national RED fully supports Government requirements and the Blueprint objectives for EDI restructuring.
  2. The national RED will be an effective consolidation vehicle for non-metro municipalities.
  3. Minimal restructuring effort is required to immediately address the problems of rural distribution.
  4. The national RED will significantly contribute to meeting the target of universal access to electricity be 2012.
  5. The national footprint will provide the base for significant benefits through economies of scale and skill.
  6. Municipalities will benefit from the process through secure cash flows from asset compensation.
  7. The National RED is financially viable
  8. EDI Holdings is best placed to programme manage the restructuring

14.   Contact Point

Thank you for this opportunity to submit our views to the Portfolio Committee.  Eskom is committed to successful achievement of Government objectives through restructuring of the EDI, and will work with all stakeholders to ensure successful operation of the national RED and the 6 metro REDs. 

Further information is available from Thulani Gcabashe, Chief Executive, Eskom Holdings.