Downwards spiral in electricity distribution can be reversed, say energy leaders

The tone was set for a three day series of public hearings amounting to a public workshop on the electricity distribution industry (EDI) when department of energy (DoE) confirmed that the rehabilitation of the industry needed R27.4bn to reverse a downward delivery spiral, bearing in mind the need for skills generally and the inability of municipalities to execute to deliver in terms of strategy.

However, the main players in the industry, including Eskom, were convinced that South Africa had the skills and ability to effect proper change.

Willie de Beer of Sanedi opened the meeting and warned that unless there was a satisfactory distribution and supply system, any amount of power stations and electricity generation programmes would be pointless if the electrical distribution industry, one of the largest employers in the country, did not revolutionize itself from within and carry out an overhaul.

The entire industry needed to be re-configured, he said, and the whole issue of the current developmental restraints facing the country needed to be looked at.

Firm management and leadership remained a key need, with effective controls in the revenue cycle being an essential requirement. Consolidated funding schemes for all parties, large and small, who are participants in the industry, had to be set up enabling the industry as whole to catch up technologically, de Beer said.

“It is within South Africa’s ability to carry out such an exercise”, he said, and added that the country “had the necessary years of experience and the people present to succeed.”

Prof. Nic Beute of Cape Peninsula University said a survey conducted on the EDI indicated that most planning had been done to develop the industry when the regional electricity distributor (RED) areas plan was mooted and the major requirement was then only the initiative to act and provide the finance and technological knowhow at lower levels at municipal distribution points to take the path forward.

Prof. Beute concluded by observing that DoE appeared to be “stuck in an analysis mode” and what was needed was a financial plan involving National Treasury and possibly Development Bank of South Africa (DBSA) to meet an already defined path and for them to come forward with the wherewithal to make past planning during the REDS exercise a reality.  Little had changed, he said, except time had been lost.

Ongama Mahlawe of the dept. of co-operative governance and traditional affairs (COGTA) said much of the problem lay with rural municipalities who had the biggest backlogs: the highest degree of finance gaps; lowest technical ability and were unable to attract and retain skilled personnel.

This was unlikely to change unless the economic picture changed, he said. “We have a situation where R49bn of the uncollected R76bn in rates taxes, including electricity fees, is owed by households.”

“With government deciding not to implement the REDs plan, Eskom remains servicing 46% of domestic customers, which revenue is lost to municipalities in any case.”  Last year, he said, only a certain number of municipalities had adequate budgets and maintenance came under the heading of discretionary expenditure.

GOGTA had, in the meanwhile, established a dedicated unit focusing on supporting municipalities on energy matters and had prioritised 108 “low capacity” municipalities. Under questioning, Mahlawe confirmed that no practical implementation had yet been carried out.

In an initial paper, DoE reminded all parties to the hearings of the legislative environment which stated that a municipality has the executive authority in respect of and has the right to administer local government matters regarding electricity and gas matters and that only NERSA could issue licences for the operation of generation, transmission or distribution facilities……and regulate prices and tariffs.

Ayanda Noah, head of distribution at Eskom said Eskom had adapted itself after the shutdown of the REDs approach. It currently had 311,831km of reticulation lines, 47 509km of distribution lines and 11 415km of underground cables and was working with a number of smaller municipalities’.

The group, she said, had broken itself into nine provincial offices and the record was that over the years since 1991, Eskom was now providing electrification to 4 million homes throughout South Africa since the inception of the electrification programme.

Going through a long list of problems that exist at municipal levels and despite their instituting recently a successful  “adopt a municipality” programme, Noah said that industry issues hampered Eskom’s ability to maintain and upgrade its own infrastructure programme given the wider industry issues and the many problems at national level, all of which eventually translated into major risk factors for Eskom.

She said that an approach had to be adopted, nevertheless, where Eskom had to consider its own interests as suspended and the national industry to dominate, she said. An approach had to be found where “the industry heals from within”, she commented. In Eskom’s view, transfer of assets was a last resort measure, Noah said

Looking back, the act of creating REDs Noah said this concept would not have really solved any of the underlying problems facing the industry.     The answer, she said may lie in “active partnering” such as was being instituted by Eskom and now being carried out with municipalities, since there were in fact only two players in the industry who could participate in the restructuring physically, that was Eskom and the municipalities themselves.

“Active partnering” was in her view a non-threatening approach, as opposed to the trauma of forced intervention to address service delivery issues. “There is no need for the industry to become paralysed since the answers lies within the industry itself”, she concluded.

NERSA, the electricity regulator, called for an alignment of financial year ends between all municipalities and the state departments involved: a central data system to gather all matters involved in generation, transmission and distribution and a multi-party agreement between state departments and all municipalities on compliance and audit issues.

DBSA said it had “huge” exposure to the electricity industry, particularly distribution, amounting to some R5bn. It called improved revenue collection and suggested pre-paid meters; that all revenue from electricity sales be “ring fenced” for maintenance and transparent tendering processes instituted with centralised controls.

Renewable energy sources as an alternative had to be focused on, DBSA said, and tariff structuring by municipalities needed to be reflective of the long-term picture in order to attract investment.

The present picture was “characterised by many of the municipalities having insufficient infrastructure to deliver energy services and a deteriorating quality of supply due to ageing equipment which required rehabilitation or replacement.

They quoted Dr W de Beer of Sanedi who had pointed out the fact that the infrastructure backlog is moving from not only a need for R27bn for maintenance but complicated an annual growth need of R2.5bn per year.

Capacity and skills in municipalities had to be strengthened by participation with a government programme, DBSA said. This must urgently involve a DoE-led rehabilitation plan of an immediate pilot programme; a project finance agreement for municipalities and the involvement of a detailed funding model between DBSA and National Treasury with COGTA, NERSA, department of public enterprises and DoE itself. A formal financing programme should be commenced at the soonest.

The South African Local Government Association echoed this call, pointing to the debilitating effect of electricity theft in informal townships and the need for meters to be installed on a user-pay basis in all households. SALGA said a “transmission group|” should be formed as a public resource to bring all stakeholders together and new electricity management systems by municipalities “conceptualised” immediately.

Not all municipalities were failing they said, and the plan called “ADAM” (whereby municipalities were re-capitalised on the basis that there was certainty in the future of any investment in them) should be re-vitalised and adopted with strong leadership from central government and the support of National Treasury.

A National Treasury spokesperson, in their paper, referred to the constitutional right of municipalities to apply surcharges in the form of a tariff base plus “a reasonable rate of return”.  A portion of this had to be set aside for repairs and maintenance (R&M), they said, but it was not prudent for government to legislate on the whole of the surcharge in the light of the law and also its use was known to be an important form of general revenue. Nevertheless, there had to be changes on this critical issue.

Currently, said Treasury, the integrated national electrification programme (INEP) amounting to grants to municipalities to create new connections and was primarily for poor households. The concern was that this was being diverted to refurbishment that could have been avoided if normal maintenance were undertaken.

A way had to be found, said Treasury officials, to ensure that R&M was undertaken on a programmed basis, that skills training programmes were brought to the all municipalities, both large and small and that the profile of the need for constant R&M from the funds generated by the sale of electricity became a high profile issue with both councillors and residents.

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