60th AMEU CONVENTIONTOWARDS SUSTAINABLE REDs

PRESENTED BY

DR WILLIE DE BEER, COO: EDI HOLDINGS

17 OCTOBER 2007

17 October 2007 Slide 2

Presentation Content

Introduction

Global EDI Reform Drivers

South Africa: EDI Context

Business Model

RED Sustainability

Brief Summary

RED Value Proposition

Global EDI Reform Assessment

Progress Towards Sustainable REDs

Conclusion

17 October 2007 Slide 3

Global EDI Reform Drivers

In the global context, restructuring and the EDI have become synonymous

South Africa is not unique with respect to the EDI reform challenges

Globally there are many restructuring case studies to learn from; inclusive of many success stories

Reform is informed by a number of drivers, such as:

Customer service expectations

Customer choice

Socio economic drivers

Increasing need for access to affordable energy sources

Economic growth requirements

Asset management challenges

Efficiency improvement requirements

Investment/funding requirements

Improved regulation

Industry sustainability

Employment sustainability

17 October 2007 Slide 4

South Africa: EDI Context

The ESI is dominated by Eskom

The EDI in South Africa is confronted with:

Significant inconsistency from a customer service and product offering perspective

Free Basic Electricity

Access to electricity

High level of fragmentation and inefficiencies

Inadequate maintenance, refurbishment and investment in network capacity

Increase in security of supply and reliability challenges

Distribution component of ESI value chain suspect

Demand Side Management (DSM)

Challenges to attract, train and retain resources

Two important differences with respect to EDI restructuring in South Africa:

It takes place in a voluntary environment

There are no privatisation motives

Current asset owners will be the future RED shareholders

17 October 2007 Slide 5

NERSA Report: EDI Maintenance Perspective

Source: NERSA Independent Technical Audit

E=Excellent; VG=Very Good; G=Good; NI=Needs Improvement

Distributor Reliability Control Maintenance Networks Skills Funding

Eskom Region G VG VG-E G-VG VG-E G

Eskom Region G VG VG-E G-VG VG-E G

Metro 1 G VG VG-E VG G G

Metro 2 G VG G G-VG G NI

Metro 3 G G-VG G-VG G-VG G G

Metro 4 G-VG NI I NI G G

Metro 5 NI NI G G-VG NI NI

Municipality 1 NI NI G NI NI NI

Municipality 2 NI NI NI NI G NI

Municipality 3 NI NI NI NI NI NI

Municipality 4 NI NI NI NI NI NI

17 October 2007 Slide 6

EDI: Maintenance and Refurbishment Requirement

0.1

0.6

1.1

1.6

2.1

2.6

R b

illi

on

Required 1.8 2 2 2.2 2.3 2.5

Current 0.4 0.5 0.6 0.63 0.66 0.7

Yr1 Yr2 Yr3 Yr4 Yr5 Yr6

17 October 2007 Slide 7

CREATING SHAREHOLDER

AND CUSTOMER VALUE

REVENUE

EFFIENCY AND CONTINIOUS

BUSINESS IMPROVEMENT

OPERATING & CAPITAL EXPENDITURE

Business Model: RED Sustainability

RED FINANCIALRED FINANCIAL

SUSTAINABILITYSUSTAINABILITY

17 October 2007 Slide 8

Business Model: Brief Summary

Distinct wires and retail focusPursue appropriate best practicesBenchmarking

Promote RED sustainabilityBalance between revenue realisation and continuous business efficiency improvementClose to the customer

Centralisation vs decentralisationEffective shareholder and stakeholder management

Focus on, interalia:Technical lossesNon-technical lossesEffective asset managementStaff development and skills retention

Service Provider to Service Authority (Municipalities) SDA as contemplated in MSA 2000 Section 81

Integrated inter RED network management approach:Managing distribution grid integrityEnhance customer interface opportunities

17 October 2007 Slide 9

EDI Holdings Direct & Oversee

EDI Restructuring

EDI Holdings Direct & Oversee

EDI Restructuring

EDI Interim State

REDs x 6REDs x 6

Wires

RetailRetailShared

ServicesShared

ServicesIndustry

AssociationIndustry

Association

17 October 2007 Slide 10

RED Value Proposition: Brief Summary

Current Asset Owners

Shareholding in a sustainable business

Derive revenue from a sustainable business

Protection of credit rating

Assets managed in a prudent manner

Customers

Consistency in customer service practices and service offerings

Improved service delivery

Transparent tariffs

Predictable pricing signals

Well regulated industry

Staff

Skills development opportunities

Employment in a sustainable industry

17 October 2007 Slide 11

Staff: Indicative Age Profile

0

5

10

15

20

25

30

35

40

%

0-30 31-40 41-50 51-65

Age Group

17 October 2007 Slide 12

Global EDI Reform Assessment

Restructuring is easily blamed when things go wrong

Reality is, that “sins of the past” and implementation “mistakes”, are the main contributors to “failures”- it is not the concept which creates in the failure

Restructuring is not an “overnight quick fix” solution

Requires time

Significant capital and other resource investment

The longer the restructuring is delayed the more difficult it becomes to realise the restructuring benefits

Significant capital investment requirements can present return on investment challenges

There is no conclusive evidence suggesting a performance difference between private and public electricity companies

The global trend suggests a well defined wires and retail businesses

A sound regulatory regime is critical to ensure effective business operations

Continuous cost cutting is not a sustainable business philosophy

Correct leadership selection is critical

There are more than enough successful restructuring case studies, providing comfort, to learn from

17 October 2007 Slide 13

Reform Assessment: Customer Supply Interruptions

Customer Supply Interruptions

70

75

80

85

90

Year

Even

ts With Storms

Without Storms

Source data: Ofgem

17 October 2007 Slide 14

Reform Assessment: Distribution Losses as Percentage of Units Distributed

Distribution Losses as Percentage of Units Distributed

2

3

4

5

6

7

8

9

10

Year

Perc

en

tag

e

Eastern

East Midlands

London

Manweb

Midlands

Northern

Seeboard

Southern

Swalec

Sweb

Yorkshire

Scottish Power

Hydro-Electric

Source data: Ofgem

17 October 2007 Slide 15Slide 15

Losses: Reduction PotentialLosses: Reduction Potential

Potential Reduction of Losses

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

Base year Year 1 Year 2 Year 3 Year 4 Year 5

Period

% L

oss

RED 1 RED 2 RED 3 RED 4 RED 5 RED 6 NORM

17 October 2007 Slide 16

RED FOUR: Losses Improvement Potential

0

2

4

6

8

10

12

14

16

18

20

% LOSS

losses 5.09 12.58 28.1 16.25

norm 7 7 7 7

Entity A Entity B Entity C Entity D

17 October 2007 Slide 17

Progress Towards Sustainable REDs

2003 to 2004 2005 to 2006 2007 to Date

o EDI Holdings establishedo Eskom Distribution ringfenced

within Eskom Holdingso Boundaries for the six REDs

definedo Eskom and SALGA signed the

accession to the co-operative agreement

o EDI Holdings developed various tools to reduce cost and to facilitate the restructuring process

o Eskom Distribution (7 Regions) aligned with the boundaries of the six REDs

o RED project governance structures implemented

o Transitional Labour Relation Structure (TLRS) established

o Metros and numerous municipalities started the MSA Sect 78 process and business ringfencing

o NERSA approved (April 2006) through the MYPD R1.2bn over a 3 year period to assist in funding some of the EDI restructuring costs

o 25th October 2006 Cabinet reconfirmed support to the creation of six wall to wall REDs as Public Entities

o RED 1 was established (June 2005)as a Municipal Entity wholly owned by the City of Cape Town

o Municipal electricity business asset transfer enabling mechanism approved by National Treasury

o Eskom Distribution 95% ringfenced

o Boundary energy metering installed as per the six RED footprint

o 78 Municipalities (ITD) signed the accession to the co-operative agreement

o Six Regional Engagement Forums (REF) established to enhance participation in the RED establishment process

o RTLRS roll out in progresso City of Cape Town took a

resolution to liquidate RED 1o Extensive progress towards a

REDs system solution o MFPF Act promulgated

17 October 2007 Slide 18

Conclusion

The EDI in its current format will not be able to underpin the projected economic growth or

provide customers with a reliable electricity supply

There is a need to define the market rules and to establish the market

The critical reform success factors must be addressed

It is essential that South Africa continuous with the EDI restructuring journey

The restructured EDI must be positioned in such a way that it will be able to effectively respond

to any future market structure

Based on the global experience and having considered the proposed RED model for South

Africa; all indications are that the EDI restructuring in South Africa could go down in history as

an example of a successful transformation business case

THANK YOUTHANK YOU

www.ediholdings.co.za