Electricity Distribution Industry EDI Restructuring RED 1 Creation

Electricity Distribution Industry (EDI) Restructuring RED 1 Creation Program for City of Cape Town 1

Agenda Background RED 1 details Corporate investigations MSA Section 78 MFMA Section 84 Ringfencing Organisational design External and Internal structures EDIH and City programs Key issues Observations City of Cape Town 2

Background National Government decisions l l All existing electricity distributors to be rationalised into 6 Regional Electricity Distributors (REDs) – “Pw. C Blueprint” RED 1 to be the first (pilot) RED EDI Holdings defined Day 1 for RED 1 as City of Cape Town and Eskom (Western Region) Council resolution of 24 June 2004 l l CCT to fully support the process Initiated MSA Section 78 investigation TMT set up “Technical Corporate RED Team” to drive technical processes of participation City of Cape Town 3

RED 1 1 2 4 3 RED ONE BOUNDARIES 39 Local Municipalities 16 District Management Areas 1 Metro 11 12 5 6 9 15 14 16 13 20 26 27 35 56 17 18 19 Cape Town and Eskom have 75% of total customer base of RED 1 29 36 22 23 28 54 55 30 51 25 24 31 37 38 39 M 43 44 45 City of Cape Town 7 8 10 32 40 46 33 41 47 34 42 48 49 50 52 53 4

Corporate investigations required For Council to approve participation in an “external” entity, investigations and decisions in terms of the following are required: Municipal Systems Act, Section 78 Municipal Finance Management Act, Section 84 City of Cape Town 5

MSA Section 78 process Start Sec 78 Process upon Receiving Trigger Do Sec 78(1) Internal Assessment Sec. 79 Restructure To Internal Unit NO Sec. 80 Sec. 78(2) Council decides to also do an external Assessment Restructure To External Municipal Entity Restructure To State Owned Entity YES Do Sec 78(3) External Assessment Internal Entity City of Cape Town External Municipal Entity (Sec 76(b)(I) & 80 (1)(a)) Council decides on appropriate Service Delivery mechanism Sec. State Owned Entity (Sec 78(4) 76(b)(iii)(bb) & 80(1)(a. A)) 6

MSA Section 78 investigation Contract awarded to Umbiko-Africon consortium Commenced 4 October 2004 Draft 78(1) report available l To organised labour for comment/input (consultation process) Final 78(1) report to Council 8 December 2004 Depending on 78(2) decision, 78(3) process to run to end January 2005, and will incorporate technical aspects of MFM Act Section 84. City of Cape Town 7

Municipal Finance Management Act Section 84 requires minimum 90 day consultation period before Council can decide on a proposed external entity l l Similar to MSA 78 process for public / labour consultation And must also solicit views of l l l National Treasury National and Provincial Departments for Local Government MEC for Local Government This process has not yet started City of Cape Town 8

Municipal Finance Management Act Section 84 represents a potential risk to the entire process Section 177 (3) provides for exemption from any specific provisions of the Act for EDI restructuring related purposes EDI Holdings has undertaken to facilitate obtaining exemption from the Section 84 process requirements before 8 December Section 78 investigation will cover MFMA Section 84 technical requirements City of Cape Town 9

Ringfencing Mayco approved immediate commencement of ringfencing process for the Electricity function on 20 October 2004 l l l Financial Operational Staffing Related support services Legal Ringfencing project team identified l All internal stakeholders involved Process regarded as key for success of program Using EDI Holdings “Ringfencing Toolkit” City of Cape Town 10

Organisational design Electricity Structure l l Part of City’s restructuring program Challenge of alignment of City and RED requirements Ringfence Electricity “as-is” until potential 78(4) decision If “external” decision taken - will be structured to RED based model from February 2005 City of Cape Town 11

External structures National Consultation NATIONAL COMMITTEE ON EDI RESTRUCTURING GOVERNMENT COORDINATING COMMITTEE TREASURY/DME RUN EDI Holdings Sectoral Consultation Regional Consultation City of Cape Town OPERATIONS & SYSTEMS B P & S Retail REDCO (Political) (1 – 6) REDCO (Tech. ) (1 – 6) FINANCE Ringfencing New EDIH proposal LABOUR AND HUMAN RESOURCES Wires LEGAL AND INSTITUTIONAL STAKEHOLDER MANAGEMENT Regional sectoral committees 12

City representation – external structures Forum Convenor(s) NATIONAL CONSULTATION DME/National Treasury NATIONAL COMMITTEE (NACEDI) EDIH CEO EDIH SECTORAL COMMITEES EDIH EDs REGIONAL COMMITTEES EDIH Functionary (Meeting Chair duty can be rotated) REGIONAL WORKGROUPS Nominated team leader City of Cape Town Members DPE DPLG SALGA EDIH Role Proposed CCT Involvement National oversight Via SALGA & DPLG ESKOM CEO NER CEO SALGA METRO Mgr. s Strategic policy Monitor/oversee EDI process City Manager (alternates: ED(D&I) / CFO) Nominees from Eskom AMEU SALGA NER Inputs to policy Process monitoring Ex officio, and as approved by City Nominees from Eskom & Municipalities Facilitating local incorporation activities. Providing advice / recommendations Appropriate officials, Project manager Nominees from Eskom & Municipalities Operational inputs and data to the Regional committees Nominated staff members NB - bearing in mind representivity and gender 13

Council and Mayco processes Council role in Section 78 decision making l Proposal to delegate possible 78(4) decision to Mayco when Council makes 78(2) decision Regular reporting on progress to Mayco and Executive Mayor, and TMT by TCRT Regular review and direction of overall process by Mayco Acknowledgement of the need for urgent political decision making for RED 1 issues City of Cape Town 14

Proposed internal structures Forum COUNCIL MAYCO TECHNICAL CORPORATE RED TEAM CCT Workgroup Coordination Team Ringfencing Steering Committee City of Cape Town Convenor(s) MAYOR CFO / ED (D & I) Project Manager Members COUNCILLORS PORTFOLIO MEMBERS ED (Corp. Serv. & Systems) Director (Budgets) Director (Strategy – D & I) Director (Electricity) HR Support Project Manager Nominees from Corporate Departments and Electricity Services Role Overall direction and decision making Strategic policy Mandating Process oversight & monitoring Political guidance Ensure corporate cohesion Program management and reporting Alignment / coordination of participants in committees and workgroups 15

Interim City representation Current City representation in committees and workgroups is on the following basis l l l “Exploratory” only No mandate to commit the City to RED creation activities Can exchange information only This approach has to apply until Section 78(1) process is complete to avoid “pre-emption” City of Cape Town 16

EDI Holdings program RED DAY ONE Activities Sectoral workstream preparations 2004 Oct Nov 2005 Dec Jan Feb Mar Apr May Jun From July Implementation & transfer activities Critical deliverables Registered company; NER licence; Signed SOB; Signed shareholders agreement; Signed SDA (RED / CCT); Key staff appointments; HR migration and transfer policy; Signed SLAs for services not transferred on Day One; Asset valuations & compositions. City of Cape Town 17

CCT program CCT activities RED DAY ONE 2004 Oct 2005 Nov Dec Jan Feb Mar Apr May Jun Organisational Validation & Review MSA Section 78(1) (for 78(2) decision) Consultation with labour MSA Section 78(3) (for 78(4)/MFMA 84 decision) CCT participation in RED program Info sharing Option evaluation Implementation activities Ringfencing Electricity and related support services Structuring Electricity per Metro/RED model Customer, staff, stakeholder interaction Dependent on/influenced by: City of Cape Town 78(2) decision 78(4) decision Organisation review decision 18

Key issues to be resolved during process Financial contributions from RED l l l Basis Quantum (existing effective contribution from Electricity ~ R 360 m per annum) Frequency Customer Relations l l Whose customer? Billing and CRM systems Assets l l l City of Cape Town Valuation methodology Related support service assets Ownership of Eskom assets 19

Key issues (cont. ) Shareholding l l Basis Ownership of Eskom share? Type of entity l l Municipal State owned Shared services l l l City of Cape Town Degree of ringfencing Initial SLAs Minimising stranded resources 20

Key issues (cont. ) Authority / Provider relationship Future IDP process Impacts on l l l City of Cape Town Cash flow Credit rating Credit control (recovery of debt for other services) Tariff setting Service delivery Staff costs as percentage of operational expenditure 21

Key issues (cont. ) Legal alignment of : Constitution l Electricity Act l Municipal Systems Act l Municipal Finance Management Act l EDI Restructuring Bill l Being addressed by EDI Holdings City of Cape Town 22

Observations RED Day 1 (July 1 2005) “non-negotiable” Program timelines and deadlines are incredibly tight For City of Cape Town to meet its obligations will require considerable effort, full-time commitment and rapid decision making in all areas of the organisation City of Cape Town 23

Questions and discussion City of Cape Town 24