18 September 2012

Independent System and Market Operator Bill.

Progress Report on further Due Diligence incorporating transfer of assets.

Background on ISMO

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The Conundrum• SA urgently needs new generation capacity and, in turn, Eskom needs

– Scarce Government capital to fund new projects– Tariff increases that have social and industrial impact– Additional Debt that have, as prerequisite, a viable ESI to repay

them

• Minimizing Government exposure requires– Mobilizing private sector funding– Private sector, in turn, needs a level playing field and clarity of

rules

• Minimizing inevitable tariff increases requires– Reducing overall sector risk with correct allocation of risks and

reward– Better allocation of resources with correct electricity pricing

signals

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What is an ISMO?

Acronym for “Independent System and Market Operator”

– “Independent” = Autonomy from generation and distribution

– “System” = National Electricity Transmission System

– “Market” = Buying of electricity from electricity generators and Selling thereof to customers at a wholesale level

ISMO = Operator of National Electricity Transmission System who buys electricity from generators and sells it to customers at a wholesale level

Impact of ISMO on IPPs

• ISMO is key in facilitating introduction of IPPs• Inclusiveness, Transparency, Accountability for a level play field in

Planning/Dispatch

• Transparency in governance and decision making

• No conflicts of interest as both player and referee

• Benefits of IPP participation in electricity generation with limited

demand for government support

• Objective: purchase/sale of electricity in the best interests of the

country

• Correct risk allocation and pricing

ISMO Functions

• ISMO Bill establishes, an autonomous state owned company, mandated to execute the following functions

– Development of the Generation Resource Planning– Buying of power from generation– Electricity trading at a wholesale level– System Operations

• A package empowering ISMO as an “honest broker” wholesale electricity buyer, a role Eskom, as generator, can never play.

• Sends out message to the market to know that responsibility to meet these obligations rests with ISMO

Wholesale tariff

National Control

TRANSMISSION RETAILPRODUCTION

SYSTEM OPERATOR

Gn1…

GnX…

WIRES

Single Buyer

Wholesaler

KSACS

Trading (Aggregation)

Dispatch

MW Flow

DX

Imports

RE-IPP

IPP’s

Current industry structure

Gn1….

Gn2…

Imports

ESKOM HOLDINGS SOC LTD

MUNICS

Wholesale tariff

National Control

DistributionGeneration

System Operator

Gn1…

GnX…

“wires”

Single Buyer

Wholesaler

KSACS

DX

Imports

RE-IPP

IPP’s

Final Structure: (ISMO & Transmission separate entities )

Gn1….

Gn2…

Imports

MUNICS

ESKOM GX ESKOM DX

ISMO SOC

TransmissionESKOM TX

ISMO-TX agreement

Main Presentation

Introduction– Pursuant to the public consultation process on the ISMO Bill the PPC

requested a due diligence to be conducted on the establishment of a TSO.

– A multi-party project under leadership of the DoE has been launched, including Eskom, DPE and NT

– In his letter dated 8 August 2012 the Minister of Public Enterprises authorised Eskom to participate in the due diligence and provided the terms of reference

Scope– Due diligence was undertaken Eskom upon publication of ISMO Bill by

the Department of Energy (13 May 2011 –GG34289).

– Scope of ISMO due diligence was confined to the functions in the ISMO bill (Energy Planning, Procurement, Market Administration and System operator).

– The due diligence currently undertaken includes the transmission grid, assets, people, systems and all support functions. Given limited time constraints this will be a very high level impact assessment.

– A comprehensive implementation plan may be required in future, before final implementation of the chosen option.

Scope– Impact to be assessed on:

• Eskom• The future SOC (ISMO or TSO)• The Fiscus (for support)

– The due diligence will consider the following areas:• Financial• Legal and Regulatory• Technical• Human Resources

– A business case for a way forward is not part of the scope of work.

Scenarios

– Two scenarios will be modelled:

– Scenarios 1 & 2 will be modelled with and without the transfer of Eskom customers to the SOC.

Definition Description

Base Case

Status Quo Retain Eskom as a vertically integrated utility. This is the default scenario and is the base case against which the impacts of the other scenarios can be assessed.

1 Independent System Market Operator (ISMO)

• Perform the duties as set out for the ISMO as contemplated in the ISMO Bill.

2 Transmission System Operator (TSO)

Perform the duties as set out for the ISMO as well as the duties of Transmission, including ownership of the transmission grid.

Project Plan

– A project plan has been developed (see spread sheet).

– Target completion date is mid December 2012 to January 2013

• The financial impact assessment is on the critical path

• The appointment of consultants, permitting them adequate time to perform a proper job and a review by government will take the bulk of the amount of time indicated.

• Consultation with principals could affect time-line

– National Treasury nominated 3 people to participate in the review of Eskom’s credit rating and to provide government oversight.

Conclusion

– The team will endeavour to shorten the project duration as far as possible, however the project plan indicates a minimum project duration of 4 to 6 months (subject to approval by principals).

– Resources are now fully mobilised to perform the work and there is a high level commitment to complete as soon as possible.

– The PPC chair will be provided with fortnightly progress reports, via the DoE (as project leader). Setting of dates for the next written reports and presentations will assist the team with forward planning.

Thank You

Project Plan (1)

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Present time

Eskom Transmission - impact of transfer to ISMO/TSOProject plan = expected time required (weeks) = key milestone

Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16GOVERNANCE/ STAKEHOLDER MANAGEMENT

Governance approval to perform work DPE, Eskom

Agree on oversight mechanismDPE, NT, DOE, Eskom

Bi-Weekly (Wednesday) coordination meetings with team

Eskom, DPE, DoE & NT

Bi -weekly feedback to PC Chair DoE to lead

PPC Meetings as scheduled

Project Plan (2)

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Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

FINANCE

Model set upAlign Eskom budget to ISMO & Tx end state entity Eskom

Enhance and test model Eskom

Agree on compensation scenariosEskom, NT, DPE

Sign off on input assumptions Eskom

Run models Eskom- For each compensation scenario

-- Base case

-- ISMO out

-- Key customers and munics out

-- Transmission out

Review outcomes Eskom

- Test outcomes - are they robust?

Subject to outcomes review input assumptions and rerun models Eskom

Project Plan (3)

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Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Procurement process for appointment of agency to assess credit rating impacts Eskom

- RFP- Adjudicate- Appoint

Commence shadow rating review Third party

- "Onboard successful party"

- Credit quality impact on Eskom and ISMO/TSO assessed under each compensation scenario for:-- Base case

-- ISMO out

-- Key customers and munics out

-- Transmission out

Quantify level of Gov support required to mitigate against Eskom downgrade and credit enhancement to ISMO/TSO

Third party, Eskom, NT

Quantify implications on downgrade Third party

-- Interest rate-- Ability to raise funding

Quantify interest rate impact on Eskom and tariff implications Eskom

Assess impact on Eskom sustainability and ability to build based on available funding Eskom

Assess Fiscus ability to provide support to Eskom and ISMO/TSO

Eskom, NT, Third party

- Assess credit quality impact based on available support

Project Plan (4)

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HUMAN RESOURCES

Identify number of employees to transfer to the SOC, inlcuding impacted contingent structure

Eskom

Profile the employees to be transferred to the SOC as well as the contingent structure resources

Eskom

List all employee benefits and cost them in terms of employees to be transferred

Eskom

Identify other HR/IR related issues that would need to be addressed

Eskom

Detail the support services (HR & SSU) that would be needed by the SOC on an SLA basis

Eskom

Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Project Plan (5)

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Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16LEGAL AND REGULATORY

Identify contracts that require amendment/ cession Eskom

Identify new contract requirements Eskom

Perform a due diligence on debt covenants Eskom

Identify loans linked to Tx assets and evaluate implications Eskom

Legal review of existing Eskom loan conditions to allow for debt transfer/ acceleration etc. Eskom

Identify all licence amendment/ transfer requirements Eskom

Identify other regulatory approvals/ amendments requirements Eskom

Identify Intellectual property and required transfer structure Eskom

Evaluate land and servitude issues and assess options for transfer/ acquisition Eskom

Identify current litigation and evaluate transfer risk Eskom

Identify current insurance claims and evaluate transfer risk Eskom

Project Plan (6)

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TECHNICAL

Identify operational interface implications - New SOC to IPP's, Eskom Gx, etc. Eskom

Identify need for functions in Eskom/ new SOC due to separation Eskom

RISK

Perform a risk assessment on the separation of Tx including an assessment of potential impact, potential consequences and mitigation Eskom

REPORTING

Consolidate SA Inc pictureDOE, NT, DPE, Eskom

Prepare submission documentation DOE, NT, DPE, Eskom

Review and acceptance of report by NT, DOE, DPE and Eskom

DOE, NT, DPE, Eskom

Submit report to PPC DOE

Activity Responsible 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16