Government's efforts to restructure the multi billion-rand electricity distribution industry have been dealt their sharpest blow yet with Cape Town's decision to withdraw from Red 1, SA's first regional electricity distributor.
Red 1, which is responsible for power distribution in the Western Cape, was launched 18 months ago but is not operational as Cape Town refused to transfer its electricity assets to the new regional body.
Renewing Red 1's licence next year would therefore amount to licensing "someone who does not have a car", says a senior official at the industry regulator, the National Electricity Regulator of SA (Nersa).
WHAT IT MEANS
 Cities stand to lose billions in revenue
Constitutional change only way forward
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The five other proposed Reds - all centred in major urban areas - have so far failed to get off the ground as most municipalities refuse to participate.
Restructuring is necessary because the existing system - made up of more than 100 municipalities and Eskom - is inequitable and in many cases disadvantages the poor. Under the constitution, power distribution is a municipal prerogative and cities use large portions of their electricity income to cover administration costs and subsidise other services, like water and refuse removal, instead of pumping cash into distribution infrastructure. Consequently, SA's ageing distribution networks are suffering from lack of investment and regular maintenance, the cause of many power blackouts.
The failure of Red 1 highlights the fundamental flaw of state policy, as it was set up on broad policy principles rather than clear legislation. It has been operating without assets and customers. Red 1 CEO Saleem Mowzer has thus failed to deliver on his licence conditions as Cape Town, using its constitutional right, refused to relinquish its control over electricity in terms of national government policy dictates.
Though the city had earlier agreed to transfer its assets and back Red 1, it says that decision was based on an earlier policy whereby Reds were considered municipal entities. But in October government passed legislation that made the Reds public entities, stripping Cape Town of control over the body.
Minerals & energy minister Buyelwa Sonjica has described Cape Town's decision "as a matter of grave concern and a serious threat to the restructuring process".
Mowzer, whose job appears to be on the line, says unless the national constitution is amended, government will struggle to restructure the ailing industry. Voluntary participation has not worked.
His frustration is echoed by others in the industry, including Electricity Distribution Industry (EDI) Holdings, the company set up to oversee the restructuring. A major part of the problem, says a consultant involved in the process, is that government is not clear on how to sort out the money issues.
Billions of rand are at stake, yet there is no detail on how assets will be transferred from Eskom and the cities to the Reds or how they would be compensated. Nor is it clear how the Reds' future income from electricity tariffs would be distributed.
Compounding this is the voluntary process where municipalities that disagree with the Reds can stay out because the constitution holds precedence over government policy.
In order for the restructuring to work, all distributors need to be part of it. A constitutional amendment would certainly make life easier for EDI Holdings CEO Phindile Nzimande, who has struggled to get many cities to join. Though an amendment has been talked about, government has yet to give the nod to this option, aware of the political upheaval that would follow.
Sonjica, in her formal response to Cape Town's decision, warned that the underinvestment in infrastructure over the past 10 years was estimated at R5bn. She added that local government would continue to have the power to apply municipal surcharges on electricity sales once the Reds were operational.
Analysts say the move by Cape Town should serve as a wake-up call to national government to come clear on details of the restructuring, transfer of assets, compensation and so forth. If that does not help, it might be worth testing the rights of the municipalities in the higher courts, they say.
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