8.1 Introduction

Following the first democratic elections that took place in 1994 and the local election that followed in 1995, eleven local authorities were amalgamated to form the Greater Johannesburg Metropolitan Council. By mid 1997 it became apparent that the new structures were not optimal and the councils of the Greater Johannesburg were facing a severe financial crisis. It was then agreed that a unified, metropolitan wide initiative was necessary to particularly focus on the critical problems facing the city.

The solution to the problem at a political level was to amalgamate the five substructures of the local government into a single local authority - Johannesburg Metropolitan Council. After extensive consultation, the Johannesburg Metropolitan Council established the following companies: Johannesburg Water (Pty) Ltd., City Power Johannesburg (electricity company), Pikitup (waste company), Johannesburg City Parks (including cemeteries), Johannesburg Roads Agency, Metropolitan Bus Services, Civic Theatre, Johannesburg Fresh Produce Market, Johannesburg Propcom Pty Ltd. (Property Company), Johannesburg Zoo and Johannesburg Development Agency.

In line with the establishment of the above companies, the Council has also established a Contract Management Unit (CMU) that will oversee the performance and governance of the above companies as well as to regulate them accordingly. In this regard various agreements have been concluded in principle during the establishment of the companies. These included the Sale of Business Agreement (SBA) and the Service Delivery Agreement (SDA). The CMU further requires that Business Plans for the companies be developed - a requirement also prescribed in the SDA.

8.2 The Economy within our Business Boundaries

The following represents the economic realities within the boundaries of our operations:

• Johannesburg is a city in economic transition and it has grown from a mining town into a financial and manufacturing capital, and later into a financial and services capita and it now faces the toughest challenge of all - becoming a knowledge Capital. There is a transition underway in the economy of Johannesburg, away from low-skilled work, and towards high-skill, service-based enterprise - which requires access to advanced services such as telecommunications, and high reliability of basic services such as electricity
• The migration of people from the rural areas to the City of Johannesburg will place pressure on City Power's electrification programme. It is estimated that approximately 2 000 people per month are establishing themselves in the geographical area of the City (Not all within the boundaries of City Power)
• Economic Growth over the last ten years has averaged only 2% per annum
• Exports going through Johannesburg increased from R4.9bn in 1993 to R20.2bn in 1996, to R30 bn in 1999 (+48.8 % since 1996)
• 22.1% of Johannesburg's total exports go to Africa and 36.2% to Europe, which represents around 28.3% of South Africa's exports to Africa and 16.8% of South Africa's exports to Europe
• Over the last three years per capita GGP has grown by a mere 0.1% per annum. A stagnant local market driven by stagnant per capita incomes (as GGP growth barely kept up with employment growth), increasing income disparities and high unemployment. Per capita GGP stands at R31 000, comparable to middle-income countries average of R 33 000, but only half that of Argentina. Financial / Business services, Retail/Wholesale and Manufacturing are the largest contributors to GGP and employment, with the strongest GGP growth in Community and Social Services and Transport and Communications
• Employment has increasingly moved towards informal economic activity, moving from 9.6% of jobs in 1996 to 16.1% of jobs in 2000. Trading, services and manufacturing have seen a phenomenal growth over this period.
• Unemployment has increased from 27% to 30% over the last three years. In Johannesburg 30% of the Economically Active Population are unemployed compared to 32% for Gauteng and 38% for South Africa.
• 71% of people live on a real per capita income of less than R 25 000 per annum
• 21% of people live below the Minimum Living Level
• 10% of households have no income whatsoever
• 13% of households burn fossil fuels for cooking and heating
• There are nearly 800,000 households in Johannesburg
• Expected growth in number of households to 2010 is 81,960, or 10.3%
• The WEFA data suggests that 47% of households in Johannesburg earn less than R3, 500 per month. This is made up of around 212,000 households earning less than R1, 500 per month, and around 156,000 households earning between R1, 500 and R3, 500 per month - a total of around 367,000 households
• Around 120,000 households in informal settlements need access to electricity; there are plans to relocate around 17,000 households, and to upgrade the remainder where they currently reside
• There will be a negative impact of HIV/AIDS on employees (illness, retraining, etc.)
• There is high crime, e.g. only one manufacturing firm in five did not experience any crime in 1998

8.3 Environmental Analysis

The electricity sector has only recently embarked on a path of reform. Evidence of this is the National Electricity Distribution Industry Restructuring Process (EDIRP) launched by the Department of Minerals and Energy (DME). The EDIRP process is complicated by the fact that in South Africa electricity distribution is undertaken by Eskom and approximately 400 Local Government Electricity Departments (LGED). A factor, which further complicates any electricity reform at the local government level, is the general reform of Local Governments, which is taking place.

8.3.1 National Electricity Overview
The EDIRP was initiated due to the fact that large parts of South Africa's Electricity distribution industry are on the brink of collapse. The majority of LGEDs are not financially viable. It is difficult for government to control its electrification programme because it is not always possible to monitor Eskom and the numerous LGEDs who are responsible for electrifying homes. There are large discrepancies between the quality of service provided by and the tariffs charged by different LGEDs and Eskom. In order to address some of the aforementioned challenges, DME has embarked on a reform process which will entail splitting the operations of Eskom's distribution division and merging the operations of Eskom distribution and LGEDs into a maximum number of financially viable Regional Electricity Distributors (REDs). EDIRP will prove a challenging process, because there are financial, tax, legal, human resources, organisational design, technical, commercial, industry and regulatory aspects which have to be taken into account during the whole restructuring process. It is important that the boundaries of each RED be drawn to ensure financial viability, the appropriate mix of urban and rural customers and the appropriate and viable mix of human resource skills. Appropriate transitional structures must be put into place during implementation of the process. Finally the EDIRP should be implemented in a way that fosters proper co-ordination of investment and capital expenditure in the distribution industry.

8.3.2 Local Electricity Overview
In addition to the reform challenges posed by the EDIRP, reform of the electricity distribution industry in South Africa is challenging because of general reforms, which are taking place at a local government level. There are two main pieces of legislation in this regard. The first of these is the Municipal Systems Act, which allows for the formation of Municipal Business Enterprises (MBE), which deliver services on behalf of local governments. These services such as electricity, gas, water, sewage and refuse removal have traditionally been provided by departments which form part of local government structures. Departments have not traditionally been corporatised entities, which provide a challenge in itself. The second piece of legislation is the Municipal Demarcation Act, which draws the new boundaries of municipalities. Implementation of this legislation entails merging of a number of smaller municipalities into larger ones. In the case of Johannesburg, for example, implementation of the Demarcation Act involves merging five Metropolitan Local Councils and the Greater Johannesburg Metropolitan Council into one Council for the Unicity. Implementation of the Municipal Systems Act and the Demarcation Act together poses a formidable challenge for local government electricity distribution, because it entails consolidation of various electricity departments into single departments and then the corporatisation of these departments thus forming MBEs. A further complicating matter is the fact that future implementation of EDIRP will entail merging electricity MBEs and Eskom's distribution assets to form REDs.

8.4 Market Analysis
The key market drivers are:

• Competitors providing alternative sources of energy
• Around 117,000 households are without electricity (Not all in City Power's area of distribution)
• Demand for around 245,000 housing opportunities in year 2000 (Not all in City Power area of distribution)
• Majority of demand from households currently in informal settlements and backyard shacks
• Commercial and industrial customers account for 54% of electricity revenue and 36% of operating costs
• Current average age of electricity network is 33 years
• 18% of electricity is unaccounted for through non-technical losses
• Culture of non-payment for electricity consumption

8.5 Customer satisfaction
There are problems relating to the quality of (or continuity of) service delivery. Where communities have connections to, or ready access to suitable levels of infrastructure, their problems tend to revolve around the quality of service delivered. Surveys indicated that, even in communities with high levels of service, significant dissatisfaction exists regarding service quality offered by City Power. There is a strong indication that residents from all areas are beginning to feel a heightened sense of frustration.

In an attitudinal survey conducted by the City of Johannesburg, respondents were asked to rank the five services they considered to be most problematic. From this prioritisation, the 25 services included in the survey have been ranked from most problematic to least problematic on a city wide basis, based on all responses. This list is detailed below (note that as multiple mentions were made, percentages will add up to more than 100%):

• The survey also demonstrates that it is often not the lack of electricity that is the problem but rather the regularity or quality of supply that is a problem
• 49% of customers are dissatisfied with electricity services. Of all the households who were dissatisfied with this service, the following problems were cited (in order of magnitude):
  • High cost of electricity (39%)
  • No electricity (28%): Cooking, heating problems were specifically mentioned.
  • Service problems (34%): Electricity cuts, overloads and lack of statements were the main service issues, and there is an indication that a small proportion of these problems are due to illegal connections.

8.6 Competitor Analysis

8.6.1 Other Sources of Energy
No information is available at this stage on the energy market and the penetration of electricity versus other sources of energy. This study will be undertaken in the next planning cycle.

8.6.2 Other Distributors
Eskom is the only competitor to City Power in its boundaries of operation. Eskom's business processes and systems are further advanced than that of City Power and Eskom has already deployed comprehensive customer service business architecture and are currently deploying the second generation of customer service systems. Eskom could without any significant effort take over City Power's customer base. This does pose a significant risk to the Company

8.7 Competitive Advantages
The competitive advantages of City Power over Eskom are:

• City Power is a smaller business and has the ability to move faster
• Small geographic operational area