Post on 15-May-2020
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TARIFF DECISION FOR SASOL OIL (PTY) LTD’S
PETROLEUM STORAGE FACILITY IN SECUNDA
10 MAY 2018
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TABLE OF CONTENTS
DECISION…………………………………………………………………………………………………………...….4
REASONS FOR DECISION ............................................................................................................................ 5
INTRODUCTION ............................................................................................................................................. 5
BACKGROUND .............................................................................................................................................. 5
THE APPLICATION ........................................................................................................................................ 6
ASSESSMENT OF THE APPLICATION ........................................................................................................ 6
CALCULATION OF THE ALLOWABLE REVENUE (AR) ............................................................................. 7
Regulatory Asset Base (RAB) .................................................................................................................. 7 Property, Plant and Equipment (PPE) 8
COST OF EQUITY ........................................................................................................................................ 11
COST OF DEBT ............................................................................................................................................ 11
Debt-to-Equity Ratio 12 WACC 12
OPERATIONAL EXPENDITURE .................................................................................................................. 13
DEPRECIATION ............................................................................................................................................ 14
CLAWBACKS ............................................................................................................................................... 15
TAX EXPENSE .............................................................................................................................................. 15
ALLOWABLE REVENUE (AR) ..................................................................................................................... 17
VOLUMES ..................................................................................................................................................... 17
TARIFF DESIGN ........................................................................................................................................... 18
CONCLUSION ............................................................................................................................................... 19
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LIST OF TABLES
Table 1: Tariff approved for the storage facility .................................................................. 4
Table 2: Comparison of Net Working Capital values .......................................................... 9
Table 3: Comparison of the Deferred tax ......................................................................... 10
Table 4: Calculation of the RAB ....................................................................................... 10
Table 5: WACC Calculation ............................................................................................. 12
Table 6: Comparison of Opex costs ................................................................................. 13
Table 7: Clawback Calculation ......................................................................................... 15
Table 8: Tax Calculation .................................................................................................. 16
Table 9: Comparison of AR values .................................................................................. 17
Table 10: Forecast throughput Volumes .......................................................................... 18
Table 11: Comparison in tariffs ........................................................................................ 18
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THE NATIONAL ENERGY REGULATOR OF SOUTH AFRICA
In the matter regarding
THE APPLICATION FOR APPROVAL OF A TARIFF FOR A LICENCED PETROLEUM
STORAGE FACILITY IN SECUNDA
By
SASOL OIL (PTY) LTD
THE DECISION
1. On 10 May 2018, the National Energy Regulator of South Africa (NERSA) approved,
as a condition of Sasol Oil (Pty) Ltd’s operation licence (licence number:
PPL.sf.F3/17/2006), the tariff for its petroleum storage facility located at Synfuels,
Secunda in the Mpumalanga Province.
2. The tariff approved by NERSA for the petroleum storage facility is a maximum tariff and
is exclusive of VAT. The tariff for the petroleum storage facility is shown in Table 1.
Table 1: Tariff approved for the storage facility
3. The approved tariff will remain in force until NERSA takes a decision to approve a new
tariff for this facility.
4. Furthermore, Sasol Oil is required to submit a plan for the rehabilitation of land in
accordance with Regulation 9 of the Regulations made in terms of the Petroleum
Pipelines Act, 2003 (Act No. 60 of 2003) (‘the Act’).
1 July 2018 to 30 June 2019
Tariff (cents per litre) 120.40
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REASONS FOR DECISION
INTRODUCTION
5. On 29 March 2007, the National Energy Regulator of South Africa (NERSA) issued a
licence with conditions to Sasol Oil (Pty) Ltd (‘Sasol Oil’) for the operation of a
petroleum storage facility located at Synfuels Road, Secunda in Mpumalanga (licence
number: PPL.sf.F3/17/3/2006).
6. On 30 November 2017, Sasol Oil, submitted a tariff application to NERSA. The tariff
application is for the period 1 July 2018 to 30 June 2019 and is based on Tariff
Methodology Version 4.
7. This is not Sasol Oil’s first tariff application. In the 2017/18 tariff period, NERSA
approved a tariff of 736.20 cents per litre (cpl), which was based on a Standard
Option 2 Tariff Methodology.
8. Sasol Oil applied for a tariff of 120.40 cpl for the period 1 July 2018 to 30 June 2019.
BACKGROUND
9. Sasol Oil is a private company registered in terms of the company laws of South Africa,
with company registration no. 1981/007622/07.
10. The tariff application was submitted based on the Tariff Methodology Version 4 for
approval of tariffs for the Petroleum Loading and Storage facilities, adopted on
24 August 2017 [‘the Tariff Methodology Version 4’ or ‘the Trended Original Cost (TOC)
Tariff Methodology’]. The Tariff Methodology Version 4 requires that assets be valued
using the TOC method. The tariff applied for is a maximum tariff and is exclusive of
Value Added Tax (VAT).
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Applicable Law
11. The legal basis for NERSA to approve tariffs for petroleum loading and storage facilities
is derived from the National Energy Regulator Act, 2004 (Act No. 40 of 2004) (‘NERSA
Act’), read with the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) (‘the Act’)1.
The Methodology
12. NERSA is required in terms of section 28(2) (a) (i) of the Act to set/approve tariffs based
on a systematic methodology applicable on a consistent and comparable basis.
13. The tariff application by Sasol Oil was prepared in accordance with the Tariff
Methodology Version 4 for the approval of tariffs for the Petroleum Loading facilities
and Petroleum Storage facilities.
14. The Tariff Methodology Version 4 prescribes the use of the TOC Method for asset
valuation.
Decision-Making Process
15. As part of the consultation process, NERSA published the non-confidential version of
the tariff application on its website for comments on 19 March 2018. Notices inviting
the public to attend the Public Hearing were published in the Independent Newspapers
and the Beeld newspaper on 19 March 2018. The closing date for submission of written
comments was 17 April 2018.
16. The Public Hearing to consider the tariff application was scheduled for 19 April 2018
but did not take place as no members of the public or affected stakeholders registered
to make presentations.
THE APPLICATION
Assessment of the application
17. In assessing this tariff application, NERSA used the Tariff Methodology Version 4 to
assess the outcome of the tariff applied for by Sasol Oil for its storage facility.
1 Available at www.nersa.org.za
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18. Data supplied by Sasol Oil was used for most of the calculations performed in this
evaluation. Where this is not the case, the reasons for not using Sasol Oil’s supplied
data are provided.
Calculation of the Allowable Revenue (AR)
19. In accordance with the Tariff Methodology Version 4, the following formula was used
to determine Sasol Oil’s AR:
AR = (RAB x WACC) + E + D ± C +T
Where:
RAB = Regulatory Asset Base
WACC = Weighted Average Cost of Capital
E = Expenses: Operating and Maintenance expenses for the tariff period under
review
D = Depreciation expense for the tariff period under review
C = Clawback adjustment: to correct for differences between actual and
forecasts in formula elements from a preceding tariff period in relation to
the actual estimates for that tariff period
T = Tax: estimated Tax Expense for the tariff period under review.
20. The elements of the AR are discussed in more detail in the paragraphs below.
Regulatory Asset Base (RAB)
21. According to the Tariff Methodology Version 4, the RAB is to be determined by applying
the following formula:
RAB = (V - d) + w ± dtax
Where:
V = Value of Operating Property, Plant and Equipment
d = Accumulated Depreciation and Accumulated Amortisation of inflation
write-up for the period up to the commencement of the tariff period under
review
w = Net Working Capital
dtax = Deferred Tax
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Property, Plant and Equipment (PPE)
22. Sasol Oil states that the PPE value is calculated by using the TOC method as
prescribed by the Tariff Methodology Version 4. The Tariff Methodology Version 4
requires that the original cost of the assets be indexed annually with the Consumer
Price Index (CPI) over the economic useful life of the assets. Sasol Oil calculated its
PPE value to be R923 052
23. NERSA accepted the use of the TOC method to calculate the PPE on which a return
is to be earned. The original cost of the assets were trended by the CPI from the year
in which the assets were brought into use, until the tariff period under review. NERSA
has arrived at a PPE value of R952 393.
24. Sasol Oil applied the TOC method correctly when calculating the PPE value from
which a return should be earned. However there is a difference between the PPE
values calculated by Sasol Oil and NERSA due to the different CPI values used
when trending the assets.
Net Working Capital (w)
25. The Net Working Capital refers to the various regulated activities or business
operation funding requirements other than operating property, plant, vehicles and
equipment in service. These funding requirements include Inventories, Trade
Receivables, Operating Cash and Trade payables.
26. The Net Working Capital is included in the calculation of the RAB and is calculated
using the following formula provided in the Tariff Methodology Version 4:
Net Working Capital = Inventory + Trade Receivables + Operating Cash +
Minimum Cash balance – Trade Payables
27. In its application, Sasol Oil states that the Inventory is valued at the lower of cost or net
realisable value. The net realised value is calculated by using the lowest Basic Fuel
Price (BFP) at the purchase date. NERSA accepted the approach used by Sasol Oil in
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determining the value of Inventory, as the Tariff Methodology prescribes that inventory
be valued at the lower of cost or net realisable value.
28. Sasol Oil calculated its Trade Receivables based on 30 days of AR, Operating Cash
based on 45 days of Operating Expenditure (OPEX) and Trade Payables based on 45
days of OPEX. Sasol Oil calculated its Net Working Capital to be R78 274.
29. NERSA applied its Tariff Methodology Version 4, which prescribes that Trade
Receivables be calculated on 30 days of AR, Operating Cash on 45 days of OPEX and
Trade Payables on 45 days of OPEX. NERSA calculated the Net Working Capital to
be R78 748.
30. There is a slight difference between the Net Working Capital calculated by Sasol Oil
and that calculated by NERSA due to the difference in values used to calculate the
components of the Net Working Capital, i.e. Trade Receivables and AR.
31. A comparison of the Net Working Capital values of Sasol Oil and NERSA is presented
in Table 2.
Table 2: Comparison of the Net Working Capital values
2018/19
Sasol Oil NERSA
R R
Inventory 24 549 24 549
Trade Receivables 53 725 54 199
Operating Cash 51 886 51 886
Trade Payables (51 886) (51 886)
Net Working Capital 78 274 78 748
Deferred Tax
32. Sasol Oil calculated a Deferred Tax liability of R2 028. NERSA also computed the
deferred tax of R2 028. The calculation of the Deferred Tax is depicted in Table 3.
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Table 3: Comparison of the Deferred Tax
2018/19
Sasol Oil NERSA
R R
Wear and Tear 24 652 24652
Less Historical depreciation 17 409 17 409
Timing difference (7 243) (7 243)
Deferred tax liability (timing
difference x company tax of 28%) (2 028) (2 028)
33. The Net Working Capital and the Deferred Tax were added to the PPE value to
calculate the RAB value from which a return is earned. The RAB values are depicted
in Table 4.
Table 4: Calculation of the RAB
2018/19
Sasol Oil NERSA
R R
PPE-d 923 052 952 393
Net Working Capital 78 274 78 748
Deferred tax (2 028) (2 028)
RAB 999 298 1 029 113
34. Table 4 shows that there is a difference in RAB values calculated by Sasol Oil and
NERSA due to the different PPE and Net Working Capital values calculated by both
parties.
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
35. Section 5 of the Tariff Methodology Version 4 stipulates that the following formula is
used to determine the Weighted Average Cost of Capital (WACC):
Kd*
EqDt
DtKe*
EqDt
Eq WACC
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Where:
Eq = Shareholders equity
Dt = Interest bearing debt
Ke = Post-tax, real cost of equity derived from the Capital Asset Pricing
Model (CAPM)
Kd = Post-tax, real2 cost of debt
36. In determining the WACC, the following components of WACC were analysed:
Cost of Equity
37. The Tariff Methodology prescribes that the Cost of Equity be determined according to
the CAPM3. Sasol Oil states in its tariff application that the WACC calculation is in line
with the Tariff Methodology Version 4.
38. The Tariff Methodology Version 4 requires that the economic data used to calculate
the Cost of Equity be that of 12 months prior to the commencement of the tariff period
under review. In this regard, Sasol Oil used the May 2017 (13 months prior to the
commencement of the tariff period) economic data instead of the economic data of
June 2017 (12 months prior to the commencement of the period). The use of different
economic data resulted in different WACC values being computed by Sasol Oil and
NERSA. The economic data is updated quarterly and published by NERSA on its
website.
39. Sasol Oil applied a Risk Free Rate (Rf) of 4.68%, a Market Risk Premium (MRP) of
4.55% and Beta of 0.79 which resulted in a Cost of Equity of 8.27%.
40. NERSA applied a Rf of 4.70%, MRP of 4.21% and a Beta of 0.79 which resulted in a
Cost of Equity of 8.03%.
Cost of Debt
41. Sasol Oil used the Prime Rate of 9.15% at the time of submitting this tariff application
to calculate its nominal Cost of Debt of 6.59% (Post-tax).
2 First convert from pre- to post-tax and then from nominal to real.
3 The cost of equity can also be determined by applying any other appropriate model as per the provisions of Regulation 4(5) of the Regulations made under the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).
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42. Sasol Oil calculated the real Cost of Debt of 1.09% by converting the nominal Pre-tax
Cost of Debt of 9.15% with a CPI of 5.50%.
43. NERSA calculated the real Cost of Debt of 1.42% by converting the nominal Pre-tax
Cost of Debt of 9.15% with a CPI of 5.10%.
44. There is a difference between the real Cost of Debt applied for by Sasol Oil and that
calculated by NERSA due to the different CPI used by both parties.
Debt-to-Equity Ratio
45. Sasol Oil used the minimum Debt-to-Equity ratio of 30:70 as prescribed in the Tariff
Methodology Version 4. NERSA accepts the use of the minimum Debt-to-Equity ratio
of 30:70 in determining the WACC value as it is considered to be reasonable for the
efficient operation of petroleum infrastructure.
WACC
46. Sasol Oil calculated its real WACC to be 6.12% and NERSA calculated its real WACC
to be 6.04%. The WACC calculated by Sasol Oil and NERSA is depicted in Table 5.
Table 5: WACC Calculation
Detail Sasol Oil NERSA
Risk Free Rate (before-tax real) 4.68% 4.70%
Market Risk Premium (real) 4.55% 4.21%
Beta 0.79 0.79
Cost of Equity (post-tax real) 8.27% 8.03%
Cost of Debt (Pre-tax) 9.15% 9.15%
Corporate Tax rate 28%
28%
Norminal Cost of Debt 6.59% 6.59%
CPI forecast 5.50% 5.10%
Cost of Debt (post-tax real) 1.09% 1.42%
Capital Structure: Debt 30% 30%
Equity 70% 70%
Weighted Average Cost of Capital
(WACC) 6.12% 6.04%
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47. Table 5 shows that there is a difference in WACC values due to the different MRP and
CPIf resulting in a different Cost of Equity and Cost of Debt, which ultimately result in
different WACC values.
Operational Expenditure
48. Regulation 5(2) read with Regulation 4(2)(a) made under the Act provides that the
tariffs approved by NERSA must enable an efficient licensee to recover the reasonable
Operational and Maintenance expenses in the year in which they are incurred.
49. Sasol Oil has an approved Cost Allocation Manual (CAM). Operational costs and
corporate overheads are allocated in accordance with the approved CAM.
50. Sasol Oil’s operating expenses for the tariff period under review are forecast to be
R420 849 as illustrated in Table 6 below. The projections show an increase of 235.23%
when compared to the OPEX costs approved in the 2017/18 tariff period. The reasons
for the increase is due to the change in Tariff Methodology. The 2017/18 tariffs were
based on the Standard Costing Option which allowed the use of notional values in the
calculation of standard variables such as RAB, OPEX and WACC.
Table 6: Comparison of the Opex costs
Details Audited actuals
2016/17
Approved
2017/18
2018/19 %
Difference
R R R
Storage depot and divisional cost 292 377 289 760 -0.90%
Corporate cost 153 724 131 080 -14.73%
Total 446 101 125 541 420 849
% difference -71.86% 235.23%
51. The Standard Costing Option Tariff Methodology used an average of 102 cents of the
total design capacity of the facilities to calculate the OPEX costs. This resulted in a
decrease of 71.86% in the OPEX costs allowed in the 2017/18 tariff period.
52. However, the change from the Standard Option 2 Tariff Methodology to TOC allows
the licensee to recover the costs incurred for the purpose of operating and maintaining
the facility. This therefore resulted in OPEX costs increasing by 235.32% when
compared to the OPEX cost allowed in the 2017/18 tariff period. Furthermore, it is worth
noting that the OPEX costs for the 2018/19 decreased by 6% (from R446 101 to
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R420 849) when compared to the actual audited costs incurred in the 2016/17 tariff
period.
53. Based on the actual audited cost of R446 101 for the 2016/17 tariff period, the forecast
costs of R420 849 for the 2018/19 tariff period are deemed reasonable. Therefore,
NERSA accepted the forecast OPEX costs submitted by Sasol Oil for this tariff
application.
54. NERSA reserves the right to verify the OPEX values submitted by Sasol Oil. Any
difference between the expenses provided in this tariff application and actual expenses
incurred will be subject to a clawback adjustment.
Land Rehabilitation
55. No provision for land rehabilitation costs has been submitted by Sasol Oil.
56. Additional information was requested from Sasol Oil to ensure compliance with
Regulation 9 of the Regulations, made under the Act. At the meeting held on 20 April
2018, Sasol Oil indicated that it cannot include the Land Rehabilitation cost in the AR
as it will not be able to recover the cost through tariffs since it does not have third-party
access in its facilities. Sasol Oil further stated that there is a provision made in its
financial statements in case there is a need to rehabilitate its facility.
Depreciation
57. Section 8.1 of the Tariff Methodology Version 4 prescribes that Depreciation be
calculated on a straight line basis over the service life of each of the assets or classes
of assets.
58. Sasol Oil’s assets are depreciated on a straight-line basis and the Depreciation
calculated by the Sasol Oil is R18 256 for the tariff period under review.
59. NERSA in its calculation depreciated the assets on a straight-line basis and calculated
the Depreciation to be R18 255 for the tariff period under review.
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Clawbacks
60. Table 7 shows a clawback adjustment amount of R71 563 in favour of Sasol Oil in
respect of the 2016/17 tariff period. The clawback adjustment consists of the volume
adjustment between projected volumes and actual volumes achieved in the 2016/17
tariff period as well as the AR and the clawback adjustment.
Table 7: Clawback Calculation
Clawback Calculation Sasol Oil NERSA
Volumes Adjustment Formula R Formula R
Projected 2016/17 Volumes a 523 104 a 523 104
Actual 2016/17 Volumes b 534 895 b 534 895
Difference c = a - b -11 791 c = a - b -11 791
Tariff Set by ER (c/l) d 15.37 d 15.37
Volumes Adjustment Clawback e = c x d -1 812 e = c x d -1 812
AR Adjustment (R)
2016/17 RfD
2016/17 Actual
Clawback Calculation
2016/17 RfD
2016/17 Actual
Clawback Calculation
R R R R R R
RAB 927 290 967 139 39 849 927 290 967 139 39 849
WACC 5.54% 5.53% -0.01% 5.54% 5.53% -0.01%
Allowable revenue
RAB X WACC 51 372 53 486 2 114 51 372 53 486 2 114
D 18 910 18 520 -390 18 910 18 520 -390
E 375 150 446 101 70 951 375 150 446 101 70 951
Amortisation 17 790 17 705 -85 17 790 17 705 -85
AR before Tax 463 222 535 812 72 590 463 222 535 812 72 590
Tax 26 900 27 685 785 26 900 27 685 785
Clawback -409 690 -409 690
Total AR adjustment 80 432 563 497 73 375 80 432 563 497 73 375
Total Clawback 71 563 71 563
Tax Expense
61. Sasol Oil has used the notional tax approach in determining its Tax Expense. The
notional tax refers to a licensee’s estimated notional Tax Expense with respect to the
regulated activity for the tariff period under review. The Tax Expense has been
calculated using the following formula:
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Tax = {(NRBTA)/ (1-t)*t}
Where:
NRBTA = Net revenue before tax allowance
= {(RAB*WACC) + E + D (historic & write-up) ±C} - {E + Depreciation (historic))}
t = Prevailing corporate tax rate of the licensee
62. NERSA accepted the use of the notional tax approach. The Tax Expense and
components of the Tax Expense are analysed in Table 8.
Table 8: Tax Calculation
(R)
2018/19
Sasol Oil NERSA
R R
Corporate tax 28% 28%
RAB 999 298 1 029 113
WACC 6.12% 6.04%
Return on WACC 61 152 62 158
Operating Expenses 420 849 420 489
Depreciation 18 256 18 255
Amortisation 21 766 23 352
Clawback 71 563 71 563
AR before Tax Expense 593 586 595 817
Less: Operating Expenses 420 849 420 489
Depreciation (historic) 18 256 18 255
Taxable Income before Gross up 154 481 157 073
Taxable Income after Gross up (i.e.
taxable income/1-t) 214 557 218 156
Tax Expense 60 076 61 083
63. Table 8 shows that there is a difference in Tax Expense due to the different RAB values,
Amortisation and ultimately different AR values determined by Sasol Oil and NERSA.
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Allowable Revenue (AR)
64. Sasol Oil calculated its AR based on the Rate of Return (ROR) approach. This is in
accordance with the Tariff Methodology Version 4.
65. NERSA also performed its calculations of AR based on the ROR approach. The
comparison between the AR calculated by Sasol Oil and NERSA are shown in Table 9.
Table 9: Comparison of the AR values
66. Table 9 shows that there is a difference in the AR values due to the different RAB, Tax
Expense and Amortisation values calculated by Sasol Oil and NERSA.
Volumes
67. Sasol Oil submitted its projected volumes for the 2018/19 tariff period to be 542 918
litres. The 2018/19 projected volumes shows a decrease of 2% when compared to the
prior year’s projections. However, the 2018/19 volume projections are deemed to be
reasonable when compared to the actual audited volumes of 534 895 achieved by
Sasol Oil in the 2016/17 tariff period.
Sasol NERSA
R R
Asset value (PPE – d) 923 052 952 393
Net Working Capital 78 274 78 748
Deferred Tax (2028) (2028)
Regulatory Asset Base (RAB) 999 298 1 029 113
RAB*WACC 61 152 62 158
Operating Expenses 420 849 420 849
Tax Expense 60 076 61 083
Depreciation 18 256 18 255
Amortisation 21 766 23 352
Clawback 71 563 71 563
Allowable Revenue 653 662 657 260
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68. Sasol Oil indicated that there is a decrease in volume projections due to a decline in
the demand for the lubricant products, which also negatively impacts the market growth
of its lubricant product.
69. NERSA therefore accepted the projected volumes submitted by Sasol Oil in this tariff
application. NERSA will continuously monitor the volumes and any difference between
the projected volumes and actual volumes will be subject to a clawback adjustment in
future tariff periods.
70. Table 10 shows the actual volumes for the 2016/17 tariff period and projected volumes
for the 2017/18 and 2018/19 tariff periods.
Table 10: Forecast Volumes
Tariff Design
71. In calculating the tariff, Sasol Oil used the total AR divided by total throughput volume
in litres. The tariff applied for is expressed in cpl and is exclusive of VAT.
72. Sasol Oil applied for a tariff of 120.40 cpl for the tariff period under review.
73. The tariff calculated by Sasol Oil and that calculated by NERSA are shown in Table 11.
Table 11: Comparison in tariffs
74. Table 11 shows that there is a difference in tariff of 0.5% due to the different RAB, Tax
Expense and WACC values, ultimately resulting in the AR values being different. It was
therefore decided to approve the tariff of 120.40 cpl applied for by Sasol Oil for the tariff
period under review.
Audited 2016/17 2017/18 forecasts
2018/19 forecasts
Volumes (litres) 534 895 553 923
542 918
% difference 3.55% -2%
2018/19
Sasol Oil NERSA
AR (Rands) 653 662 657 260
Volume (litres) 542 918 542 918
Tariff (cents per litre) 120.40 121.06
% difference 0.5%
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Conclusion
75. On the conspectus of the facts and evidence, it is appropriate and in compliance with
the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to
make the decision set out above. The decision finds a reasonable balance between
the interests of customers on the one hand and the interests of investors on the other.