REGULATION OF ELECTRICITY, PIPED-GAS AND PETROLEUM ...

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REGULATION OF ELECTRICITY, PIPED-GAS

AND PETROLEUM PIPELINES INDUSTRIES

Parliamentary Portfolio Committee on Energy

Chief Executive Officer and Full-Time Regulator Members

11 November 2014

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PRESENTATION OUTLINE (1)

A. Introduction

B. Vision, Mission and Values

C. Mandate

D. National Energy Regulator Act, 2004 (Act No. 40 of 2004)

E. Institutional ArrangementsI. Structure of the Energy Regulator

II. Energy Regulator Subcommittees and Committees

III. Organisational Structure

F. Regulatory Independence and ProcessI. Regulatory Principles

II. Regulatory Independence

III. Public Participation in the Regulatory Process

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PRESENTATION OUTLINE (2)G. Electricity Industry Regulation

I. Electricity Industry Culture and Current Status

II. Economic Regulation

III. Municipal Tariff Process

IV. Tariff Structure Guidelines

V. Inclining Block Tariffs

VI. Licensing

VII. General Issues

H. Petroleum Pipelines Industry RegulationI. Genesis of Petroleum Regulation

II. Brief Overview of Petroleum Sector

III. Institutional Arrangements

IV. Challenges facing Regulation

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PRESENTATION OUTLINE (3)I. Piped-Gas Industry Regulation

I. Gas Industry Overview and Regulation

II. Regulatory Decisions

III. Challenges and Goals

IV. Key Messages

J. Planning and Corporate Development

K. Conclusion

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A. INTRODUCTION

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INTRODUCTION• The National Energy Regulator (NERSA), a Schedule 3A

Public Finance Management Act, 1999 (Act No. 1 of 1999)Public Entity, was established on 1 October 2005 in terms ofthe National Energy Regulator Act, 2004 (Act No. 40 of2004) to regulate the:o Electricity industry (Electricity Regulation Act, 2006 (Act No. 4 of

2006))

o Piped-Gas industry (Gas Act, 2001 (Act No. 48 of 2001))

o Petroleum Pipelines industry (Petroleum Pipelines Act, 2003 (ActNo. 60 of 2003))

• In executing its mandate NERSA endeavours to balance theconflicting interest of both licensed entities and end users

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B. VISION, MISSION AND

VALUES

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VISION

“To be a recognised world-class leader in energy

regulation”

MISSION

“To regulate the energy industry in accordance with

government laws and policies, standards and

international best practices in support of sustainable

development”

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VALUES

• Passion

• Spirit of Partnership

• Excellence

• Innovation

• Integrity

• Responsibility

• Professionalism

• Pride

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C. MANDATE

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MANDATE (1)

NERSA’s Mandate is anchored in:

• 4 Primary Acts:

o National Energy Regulator Act, 2004 (Act No. 40 of 2004)

o Electricity Regulation Act, 2006 (Act No. 4 of 2006)

o Gas Act, 2001 (Act No. 48 of 2001)

o Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)

• 3 Levies Acts:

o Gas Regulator Levies Act, 2002 (Act No. 75 of 2002)

o Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004)

o Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987)

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MANDATE (2)

• 3 Facilitating Acts:

o Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA)

o Promotion of Access to Information Act, 2000 (Act No. 2 of 2000)

(PAIA)

o Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000)

(PAJA)

• Foundational:

o Constitution of the Republic of South Africa, 1996

• Other:

o All other applicable laws of the Republic

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MANDATE (3)

The mandate of NERSA, as contained in relevant legislation, is

summarised as follows:

• Issuing of licences and setting pertinent conditions

• Setting and/or approving tariffs and prices

• Monitoring and enforcing compliance with licence conditions

• Dispute resolution including mediation, arbitration and the handling of

complaints

• Gathering, storing and disseminating industry information

• Setting of rules, guidelines and codes for the regulation of the three

industries

• Determination of conditions of supply and applicable standards

• Registration of import and production activities

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D. NATIONAL ENERGY

REGULATOR ACT, 2004 (ACT NO.

40 OF 2004)

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NATIONAL ENERGY REGULATOR ACT

• The National Energy Regulator Act combines the non-

technical aspects of the Electricity Regulation Act, Gas Act

and Petroleum Pipelines Act and repeals these provisions

from the three Acts;

• Establishes a National Energy Regulator to administer all

three Acts and related legal instruments (regulations,

levies); and

• Passed by Parliament, came into operation on the 15

September 2005.

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E. INSTITUTIONAL

ARRANGEMENTS

I. STRUCTURE OF THE ENERGY

REGULATORIn terms of section 5 of the National Energy Regulator Act, 2004

(Act No. 40 of 2004), the Minister of Energy appoints nine (9)

Regulator Members:

• Of the nine (9) Regulator Members:

o Four (4) are Full-Time Regulator Members (FTRMs) and hold office for

a period of five (5) years

o Five (5) are Part-Time Regulator Members (PTRMs) and hold office for

a period of four (4) years

o Chairperson and Deputy Chairperson are Part-Time Members

o Full-Time Regulator Members are:

• Chief Executive Officer

• 3 Members primarily responsible for Electricity, Piped-Gas andPetroleum Pipelines industry regulation respectively

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II. ENERGY REGULATOR SUBCOMMITTEES

AND COMMITTEES• Regulatory Subcommittees – open to the public except

where confidential matters are to be considered:

o Electricity Subcommittee (ELS)

o Piped-gas Subcommittee (PGS)

o Petroleum Pipelines Subcommittee (PPS)

• Cross-Cutting Subcommittees – open to the public except

where confidential, organisational or governance matters are

to be considered:

o Regulator Executive Committee (REC)

• Governance Committees – not open to the public:

o Human Resource and Remuneration Committee (HRRC)

o Finance Committee (FIC)

o Audit and Risk Committee (ARC)

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III. ORGANISATIONAL STRUCTURE

• 6 Divisions each with a number of departments

o Headed by Executive Managers

• 5 Specialised Support Units

o Headed by Senior Managers

• Executive Managers and Senior Managers report directly

to CEO

o Regulatory Executive Managers have a dotted line reporting to the

relevant Full-Time Regulator Member (80%)

• Approved staff establishment = 177

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Energy Regulator

FTRM primarily responsible for

Electricity Regulation


Petroleum Pipelines

Regulation

CEO


Piped-Gas Regulation

Electricity Regulation (ELR) (3)

Piped Gas Regulation (GAR) (6)

Petroleum Pipelines

Regulation (PPR) (6)

Corporate Services (COS) (2)

Human Resources (CHO) (2)

Finance and Administration

(CFO) (2)

Special Support Units (SSU)

CEO’s Office Operations (COO) (6)

Electricity Infrastructure

Planning (EIP) (10)

Electricity Pricing and Tariffs (EPT) (16)

Electricity Regulatory Reform

(ERR) (5)

Electricity Licensing, Compliance and

Dispute Resolution (ELC) (19)

Gas Pricing and Tariffs

(GPT) (5)

Gas Licensing, Compliance and

Dispute Resolution (GLC) (8)

Petroleum Pipelines Tariffs

(PPT) (8)

Petroleum Licensing, Compliance and

Dispute Resolution (PLC) (5)

Legal Advisory Services (LAS) (5)

Communication and Stakeholder

Management (CSM) (10)

International Coordination and

partnerships (ICP) (3)

Information Resources

Management (IRM) (12)

Human Resources

Human Resources (HRD) (5)

Finance and Administration

(FAD) (13)

Regulator Support (RSU) (15)

Regulatory Analysis and

Research (RAR) (3)

Strategic Planning and Monitoring

(SPM) (3)

Internal Audit (IAU) (5)

SLA

SLA

SLA

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F. REGULATORY INDEPENDENCE

AND PROCESS

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I. REGULATORY PRINCIPLES (1)Underpinned by NERSA’s legal mandate

• Transparency - explain decisions and processes to

regulated entities and other interested parties, implying that

the data or information that the decision is based on, is

readily available and the reasoning behind it is readily

explained

• Neutrality - neutral to all market players without favouring

one or other group (non-discrimination)

• Consistency and Predictability - Decisions must be

consistent and should have a reasonable degree of

predictability based on previous rulings in similar cases

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I. REGULATORY PRINCIPLES (2)• Independence - The independence of the Energy Regulator

from the regulated companies is a prerequisite for any

sound regulatory system. Independence from political

influence is also desirable to ensure long-term stability of

regulatory practices. Avoidance of regulatory capture by

some customer groups is also necessary for successful

regulation

• Accountability - The Energy Regulator is accountable for

its actions and decisions. Independence must not be

confused with the lack of accountability

• Integrity – The Energy Regulator should exercise honesty,

fairness and sincerity in the management of the Energy

Regulator’s affairs and in all its dealings with stakeholders

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I. REGULATORY PRINCIPLES (3)• Efficiency - The Energy Regulator should make the best

use of resources to further the regulatory objectives by

exercising objectivity and commitment to evidence-based

strategies for improvement

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II. REGULATORY INDEPENDENCE • The National Energy Regulator Act provides that the

Regulator must act independently of any undue influence or

instructions (Section 9(c) of the National Energy Regulator

Act);

• In carrying out its regulatory functions, the Energy Regulator

does this in line with its regulatory principles and governing

legislation; and

• To ensure regulatory independence, the Energy Regulator

has developed regulatory mechanisms (i.e. policies,

procedures, rules, guidelines, systems, etc.) that makes its

decision making process to be open, transparent, credible,

consistent, predictable, as well as making it accountable for

its decisions.

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III. PUBLIC PARTICIPATION IN THE

REGULATORY PROCESS (1)

• To achieve a culture of accountability, openness and

transparency, NERSA ensures that public participation takes

place in all its processes;

• The Constitution of South Africa and the Promotion of

Administrative Justice Act require administrative action to be

open, transparent, reasonable and procedurally fair; and

• To enable openness and transparency, NERSA conducts

public participation in the following ways:

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REGULATORY PROCESS (2)a) Public Hearings (1)

• In September 2010, NERSA approved Procedures for

Public Hearings as contemplated in sections 8(5) and

8(10)(a) of the National Energy Regulator Act, to give effect

to the relevant provisions in the primary legislation;

• The public gets invited through newspaper adverts, website

and radio to make presentations during public hearings;

• It is a requirement that those interested to present make

prior arrangements and register with the Regulator;

• The public is expected to present facts, reasons and

evidence during public hearings;

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a) Public Hearings (2)

• Only the panel consisting of Regulator Members asks

questions during public hearings;

• Public hearings take place during which stakeholders may

provide comments;

• Public allowed to present in their preferred language; and

• Only the Regulator asks questions during public hearings.



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MYPD3 (2013) experience:

• Members of civil society raised the following points forNERSA to consider:o Location of hearings;

o Timing of hearings;

o Language of documentation; and

o Format of Dialogue.



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b) Notice and Comments – Consultation Papers

• The public gets invited through newspaper adverts, website

and Government / Provincial Gazette to comment

c) Notice and Comments – Decisions

• The public gets invited through newspaper adverts and

website to comment

• Final decisions by the Energy Regulator take comments into

account



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d) Energy Regulator and Subcommittee Meetings

• Energy Regulator meetings are open to the public, exceptwhen confidential matters are discussed (section 8(9)(a) ofthe National Energy Regulator Act);

• The public is accorded only observer status duringmeetings; and

• An applicant may be accorded an opportunity to clarifymatters during closed meetings of the Energy Regulator.

e) Stakeholder workshops

• The public gets the opportunity to engage the regulatorduring stakeholder workshops



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G. ELECTRICITY INDUSTRY

REGULATION

• National Energy Regulator Act, 2004 (Act No. 40 of 2004)

• Electricity Regulation Act, 2006 (Act No. 4 of 2006) (‘ERA’)

• Key Published Policyo Electricity Pricing Policy (EPP) GN1398, 19 December 2008

o Integrated Resource Plan 2010 GN400, 6 May 2011

• Key Regulationso Electricity Regulations on New Generation Capacity GN 399 4 May

2011

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ENABLING LEGISLATION

• To achieve efficient, effective, sustainable and orderlydevelopment of the electricity supply industry in South Africa;

• To safeguard and meet the interests and requirements ofpresent and future electricity customers and end users;

• To facilitate investments and universal access to electricity;

• To promote the use of diverse energy sources, energyefficiency, competitiveness and customer choice; and

• To facilitate a fair balance between the interests ofcustomers, licensees, investors and the public.

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OBJECTS OF ERA

• Licensing of Generation, Transmission, Distribution, Trading, Import andExport;

• Setting of licence conditions and standards;

• Monitoring and enforcement of compliance;

• Regulation of tariffs and price structures;

• Issue rules to implement national government's electricity policyframework, the integrated resource plan (IRP) and the ERA;

• Investigate complaints;

• Mediate or arbitrate in disputes;

• Gather and store industry information; and

• Register those who need to be registered.

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FUNCTIONS PRESCRIBED IN THE ERA

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I. ELECTRICITY INDUSTRY

STRUCTURE AND CURRENT

STATUS

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• Dominated by the vertically integrated incumbent – Eskom

• Eskom is responsible for the generation of 96% (~27 Powerstations) of electricity in the RSA and 40% of Distribution

• Cabinet Decision 2007 for new generation capacityo 30% Independent Power Producers ( IPPs)

o 70% Eskom

o Eskom designated to be single buyer

o IPPs will sell to Eskom under long term Power Purchase Agreements

• Total Distribution licensees = 188 including Eskom :o 174 Municipalities

o 13 Private Distributors

o 1 Eskom

• Eskom Distribution - distributes to 40% of end users and theMunicipalities and private distributors distribute to the rest

INDUSTRY STRUCTURE

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Eskom generation

Eskom transmission

Eskom distribution

Customers bCustomers a Customers n

Generation oligopoly

Transmission monopoly

Distribution fragmentation

D 1 D 2 D 3 D nLocal authority

distributors

Municipal generator Municipal generator

IPPs

CURRENT STRUCTURE

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ESKOM GENERATION ENERGY AVAILABILITY

FACTOR

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ESKOM INSTALLED CAPACITY AND PEAK

DEMAND 2007-2014 AND RENEWABLE

ENERGY

0

200

400

600

800

1000

1200

1400

Cu

mu

lati

ve

RE

IPP

P G

rid

Ca

pa

cit

y (

MW

)

1256 MW reached

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CUMULATIVE RENEWABLE ENERGY

CAPACITY UNDER REIPP PROGRAMME AS

AT 25 OCTOBER 2014

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RENEWABLE ENERGY PRODUCTION PROFILE 1

JUNE 2014 TO 4 JUNE 2014 (AS AN EXAMPLE)

Prices in Red actually applied

MYPD 1 Decision

Revision 1: 2008 price in

Dec 2007

Revision 2: 2008 price in

Mar 2008

Interim

MYPD 2 Decision

Revision: 2012 price Mar 2012

MYPD3 Decision

MYPD2

RCA

MYPD3 RCA

2006 2007 2008 2008 2008 2009 2010 2011 2012 2012 2013 2014 2015 2015 2016 2017

Average Price Increase (%)

5.10 5.90 6.20 14.20 27.50 31.30 24.80 25.8 25.90 16.00 8 8 8 12.69 * *

Average Price (c/kWh)

17.91 18.09 18.27 22.61 25.24 33.14 41.57 52.3 65.85 60.66 65.51 70.75 76.41 79.73 82.53 89.13

* The Prices shown must still be

adjusted by the MYPD3 Regulatory

Clearing Account which is currently

under discussion with NERSA

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HISTORY OF THE ESKOM PRICE

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II. ECONOMIC REGULATION

• NERSA gets its Mandate to Regulate Electricity prices fromElectricity Regulation Act, 2006 (Act No. 4 of 2006)o Section 4(a)(ii) - the regulator must regulate prices and tariffs

o Section 15 (1) (a) - the regulator must enable an efficient licensee torecover the full cost of its licensed activities, including a reasonablemargin or return

o Section 15(1) (c) and (d) - the regulator “must avoid undue

discrimination between customer categories” and “may permit the

cross-subsidy of tariffs to certain classes of customers”

• NERSA also has to comply with the Principles in theElectricity Pricing Policy document because Section 4 (a)(iv) says:- issue rules designed to implement the nationalgovernment's electricity policy framework, the integratedresource plan and this Act 47

REGULATION OF ELECTRICITY PRICES /

TARIFFS

Standard tariffs revenue requirement

Cat. 6Cat. 7

Cat. 8Cat. 9Cat. 10Cat. 11Cat. 12

Cat. 13

Cat. 14

Cat. 15

Cat. 16

Cat. 17Cat. 18 Cat. 19

Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5

Admin

Networks

Tariff E

EnergyTariff C

Tariff BTariff A

Tariff D

Tariff restructure

Other Regulator

y and policy issues

Costing and

revenue requireme

nt

Pricing objectives

Tariff design

Cost to serve study

Annual tariff

adjustments

A suite of tariffs

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REGULATION OF ELECTRICITY TARIFFS /

PRICES

• Eskom’s price reviews are determined on a multi year basis

• This process is referred to as the Multi-year Price

Determination (MYPD)

• The first MYPD was approved in 2005 (1 April 2005 to 31

March 2008) lasting for a period of three years

o Referred to as MYPD1

• The second MYPD was approved in 2010 also lasting three

years (1 April 2010 to 31 March 2013


o Note: There was an interim price review during 2009

• Recently a third generation MYPD was approved with an

extended period of 5 years


ESKOM PRICE SETTING PROCESS (1)

• MYPD1 was interrupted twice by applications from Eskom

due to changes in forecasts and estimates

• MYPD2 was reviewed in the third year and reduced from

an average price increase of 25% to a 16% average

increase

• The regulatory approach followed in the MYPD process is

based on the Rate of Return regulatory principles

• This is a mechanism that allows the utility “to recover its

costs to supply plus a fair rate of return on the Regulatory

Asset Base”

• The revenues are then converted to an average price

based on the forecast volumes for each year of the MYPD51


• Within the MYPD mechanism, some incentives on

performance are prescribed

• The mechanism also has a risk management device that

deals with the differences between forecast values and

actual performance e.g. unforeseen increases in the cost of

fuel

• All variances are then deposited into a Regulatory Clearing

Account

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MYPD component Description

Regulatory return •Determines the return to investors based on the allowed rate of return

•Calculated based on the Weighted Average Cost of Capital (WACC)

Plus (+) Primary Energy (Fuel) Costs •Cost of fuel used in the generation of electricity

•Mainly coal, diesel, nuclear fuel etc.

Plus (+) Independent Power Producers (IPPs) •Electricity purchased by Eskom from other producers (IPPs)

Plus (+) Asset Depreciation •Asset amortisation of the expected economic life of the asset

•May use actual estimation per assets or may use average estimated asset lives

Plus (+) Integrated Demand Management (IDM)

costs

•Costs incurred in support of Energy Efficiency, Demand Side Management and similar

programmes

Plus (+) Operating Costs •Operational costs incurred in the production and supply of electricity

•Manpower costs, repairs and maintenance, administration costs etc.

Plus (+) Government Taxes / Levies •Levies and taxes imposed on electricity by Government (treated as past through costs

•Currently the levy imposed is the Environmental Levy

Plus/Minus (+/-) Balance in the Regulatory

Clearing Account (RCA)

•The account to which all variances between forecasts and actual figures are deposited.

•The balance is used at a NET basis – Could be a reduction to Eskom’s revenues or

addition to calculated revenues

Equals (=) Allowed revenues for each year Revenues allowed for collection by Eskom from it’s customers

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MYPD COMPONENTS

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PRICES

Electricity Retail Tariffs (ERTSA) Determination including Municipal Wholesale

Municipal Retail Tariffs

RCA Balance

Eskom revenue Determination

• Once the annual revenue for Eskom has been calculated, it is

converted to an average price by dividing it by the expected /

forecast sales volumes

• The average price is compared to the previous year’s

average price to arrive at the average price increase

percentage

• The average price must then be recovered from various

customers at differing rates

o Cost of supply studies are performed

o Costs allocated based on cost drivers

o Cross-subsidy level between (and among) customer classes

determined

o Tariffs to various customer classes are then determined based on the

above55


• From the above a suite of tariffs is then approved by the

Energy Regulator

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PRICES



RCA Balance


• The Regulatory Clearing Account (RCA) is an account in

which all potential adjustments to Eskom’s allowed revenue

is accumulated (deposited both positive and negative)

o Variances from forecast coal prices;

o Variances from forecast / planned capital expenditure;

o Variances from forecast sales volumes; etc.

• The account is created at the beginning of the year and

continuously monitored (using quarterly reports)

• The RCA balance is then measured as a percentage of total

allowed revenue (annually)

o If the RCA balance is less than or equal to 2% of the allowable

revenue, then there will be no immediate draw down requirement or

tariff adjustment but the RCA balance will be carried over to the next

financial year 58

RISK MANAGEMENT DEVICE (1)

• The RCA balance is then measured as a percentage of total

allowed revenue (annually) – Cont.

o If the RCA balance is between 2% and 10%, the amount is allowed

for draw down requiring a tariff adjustment in the next financial year

without the need for a full stakeholder consultation process

o If the balance is greater than 10% of the allowable revenue then there

will be a full stakeholder consultation process before any draw down

(tariff adjustment) is allowed

o At the end of the MYPD period, the balance in the RCA account will

be liquidated and taken into account when determining the revenue

requirement for the next MYPD period

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RISK MANAGEMENT DEVICE (2)

• Eskom applied for a revenue shortfall of R18bn at the end

of the MYPD2 control period;

• The application was analysed using the RCA rules

contained in the MYPD methodology;

• The RCA balance of R7 818 million was approved in favour

of Eskom;

• The bulk of the RCA balance was as a result of Open Cycle

Gas Turbine (OCGT) usage;

• The MYPD2 RCA implementation plan was developed and

approved by the Energy Regulator; and

• The MYPD2 RCA balance will be implemented in the

2015/16 financial year resulting in the average increase of

12.69% instead of the 8.00% approved in the MYPD3.60

MYPD2 REGULATORY CLEARING ACCOUNT

61

III. MUNICIPAL TARIFF

PROCESS

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PRICES



RCA Balance


• In terms of the Electricity Regulation Act, 2006 (Act No 4 of

2006), “The Regulator must regulate prices and tariffs”;

• On an annual basis distributors apply to the Regulator for

electricity tariff increases. There are 186 licensed

distributors; these include 174 municipalities and 12 private

distributors;

• NERSA develops an annual municipal guideline and tariff

benchmark levels, based largely on the Eskom price

increase;

• The guideline assists municipalities in preparing budgets,

resulting in the adjustments of electricity tariffs;

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OVERVIEW: GUIDELINE INCREASE (1)

• The tariff benchmarks are a tariff range which is a guide to

municipalities on the appropriate levels that tariffs should

be set;

• The approved guideline increase together with the tariff

benchmarks are communicated to municipalities and are

used by municipalities when applying for their tariff

adjustments;

• Licensees are then required to annually submit their

proposed price adjustments in the form of a tariff schedule

per customer class, indicating current and proposed tariffs,

which is then considered for approval by the Regulator;

64


• In accordance with the Municipal Finance Management Act,

2003 (Act No. 56 of 2003) (MFMA), the implementation date

for tariff increases for municipalities is 1 July annually;

• NERSA strives to ensure that all tariff applications received

are analysed and approved by the Regulator before the

implementation date; and

• Further the MFMA requires that all tariffs be approved by 15

March to be implemented on 1 July of the same year.

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• When determining municipal percentage increase guideline,

the following issues are considered:

o The proposed Eskom price increase applicable to municipal

distributors; Based on the study done in determining the guideline, the

electricity purchases by municipal distributors make up approximately

70% on average of their total costs to supply end-use customers;

o The analysis of other municipal costs besides purchase costs; while

purchase costs make up the bulk of municipal costs, municipalities are

also subjected to other costs like operating and maintenance costs. i.e.

salaries, repairs and maintenance, capital charges and other costs;

and

o The formula for calculating the guideline is:

MG = ( B x BPI ) + (S x SI) + ( R x RI) + ( C x CCI) + (OC x OCI) 66

PRINCIPLES FOR DETERMINING THE

GUIDELINE INCREASE

• When reviewing applications by municipalities, the financial

viability/health of each municipality is assessed. The

performance of the municipality is measured through the

financial and technical benchmarks (based on information

received from municipalities);

• The percentage applied for by the municipality is also

compared to the guideline that is issued by NERSA on an

annual basis;

67

REGULATING MUNICIPALITIES (1)

• NERSA may approve tariffs that are above the guideline

and outside the benchmarks if enough motivation has been

provided by the applicant and has been thoroughly tested,

i.e. where a municipality is undertaking significant capital

expenditure programs, refurbishment/maintenance

backlogs etc.; and

• Municipalities applying for an increase above the

determined guideline are required to go through a public

hearing process, where they have an opportunity to present

their detailed motivation to the Regulator.

68

REGULATING MUNICIPALITIES (2)

69

IV. TARIFF STRUCTURE

GUIDELINES

• In designing tariffs, licensees must ensure that tariffs are

aligned to the principles in the Electricity Pricing Policy.

Some of the key objectives are as follows:

o Tariffs should be equitable and fair;

o Tariff increases should be predictable and stable;

o Tariffs should promote overall demand and supply side economic

efficiency and should be structured to encourage sustainable,

efficient and effective usage of electricity; and

o Tariff levels and structures should accommodate social

programmes.

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TARIFF OBJECTIVES

• The following are currently the NERSA prescribed tariffstructures:o Inclining Block Tariff (IBT) (introduced by NERSA in 2010/11 )

o Single rate energy tariff (all costs expressed in a single cent/kWhcharge)

o Two part tariff (consists of a fixed monthly charge plus a variablecharge related to metered kWh consumption)

• Energy rate (c/kWh)

• Fixed monthly charge (R/month)

o Three part tariff

• Energy rate (c/kWh)

• Fixed monthly charge (R/month)

• Demand charge (R/kVA/month – recovers capital costs elements)

o Two part time-of-use tariff

o Three part time-of-use tariff71

BASIC TARIFF STRUCTURES (1)

• There may also be variances to these structures but these must bebased on the municipality’s profile and at least meet the tariff objectivesmentioned

72

BASIC TARIFF STRUCTURES (2)

• The tariff structures prescribed relate to the followingbasic customer categories:o Domestic tariff – IBT structure where:

• Block 1: 0 – 50 kWh

• Block 2: 51 – 350 kWh

• Block 3: 351 – 600 kWh

• Block 4: >600 kWh

o Commercial tariff – average consumption of 2000 kWh/month

o Industrial tariff – average consumption of 200 kVA, 43800 kWhand load factor of 30%

o Some time-of-use tariffs especially at commercial and industrialtariffs

o Agricultural tariffs

o Some variations to the above structures which may even bebased on negotiated price structures between the partiesconcerned

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BASIC CUSTOMER CATEGORIES

74

V. INCLINING BLOCK TARIFFS

• On 24 February 2010, the Energy Regulator approved

the implementation of IBTs concurrently with the

2010/11 Eskom price increase, in order to provide for

cross-subsidies for low income domestic customers, as

required by the Electricity Pricing Policy (EPP)

• The IBT tariff when structured optimally allows the

achievement of the following objectives:

o protecting low-income tariff customers; and

o promoting energy efficiency.

• The two objectives are in compliance with the EPP.

75

INCLINING BLOCK TARIFF: BACKGROUND

What is an Inclining Block Tariff (IBT)?

• An IBT is a tariff structure where the customers’

consumption is divided into blocks. Each block has a

price per unit of energy consumed; which increases with

each succeeding block i.e. it consists of different prices

for different energy consumption levels. For example: a

low block rate for the first 100 kWh of consumption and a

higher block rate for the balance of consumption

It must be noted that the IBT is only applicable for

residential/domestic customers (for now)

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INCLINING BLOCK TARIFF

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Block 1

0 – 50kWk

68.0c/kWh

Block 2

51 –

350kWh

87.0c/kWh

Block 3

351 –

600kWh

119.0c/kWh

Block 4

>600kWh

143.0c/kWh

INCLINING BLOCK TARIFF: EXAMPLE

1. Easy and economical to implement/ administer;

2. To ensure stability, simplicity and understandability and

transparency;

3. Utilize appropriate metering and supply technology;

4. Customer’s ability to pay;

5. Equity: preserving a degree of cross-subsidies to ensure

support to low income customers;

6. Shield the poor from the impact of unacceptably high

price increases; and

7. To ensure revenue neutrality to the utility.

78

KEY DESIGN PRINCIPLES

79

VI. LICENSING

• The ERA requires that anyone who is involved inGeneration, Transmission, Distribution, Import/Exportsand Trading should be licensed by NERSA;

• With each and every licence granted; NERSA imposeslicence conditions which should be complied with;

• The ERA stipulates that the licensing process should notexceed 120 days;

• After a licence has been issued, NERSA has to monitorfor compliance; and

• NERSA currently has 334 licensees.

80

LICENSING AND COMPLIANCE MONITORING

81

VII. GENERAL ISSUES

• Preliminary NERSA investigation report considered by the

Energy Regulator on 26 March 2014

• Eskom was required to provide a detailed report on the

matter;

• Eskom’s high level summary report was received in

September 2014;

• Eskom’s investigation is still under way;

INVESTIGATION OF THE 6 MARCH 2014

LOAD SHEDDING (1)

82

• The preliminary findings are:o Delay in building new capacity

o Age related deterioration of the generation fleet

o Mandate to keep the lights on

o Plant Performance

o Deferred maintenance and maintenance space for accelerated

maintenance

o Coal quality

• Eskom is currently preparing a plan for the acceleration of

the restoration of the capacity and reliability of the fleet that

will be submitted to NERSA

INVESTIGATION OF THE 6 MARCH 2014

LOAD SHEDDING (2)

83

• The investigation is being done in terms of Section 32 (1) of

the ERA as shown below:

1) The Regulator must, in applicable circumstances, at its own

instance or on receipt of a complaint or inquiry relating to the

generation, transmission, distribution or trading, investigate

complaints-

a) of discrimination regarding tariffs or conditions of access;

b) if a licensee is involved, of failure to abide by its licensing

conditions; or

2) On receipt of a report under subsection (1), the Regulator may

institute a formal investigation.

84

BHP BILLITON INVESTIGATION (1)

• Eskom was requested to provide a financial justification for

their application including the benefit of the interruptible load

which they receive for free;

• BHP Billiton was given an opportunity to respond;

• Eskom’s comment on the response was sought and received;

• Affected government departments were given an opportunity

to comment and provide input;

• Unsolicited input was received from the Aluminium

Federation of South Africa (AFSA);

• Specific input was sought from Industry Specialists; and

• NERSA staff have done their own analysis and at present

Senior Counsel Legal Opinion is being sought on specific

issues concerning NERSA’s mandate and Public Interest.85

BHP BILLITON INVESTIGATION (2)

• Embedded Generation has a potential disruptive effect onmunicipal networks and revenues;

• Most municipalities are not well positioned to cope from atariff structure, technical and financial point of view withthese disruptive effects;

• NERSA are working on a consultation paper which shouldbe published early 2015 which will aim to highlight theissues NERSA sees and result in a regulatory frameworkfor this class of generation; and

• It is important to extract the benefits of this generation andmitigate the adverse effects, as all customers are involvedwhether they install embedded generation or not.

86

EMBEDDED GENERATION

87

H. PETROLEUM PIPELINES

INDUSTRY REGULATION

88

I. GENESIS OF REGULATION

• 1940’s cutthroat competition, sectoral decline –RATPLAN

• 1950’s/60’s First oil refineries - incentives

• 1970’s United Nations oil embargoo Petroleum Products Act and Central Energy Fund Act

o Secrecy

o Synfuels

• 2000’s Implementing White Paper on Energy Policyo Petroleum Pipelines Act 2003

o National Energy Regulator Act 2004

89

90

II. BRIEF OVERVIEW OF

PETROLEUM SECTOR

91

0

100

200

300

400

500

600

700

800

900

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

South Africa Egypt Algeria

Source BP Statistical Review 2014

OIL CONSUMPTION '000 BBLS PER DAY

South African Regulated Petroleum Infrastructure

Kms

Pipelines 3 310

Storage tank capacity1 cubic metres

Crude oil 8 262 220

Petrol/Diesel/Paraffin/Jet/Avgas 2 657 771

LPG 7 236

Number

Port Loading facilities 14

921 Excludes capacity within refineries

2005 TO 2014

Number of operating licences issued 199

Number of operating licences revoked 57

Number of operating licenses in operation 142

Number of licenses amended 33

93

Operating

Crude oil pipelines 8

Refined products pipelines 7

Crude oil marine loading facilities 3

Refined products marine loading facilities 11

Crude oil storage facilities 3

Petroleum Products storage facilities 175

Number of construction licenses issued 41

Number of construction licenses issued and construction complete 18

Number of construction licences under construction 14

Number of construction licences on hold for various reasons 9

94

III. INSTITUTIONAL

ARRANGEMENTS

95

WHAT DOES NERSA

REGULATE?

1. Marine loading facilities

2. Storage facilities

3. Pipelines

96

97

WHO REGULATES WHAT?

Upstream

Pipelines

PASA /

DMR

Minister of

Energy

NERSA

Retailing

Minister of

Energy

Refining

Wholesaling

Storage

Downstream

Loading facilities

98

http://www.edinphoto.org.uk/0_my_p_0/0_my_photographs_0_scotland_petrol_pumps.htm

• The advent of Petroleum Pipelines and Storage

regulation has coincided with an unprecedented

investment boom

99

100

IV. CHALLENGES FACING

REGULATION

101

CHALLENGE 1: OIL PRICE

102

0

200

400

600

800

1000

1200

1400

R

a

n

d

/

b

b

l

Brent Oil Real (2013 Rands, Year end)

Oil per barrel costs the economy 6.5 times what it

cost in 1994, in real terms

Petroleum

Pipelines Act

• This has very significant implications for:

o An export orientated economy

o Transport modes – it calls out for alternatives to oil propelled

transport.

• It suggests that petroleum regulation should be rigorous

• It also suggests that competition should be much keener

103

PETROL ULP 93 GAUTENG SEPTEMBER 2014cents/litre

Basic Fuels Price 771.75 58%

Wholesale Margin 31.00 2%

Secondary Storage 17.10 1%

Secondary Distribution 11.70 1%

Petroleum Products Levy 0.15 0%

Zone differential in Gauteng 33.10 2%

Retail Margin 143.30 11%

Road Accident Fund 104.00 8%

Customs &excise 4.00 0%

Fuel tax 224.50 17%

Slate levy - 0%

Pump Rounding 0.40 0%

Retail price 1 341.00 100%

104

%International component + refining margin 58

Taxes & Levies 25

Local regulated prices 18

100

Oil price and

exchange rate

driven

105

CHALLENGE 2: OIL

EXPLORATION

106

0

200

400

600

800

1000

1200

1400

199

4-0

1-0

1

199

5-0

1-0

1

199

6-0

1-0

1

199

7-0

1-0

1

199

8-0

1-0

1

199

9-0

1-0

1

200

0-0

1-0

1

200

1-0

1-0

1

200

2-0

1-0

1

200

3-0

1-0

1

200

4-0

1-0

1

200

5-0

1-0

1

200

6-0

1-0

1

2007-0

1-0

1

200

8-0

1-0

1

200

9-0

1-0

1

201

0-0

1-0

1

201

1-0

1-0

1

201

2-0

1-0

1

201

3-0

1-0

1

R

a

n

d

/

b

b

l

Brent Oil Real (2013 Rands, Year end)

8 years, no oil

production

SA needs own oil

Should we be more

worried about this?

Minerals and

Petroleum

Resources

Development Act

review very important

107

CHALLENGE 3: RETAIL PRICE

REGULATION

PETROL ULP 93 GAUTENG SEPTEMBER 2014

cents/litre

Basic Fuels Price 771.75 58%

Wholesale Margin 31.00 2%

Secondary Storage 17.10 1%

Secondary Distribution 11.70 1%

Petroleum Products Levy 0.15 0%

Zone differential in Gauteng 33.10 2%

Retail Margin 143.30 11%

Road Accident Fund 104.00 8%

Customs &excise 4.00 0%

Fuel tax 224.50 17%

Slate levy - 0%

Pump Rounding 0.40 0%

Retail price 1 341.00 100%

108

%Internation component + refining margin 58

Taxes & Levies 25

Local regulated prices 18

100

Regulated

pipeline tariffs

included (2%)

109

REGULATED PIPELINE

TARIFFS

110

0

5

10

15

20

25

30

199

1/9

2

199

2/9

3

199

3/9

4

199

4/9

5

199

5/9

6

199

6/9

7

199

7/9

8

199

8/9

9

199

9/0

0

200

0/0

1

200

1/0

2

200

2/0

3

200

3/0

4

200

4/0

5

200

5/0

6

200

6/0

7

200

7/0

8

200

8/0

9

200

9/1

0

201

0/1

1

201

1/1

2

201

2/1

3

201

3/1

4

201

4/1

5

ce

nts

/ lit

er

Financial year

Transnet's Durban to Coalbrook (Crude) Pipeline Tariff

Nominal tariff Real tariff (1991/92 = base) Base line

0

5

10

15

20

25

30

199

1/9

2

199

2/9

3

199

3/9

4

199

4/9

5

199

5/9

6

199

6/9

7

199

7/9

8

199

8/9

9

199

9/0

0

200

0/0

1

200

1/0

2

200

2/0

3

200

3/0

4

200

4/0

5

200

5/0

6

200

6/0

7

200

7/0

8

200

8/0

9

200

9/1

0

201

0/1

1

201

1/1

2

201

2/1

3

201

3/1

4

201

4/1

5

ce

nts

/ lit

er

Financial year

Transnet's Durban to Alrode Pipeline Tariff

111

0

50

100

150

200

250

20

00

200

1

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

cen

ts/l

itre

Regulated Prices & Taxes ULP 93 (April)

Fuel Tax

RAF

Transport Costs

Wholesale margin

Retail Margin

Service cost recoveries

112

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

cen

ts/lit

re

Regulated Margins, Real (2000 Rands)

Transport Costs Wholesale + retail margin Service cost recoveries

Transport x1.3

Retail + wholesale x1.8

Service Costs x2.5

Old fashioned regulation

was CPI-x

• Pipeline tariffs are component of transport costs

• Storage tariffs do not feature in price regulation

113

114

CHALLENGE 4: ACCESS AND

EMPOWERMENT

115

STORAGE ACCESS FOR

THIRD PARTIES

116

0

10

20

30

40

50

Total No. of Licensees

Total No. of Mechanisms Received

Published on licensee Website

Progress in 3rd party access mechanisms

3rd party access volumes are

1.7% of total volumes

excluding merchants

175

131

32

7 7

0

20

40

60

80

100

120

140

160

180

200

No. ofstoragefacilities

Approvedtariffs

Tariffsoutstanding

Tariffs notapproved

Decisions inprogress

Storage Tariffs

117

Is the regulation of petroleum

achieving what it was intended to

achieve?

• 1998 White Paper on Energy Policy

• 2003 Petroleum Pipelines Act

• 2004 National Energy Regulator Act

• 2014 Nine years of experience later

• Is regulation achieving what it was intended to achieve?

• Regulatory impact assessment – normal and due

• Required by Petroleum Pipelines Levies Act

118

119

CHALLENGE 5:

OVERLAPPING

JURISDICTIONS

Act Regulator

Petroleum Products Act Dept of Energy

Petroleum Pipelines Act NERSA

National Ports Act Ports Regulator

National Ports Authority

Transnet Act (Transnet National Ports

Authority (TNPA) – a

regulator – part of a

commercial State Owned

Company) 120

REGULATORY LEGISLATION COVERING

PETROLEUM INFRASTRUCTURE

Challenge Mitigation actions

1. Overlapping jurisdictions inhibiting

investment boom. Investors forum

shopping

Persuade policy departments to jointly

review legislation

2. DoE and NERSA use different

tariff/price methodologies for same

asset

Persuade DoE to amend Regulations

(draft out for public comment) and Act

3. TNPA authorising investment in ports

(bidding rounds, Leases etc) – tariff

not included. NERSA regulates tariff.

• Close collaboration with TNPA

• Persuade policy departments to jointly

review legislation

4. TNPA and NERSA: Term of lease and

depreciation not aligned.

Persuaded TNPA to reconsider term

Persuade DoE to amend Regulations

5. Investors and NERSA: Tariffs and

bankability

• Consulted public and revised upwards

returns on equity

• Persuade DoE to amend Regulations

(draft out for public comment) and Act

121

122

CHALLENGE 6: MULTIPLE

REGULATORS IN

PETROLEUM VALUE CHAIN

• In the petroleum value chain we have 6 different

economic regulators: (excluding Health, Safety and

Environment)

1. The Minister of Mineral Resources

2. The Minister of Energy

3. The Petroleum Agency of South Africa (PASA)

4. The National Energy Regulator

5. The Transnet National Ports Authority

6. The Ports Regulator

• 5 of these 6 have elements of overlapping jurisdiction.

123

124

CHALLENGE 7: REGULATORY

CERTAINTY FOR INVESTORS

• Infrastructure investment requires regulatory certainty

• In the petroleum value chain we have 6 different

economic regulators: (excluding Health, Safety and

Environment)

1. The Minister of Mineral Resources

2. The Minister of Energy

3. The Petroleum Agency of South Africa (PASA)

4. The National Energy Regulator

5. The Transnet National Ports Authority

6. The Ports Regulator

• 3 possibly 4 of the 6 economic regulators have their

founding statutes currently under review.125

• A golden opportunity to synchronise and align

legislation

• Crucial to get the petroleum sector going

• Can there be a coordinated review of all of these

pieces of legislation?

126

127

I. PIPED-GAS INDUSTRY

REGULATION

128

I. GAS INDUSTRY OVERVIEW

AND REGULATION

• The gas value chain comprises of the elements below

• 3D seismic study - Gas extraction - Gathering & - Transportation - Industrial

• Geophysical evaluation - Field development processing (Pipeline/LNG shipping) - Power generation

and design - Continuing drilling - Fractionation - Liquefaction - Commercial

• Drilling operations operations (for tanker transportation) - Residential

- LNG regasification - Transportation

UPSTREAM MIDSTREAM DOWNSTREAM

NERSA’s JURISDICTION (Excl. gas reticulation)

Exploration Production Processing Transportation,

Liquefaction,

regasification & Storage

End users

129

TRADITIONAL NATURAL GAS VALUE CHAIN

Upstream (PASA) Midstream (NERSA) Downstream

(NERSA and Municipalities)

NG Importation

Sasol Gas

Mozambique

Exploration and

Production by

Sasol

Petroleum

International

Transmission

ROMPCO

Sasol Gas

Transnet

Distribution

Sasol Gas

Trading

CNG:VGN

Novo Energy

NGV Gas

Pipeline gas: Sasol Gas

Spring Lights

Reatile

Reticulation -Regulated by Municipalities

•Competition may not be levelled

•Sasol Gas has a competitive advantage:

- as a single supplier of gas/ gas distributor

- Price advantage exhibited over other traders

• Competitive price advantage for Compressed Natural Gas as a vehicle fuel over petrol

• Always priced approx. 20-30% below petrol price

• Potential for NGV growth due to

• increasing policy drives to address environmental concerns (carbon tax)

• increasing appetite for cleaner transport fuels (e.g., Municipalities)

• increasing appetite for cheaper fuel (Taxi Industry)

Domestic

PASA regulated

Exploration and Production

- On and offshore

Syn gas production

by Sasol Synfuels

NERSA regulated

activities

130

INSTITUTIONAL ARRANGEMENTS IN GAS

REGULATION

• Vertically integrated market structure

o Gas production/imports, pipeline transportation (transmission and

distribution), and trading are all dominated by an integrated gas

company, Sasol Gas

o Sasol Gas owns

• About 80% of existing pipeline infrastructure

• Current sources of gas supplied in the market

• ±95% of the customer share

o Sasol Gas has exclusive position in gas supply to end users in

distribution areas (except for eligible customers)

o Existing Pipeline infrastructure concentrated in Gauteng Province and

some parts of Mpumalanga, Free State and KwaZulu-Natal Provinces

131

MARKET STRUCTURE (1)

• Vertical integration may

o lead to inefficient outcomes in the market

o increase high barriers to market entry for new players

o cloud fair access to gas supply and access to gas services

o Constrain competitive conditions

132

MARKET STRUCTURE (2)

Egoli Gas reticulation network

in the Johannesburg area

CNG mobile storage and

transportation system

CNG high pressure cylinders

Transnet Lilly Pipeline

ROMPCO Mozambique to

Secunda Pipeline

Sasol Gas Pipelines

133

CURRENT INFRASTRUCTURE

• Regulated pipeline infrastructure (transmission and

distribution)

o ± 2500 km transmission pipeline network owned by Sasol Gas,

ROMPCO and Transnet

o ± 317 km distribution pipeline network owned by Sasol Gas

• Compressed Natural Gas (CNG) infrastructure

o CNG vehicle refuelling stations owned and operated by Novo Energy

and NGV Gas

o CNG mobile storage facilities owned and operated by Novo Energy and

Virtual Gas Network

o CNG steadily gaining momentum given the lower gas price compared

to petrol -Fuel/CNG price is R8.90/Litre (equivalent)

134

• Gas trading

o Six licensed gas traders (Sasol Gas, Spring Light Gas, Reatile, Novo

Energy, NGV Gas and Virtual Gas Network)

o 404 customers (350 Sasol Gas, 54 Spring Lights Gas) supplied via

pipeline in Gauteng, Mpumalanga, Free State and KwaZulu-Natal

o Novo Energy and NGV Gas supply CNG as a vehicle fuel in Gauteng

(669 vehicles converted, mostly taxis)

o Virtual Gas Network supplies CNG to 4 industrial customers in Gauteng

• Gas consumed for industrial, commercial, domestic, transport

and power generation purposes

135

• Industry regulated since 2005 when NERSA was established

• Regulated in terms of the Sasol Regulatory Agreement andGas Act until 25 March 2014

• The Agreement provided regulatory framework in the absenceof the Gas Act (which was only enacted in 2001, and becameeffective in 2005)

• The Agreement took precedence over the Gas Act for theduration of the 10 year dispensation period (26 March 2004 to25 March 2014)

• Expiry of the Agreement paved the way for migration to theprovisions of the Gas Act

• Prices, tariffs, supply and access to infrastructure nowregulated ito the Gas Act

136

BRIEF HISTORY OF GAS REGULATION IN

SOUTH AFRICA

• NERSA regulates the piped-gas industryo Currently all hydrocarbon gases transported by pipeline

(natural/synthetic gas)

o Compressed gas via CNG mobile storage and transportationtechnology

o Regulated activities include the construction/operation/conversion ofgas facilities as well as the trading in gas

• Excludes gas production, reticulation and LiquefiedPetroleum Gas (LPG) priceso Gas Exploration and Production falls under the Petroleum Agency of

South Africa (PASA)

o However, gas production and importation registered by NERSA interms of the Gas Act

o Reticulation is a responsibility of Local Government. NERSA onlymonitors gas prices charged to reticulators by Sasol Gas Ltd

137

SCOPE OF REGULATION – GAS ACT (1)

o LPG:

• storage infrastructure is licensed by NERSA in terms of PetroleumPipelines Act

• Pipelines operating at low pressures below 2 bars regulated bymunicipalities

• prices are regulated by DoE

• Note fragmentation in the regulatory landscape

• Fragmentation on LPG regulation creates confusion toindustry stakeholders

138

SCOPE OF REGULATION – GAS ACT (2)

• Regulatory mandate in a nutshell

o Objectives of the Gas Act include:

• Promote orderly development of the gas industry

• Development of a competitive gas market; Facilitate investment;Promote competition

• Promote access to gas in an affordable and safe manner; promoteHDSA companies; promote employment equity in the industry

o Functions include:

• Licensing gas infrastructure

• Pricing and tariffs

• Compliance monitoring and enforcement

• Investigations and dispute resolution139

REGULATORY MANDATE IN TERMS OF GAS

ACT

• Mandate on prices and tariffs

o S4(h) ‘monitor and approve and if necessary regulate tariffs fortransmission and storage’

• Tariff Guidelines approved in 2009

o S21(1)(p) ‘approve maximum prices for all classes of customers’where there is inadequate competition in terms of the CompetitionAct

• Regulation 3(a), The Regulator must, when approving themaximum prices, be objective i.e. based on a systematicmethodology applicable on a consistent and comparable basis

• Maximum prices methodology approved in 2011

o This is a weak mandate which is still subject to a finding ofinadequate competition

140

REGULATORY APPROACH ON GAS PRICES

AND TARIFFS (1)

• The Gas Act makes a distinction between tariff and price

• Price = charge for gas molecule, “Gas Energy price”

• Tariff = charge for (network) service

141

REGULATORY APPROACH ON GAS PRICES

AND TARIFFS (2)

The Methodology provides for two approaches:

(1) Use of Energy Price Indicators to determine the gas energy (GE)price

o This is the price of the gas energy at the point of its first entry intothe transmission / distribution system

o Energy price indicators used are coal, Diesel, Electricity, Heavy FuelOil and LPG.

(2) Pass- through (or cost-build up) to cater for -

o new entrants. e.g., importers of LNG, developers of domestic gassources, etc

o transition for incumbents and traders along the value chain after gas’first entry into the transmission, distribution system

o Where licensees deems the price to be materially lower than itspreferred gas price 142

METHODOLOGY FOR APPROVING MAXIMUM

PRICES OF GAS (GAS MOLECULE ONLY)

Maximum price for Gas Energy

Transmission

Price (R)

Tariff (R)

Distribution Tariff (U)

Trading margin Margin (R)

Total price for piped-gasThis methodology

refers to

143

• The menu of six methodologies provided for in theGuidelines are:

o Rate of return regulation;

o Incentive regulation:

• Price Caps

• Revenue Caps

o Hybrids of the abovementioned approaches;

o Profit sharing or sliding scales; and

o Tariffs based on a discounted cash flow model of allowable revenue.

144

GUIDELINES FOR MONITORING AND

APPROVING PIPED-GAS TRANSMISSION

AND STORAGE TARIFFS (1)

• Rate of return and discounted cash flow methodologiesused for approving tariffs since 2009

o These encourage entry and investments because it allows investorsto recover all costs and return on investments is guaranteed

• Other methodologies are effective in more matured marketsas they centre around encouraging efficiency andtechnological advancements

145

GUIDELINES FOR MONITORING AND

APPROVING PIPED-GAS TRANSMISSION

AND STORAGE TARIFFS (2)

146

II. REGULATORY DECISIONS

AND DECISION MAKING

PROCESS

• Make regulatory decisions on licensing, pricing, tariffs,

compliance and dispute resolutions

• Decision making process similar across the three regulated

industries

• High impact decisions on piped-gas to date:

o On 28 October 2011, NERSA approved the Methodology to Approve

Maximum Prices of Piped-Gas in South Africa

o On 26 March 2013, NERSA approved a maximum price application by

Sasol Gas Limited

147

148

Phase 1 Focused on the methodology (pricing formula)

1. Consultation Document on methodology to approve maximum prices for piped gas - focused on the methodology

• Published on 20 Oct 2010 • Closing date for submitting comments was 15 Dec 2010

2. Stakeholder workshops (Gauteng and KZN) • Workshop public notices issued on 14 & 17 Oct 2010• Gauteng workshop conducted on 26 Oct; and KZN on 02

Nov 2010

3. Public hearing on Consultation Document • Public hearing notice issued on 19 Nov 2010• Public hearing held at NERSA’s offices on 01 Dec 2010

4. Approval of Phase 1: Methodology to approve maximum price for gas

• Approved by Piped Gas Subcommittee on 08 June 2011

DECISION MAKING PROCESS ON

METHODOLOGY TO APPROVE MAXIMUM

PRICES FOR GAS (1)

149

Phase 2 Focused on weights for alternatives, price adjustment formula and trading margins

5. Draft Consultation Document: Phase Two of Methodology to approve max prices

• Published on 10 June 2011• Closing date for submitting comments - 31 July 2011

6. Stakeholder workshop on phase two consultation document (Gauteng & KZN)

• Gauteng workshop conducted on 15 Sep; KZN on 16 Sep 2011

7. NERSA Approved methodology to approve Maximum Prices for Piped Gas in SA on 28 October 2011

• Workshops on the implementation of the approved methodology held in Gauteng (8 Nov) and KZN (10 Nov); RFD later approved on 24 Nov 2011.

DECISION MAKING PROCESS ON

METHODOLOGY TO APPROVE MAXIMUM

PRICES FOR GAS (2)

150

Process and timelines

Industry Competition Assessment • Draft determination of inadequate competition published on 10 Oct 2011• Public hearing set for 25 Oct 2011 cancelled due to lack of public participation• Closing date for submitting comments on the consultation document:

Determination of inadequate competition – 11 Nov 2014• NERSA approved the determination off inadequate competition in the gas

industry on 08 Feb 2012

DETERMINATION OF INADEQUATE

COMPETITION IN THE SECTOR DONE

CONCURRENTLY WITH THE METHODOLOGY

TO APPROVE MAXIMUM PRICES

Views and considerations:

• Prices will be too low – Sasol, traders and potential suppliers

• Prices will be too high – current customers

• Prices will not reflect market prices – Sasol, customers andsome (potential) suppliers

• Traders will be disadvantaged – Cannot compete with Sasol onprice

• Choice of alternatives (Coal, electricity, diesel, Heavy Fuel Oiland LPG) – broad agreement with stakeholders

151

KEY OUTCOMES FROM THE PUBLIC

PARTICIPATION PROCESS ON THE

METHODOLOGY (1)

• Weights of the energy price indicators in the basket – criticism:o Traders and Sasol prefer higher weighting of higher priced indicators i.e.

LPG and HFO

o Consumers prefer higher weighting lower priced indicators i.e. coal

• Data sources – DoE not preferred for weights data or HeavyFuel Oil price

152

KEY OUTCOMES FROM THE PUBLIC

PARTICIPATION PROCESS ON THE

METHODOLOGY (2)

It is important to note that:

• A regulated price can only mimic competitive outcomes, realpressure on prices will only come from gas-on-gascompetition

• the Gas Act provides for a complex pricing and tariffs regime:o NERSA ‘approve’ maximum prices for gas

o NERSA ‘monitor and approve’ transmission and storage tariffs

o Regulations: must allow an efficient operator to recover its prudentlyincurred costs and make a profit commensurate with risk

o NERSA must use an approach that is objective, systematic, fair, non-discriminatory, transparent, predictable and efficient

153

CONCLUSIONS ABOUT METHODOLOGY (1)

• Possible effects of the decision on the gas sectoro Limiting the possibility of undue price discrimination behaviour

o Price reduction for many customers

o Gives NERSA powers to regulate gas prices upfront

o Gives price certainty to investors

o Facilitate investment and entry into the gas market

154

CONCLUSIONS ABOUT METHODOLOGY (2)

• The Energy Regulator approved maximum prices for:o Sasol Gas – R117.69/GJ – on 26 March 2013

o Virtual Gas Network – R278/GJ - on 29 July 2013

o Novo Energy – R249/GJ - on 9 December 2013

o Spring Lights Gas – R123/GJ – on 27 February 2014

o Reatile Gastrade – Maximum price application being amended byapplicant to comply with the Gas Act and Regulations

• For Sasol Gas, the Energy Regulator also approvedtransmission tariffs

155

MAXIMUM PRICES APPROVED TO DATE

156

Process and Timeframes

1. Application date • Sasol Gas submitted its maximum price application on 23 Dec 2012

2. Consultation on application and public participation

• Application advertised on 04 February 2013• Closing date for submitting of comments on the application was 04 Mar

2013 (later extended to 18 March 2013 upon request from various parties)

• Preliminary assessment published by NERSA on 08 Mar 2013• First public hearing on the application held by NERSA on 19 Feb 2013• Stakeholder workshop on the application held at NERSA’s offices on 11

March 2013• Second public hearing on the application held on 20 March 2013

3. Approval of Application • Application served at the Piped Gas Subcommittee meeting (open to the public) of 25 March 2013

• NERSA approved the Sasol Gas Maximum price application on 26 March 2013; Reasons for approving the application were published on the NERSA website on 23 April 2013.

DECISION MAKING PROCESS ON THE

APPROVAL OF SASOL GAS MAXIMUM

PRICE APPLICATION

• 66% of Sasol customers benefited from price reductions (342

of 522 off-take points on the network)

• Of the 20 customers that consume 80% of external volumes,

25% will see price decreases

157

IMPACT OF SASOL MAXIMUM PRICE DECISION

158

HOW DOES GAS ENERGY

PROCESS COMPARE WITH

INTERNATIONAL PRICES?

Source: Eurostat

* Exchange rates: 2011: R10.06/EUR; 2012: R10.50/EUR; 2013: R12.79/EUR (Average exchange rates per year. Source:

Oanda.com)

137

0

50

100

150

200

250

300

2011 2012 2013

South Africa class 3 price in Gauteng as at March 2013 (4,001GJ –

40,000GJ per annum, including Sasol tariffs) compared to EU industrial

tariffs (10,000GJ – 100,000GJ per annum) (ZAR / GJ)*

159

Current average price for gas is R79/GJ

160

0

20

40

60

80

100

120

140

160

< 400 GJ p.a 401 - 4,000 GJp.a.

4,001 - 40,000GJ p.a.

40,001 - 400,000GJ p.a.

400,001 -4,000,000 GJ

p.a.

> 4,000,000 GJp.a.

Class 1 Class 2 Class 3 Class 4 Class 5 Class 6

Secunda / Middelburg / Witbank

KZN

Gauteng

TOTAL MAXIMUM GAS CHARGE EXCLUDING

DISTRIBUTION TARIFF (R/GJ)

161

0

20

40

60

80

100

120

140

160

< 400 GJ p.a 401 - 4,000 GJp.a.

4,001 - 40,000GJ p.a.

40,001 -400,000 GJ p.a.

400,001 -4,000,000 GJ

p.a.

> 4,000,000 GJp.a.

Class 1 Class 2 Class 3 Class 4 Class 5 Class 6

Secunda / Middelburg / Witbank

Gauteng

KZN

TOTAL MAXIMUM GAS CHARGE INCLUDING

DISTRIBUTION TARIFF (R/GJ)

Source: waterborne Energy, Inc. Data in $US/MMbtu

South AfricaGE = $12

Price of gas in its

gaseous form

compared to LNG

• According to stakeholders looking at LNG as a supply option:

o LNG landed price plus regas costs in SA is expected to be$16/Mmbtu

o This price compares well with landed prices of LNG in other regions

LNG prices before the regas cost

162

• New pricing regime is expected to bring price transparencyand reduce number of pricing complaints from customers

163

Status from previous price regime

(Market Value Pricing)

Status from current price regime

(Max price)

• 7 pricing complaints investigated

under MVP

• Complaints related to

o Excessive pricing

o Price discrimination

• NERSA initiated 16 investigations

under MVP

• NERSA intervention led to price

reduction for those affected

customers

• 350 customers signed new gas

supply contracts with Sasol Gas

under new price regime

• 2 complaints received relating to

o Price discrimination

o Incorrect implementation of

the approved maximum

price

• Investigations still in progress

• NERSA is currently not in a position to forecast gas pricesgoing forwardo Gas prices were regulated ito of the Sasol Agreement for the past 10

years

o Implementation of maximum prices for gas only started in 2014

o Impact assessment of the pricing could only be conducted over aperiod of time

• However, gas prices are likely to be affected by the otherEnergy Indicators (Coal, LPG, diesel, Electricity and HeavyFuel Oil)

• Competition in the market will drive gas prices in the long-term

164

FUTURE OF GAS PRICES IN SOUTH AFRICA

165

III. CHALLENGES AND GOALS

• Limited regulatory mandateo Light-handed regulatory approach (approval vs. setting of tariffs and prices

o Weak enforcement mandate (can only issue notices)

o Distribution tariffs not regulated- gap that could have unintended consequences

o No mandatory third party access in gas distribution pipelines

o Solution: Gas Act currently being amended by DoE

• Policy issueso Bottom-up approach on Integrated Energy Planning – GUMP not finalised, but

draft IEP already shows no significant role for gas in the energy mix

o Lack of coordination by various government departments lead to misalignment of

legislation regulating gas

o Solution: Continuous engagement between government, parliament and the

industry on policy issues affecting gas industry

166

POLICY / REGULATORY CHALLENGES (1)

• Lack of focused gas strategy for growing the gasmarket

o Existing plans by various potential investors but not coordinated,waiting for policy signals

o Policy certainty required to stimulate gas demand in core economicsectors (electricity and transport sectors)

o Solution:

• Focused strategy required to address security of supply andencourage investment to grow the market; and

• Gas Utility Master Plan (GUMP) could facilitate investment orunlock investment hurdles in the sector if it contains a solidimplementation plan

167


• Challenges and disputes affecting gas storage anddistribution in SA

o No conventional gas storage facilities in SA

o Mobile storage units licensed for CNG transportation and storage(Capacity too small to warrant regulated third party access, 15 000GJ)

o Licensing scheme for distribution foreclose market (exclusive licencesfor areas limits number of suppliers in areas, no competition)

o No mandatory third party access in distribution and tariff not regulated

o Solution:

• Distributors granted limited period to develop licensed areas;undeveloped areas are excised from licence to open up areas fornew entrants

• Enforce compliance with regulation 3 which gives ‘eligiblecustomers’ a right to buy gas directly from suppliers (however, gassupply currently limited)

168


These challenges have most likely hampered further marketdevelopment

• Limited domestic gas reserves which result in:o Limited access to gas supply

o Least development of gas infrastructure (gas infrastructure availablein only four provinces, mostly concentrated in Gauteng)

o Proposed solution:

• Diversify gas supply by enhancing mid-term supply through

• additional pipeline imports from Mozambique and otherneighboring producing countries

• CNG and/or LNG imports from regional and international markets

• This would require additional infrastructure to be developed

• Fast-track development of appropriate regulatory framework toenable shale gas as a long-term supply solution

169

INDUSTRY CHALLENGES (1)

• Attempts to enhance gas supply through industryinitiatives

o More gas exploration activities on/offshore South Africa

• Sunbird Energy for the Ibhubesi gas field (approx. 0.2 Tcf ofproven reserves)

• Companies exploring in the Eastcoast include ExxonMobil, ImpactAfrica and Sasol Petroleum International, Silver Wave Energy

• Companies exploring in the Westcoast include Anardako, PetroSA,Canadian Natural Resources, Total, New Age, Silver Wave Energy

• Onshore production of gas in Virginia (Free State) by Molopoimminent (11.5 Bcf of 1P reserves, 28.7 Bcf of 2P reserves)

• Onshore exploration of coal bed methane resources inMpumalanga and KwaZulu-Natal

170


o Plans for shale gas exploration by various companies but awaitingappropriate policy signals (including Bundu Gas, Shell, Falcon Oil andGas Ltd)

o Feasibility studies conducted by various companies including Shell,Sasol and PetroSA for LNG imports

• Attempts likely to be futile without anchor customer(s) forthe projects (another challenge)

• Lack of anchor customer(s) to justify the:

o development of domestic gas fields (e.g., Ibhubesi gas, coal bedmethane)

o development of major gas infrastructure to support domestic gasproduction or for imports

• Hurdles to gas infrastructure development

o Potential creditworthy off-taker(s) have been unwilling to commit

o Difficulties in securing finance for large gas projects 171


o Proposed solution

• Strategic partnerships required to develop necessary gasinfrastructure

• Eskom/Independent Power Producers (IPPs) through the IntegratedResource Plan (IRP) to anchor the development as a key customer

• Government to facilitate and coordinate this development

• Relevant government departments and agencies to be coordinated towork in synergy

• Attempts in the IRP2010 to introduce gas in the electricity generationmix (3 152 MW by 2025) - No implementation as yet

172


• Difficulty in securing finance for gas projects

o Significant upfront capital required for infrastructure development

o Finance could come from the fiscus, public enterprises, developmentfinance institutions, equity investment

o Government has limited resources for competing priorities

o No framework of incentives/subsidies to encourage investment in gasinfrastructure projects

o Proposed solutions

• Strategic partnership between private entities and government

• Entities (e.g. PetroSA, Eskom, etc) needed as an anchorcustomer to make the project more bankable

• Incentives such as accelerated depreciation allowance on energyprojects that make use of gas as an energy source to generateelectricity (as it was done for wind and renewable energy projects)

173


Linked to NERSA strategic objectives:

• To facilitate security of gas supply

o Continuous monitoring of development and promotion of new gassources

o Continuous monitoring of pipeline integrity

o Continuous monitoring of Sasol’s obligation to supply a min. 120MGJ/a

• To promote competition and efficient functioning of thegas sector

o Enforcement of third party access (TPA) guidelines

o Development of mechanisms for facilitating TPA in existing facilities

o Publication of uncommitted capacity in gas transmission pipelines

o Conduct regular competition assessments and market enquiries in thegas industry 174

SHORT, MEDIUM AND LONG-TERM GOALS

(1)

Linked to NERSA strategic objectives:

• To facilitate investment in infrastructure and entry

o Licensing of new gas infrastructure; and trading activities

o Approval and monitoring of maximum prices and transportation tariffs

• Reflective of costs, risks and economic value of the product

o Enforcement of third party access to existing infrastructure

• To facilitate affordability and accessibility of gas

o Monitoring implementation of approved max prices and tariffs

o Continuous monitoring of Sasol’s obligation to supply a minimum of120MGJ/a

175

SHORT, MEDIUM AND LONG-TERM GOALS

(2)

176

IV. KEY MESSAGES

• Challenges facing the SA gas sector continues to hamperdevelopment

• Growing the gas market would require more gas and gasinfrastructure investment

• Gas to power is seen as a key enabler for further gas marketdevelopmento Implementation of the gas to power component in the IRP should be

fast-tracked to allow investment required to satisfy immediatedemand for gas

• Interdependence between electricity and gas must beexploitedo Eskom could benefit from converting its Open Cycle Gas Turbine

plants to Closed Cycle Gas Turbine plants (cost savings)

o Gas also has a role to play in the renewable energy programme dueto the intermittency of renewable sources 177

KEY MESSAGES (1)

• Gas supply is no longer an issueo Mozambique, Tanzania additional gas finds could benefit SA

o LNG imports from global market is also a supply solution but decisiveactions required

• Gas strategy aligned with GUMP needed to give policycertainty to grow the gas marketo Gas Utilization Master Plan must be fast-tracked and its legal status

must be clear

o Alignment of Integrated Energy Plan (IEP), IRP and GUMP is criticalto avoid conflicting messages from government

o IEP should realize the potential for gas in order for SA to benefit fromthis new era of natural gas

178

KEY MESSAGES (2)

• Alignment of legislation regulating gas or affecting gasindustry is also critical

• Current regulatory framework and the proposedamendments in the Gas Bill are appropriate for encouragingfurther industry development, but finalisation of the Bill mustbe fast-tracked

179

KEY MESSAGES (3)

180

J. PLANNING AND CORPORATE

DEVELOPMENT

• As highlighted in the approved Annual Performance Plan,Programme 6 of NERSA is: Establishing NERSA as anefficient and effective regulator (link to Strategic Objective6: Establish and position NERSA as a credible and reliableregulator)

o Purpose: to ensure that systems, processes, procedures andresources are in place that will put NERSA in the position toappropriately advise policy makers on any matter relating to theeffective and efficient regulation of the electricity, piped-gas andpetroleum pipelines industries, thereby contributing towards thebroader government objectives aimed at the economicdevelopment of the country

181

PLANNING AND CORPORATE

DEVELOPMENT

182

I. LEVELS OF ORGANISATIONAL MATURITY

Ad-hoc, not

repeatable;

success often

dependent on

individuals

Documented;

loose process

discipline that

may break under

stress

Standard

business process;

executional

consistency

across

organization

Metric-driven,

transparent

performance

standards, widely

understood

"What great looks

like": highly

evolved,

continuous

improvement in

place, ...

Level :

Initial

1

Level

Repeatable

2

Level :

Defined

3

Level

Managed

4

Level :

Optimised5

II. MATURITY OBJECTIVES

Level :

Initial

1

Level

Repeatable

2

Level :

Defined

3

Level

Managed

4

Level

Optimised

5

Past

Short term

Medium term

Long term

NERSA established with

external support and

benchmarking

NERSA standardises processes

and enhances consistency and

professionalism

NERSA reviews operating

model, enhancing efficiency

and performance orientation

Continuous improvement

with revised operating

model

183...ultimate goal to achieve NERSA's Vision; "To be a

recognised, world-class leader in energy regulation"

Today

2016 Target

2020 Target

Beyond

2020 Target

184

III. SHORT, MEDIUM AND LONG TERM GOALSProgress To Date Medium Term Goals

Short Term Goals

Long Term Goals

Inception

(2005)Benchmarking

(2008)

Review and

improve processes

and systems

Regulatory

Reporting

Manuals

Regulatory

Reporting

System

Harmonisation

of tariff

methodologies

Business

Process

Review

Comprehensive

Systems

Review Regulatory

Impact

AssessmentISO

Certification

Organisational

Review

Grow

PresenceContinuously

Improve

Advocacy for

regulatory regime

with consequences

195

K. CONCLUSION

CONCLUSION (1)

• NERSA would like to thank the Parliamentary Portfolio

Committee for the opportunity to present on the regulation of

the electricity, piped-gas and petroleum pipelines industries

as well as its short medium and long-term goals;

• NERSA continues to grow from strength to strength since its

inception in 2005.

• The results of its work continue to have a profound impact on

the lives of ordinary people as well as on the economy of the

country;

• The regulation of the three energy industries characteristically

continues to pose challenges in that the Energy Regulator is

required to balance the conflicting interests of licensees,

investors, consumers/end-users and the policy maker;196

CONCLUSION (2)

• To deal with regulatory challenges, NERSA has

undertaken various initiatives to refine regulatory

practices and methodologies in its quest to become a

recognised world-class leader in energy regulation and

will continue to do so.

197

198

THANK YOUvisit us at www.nersa.org.za

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