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1
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
2
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
3
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
4
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
5
A. INTRODUCTION
6
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
7
B. VISION, MISSION AND
VALUES
8
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”
9
VALUES
• Passion
• Spirit of Partnership
• Excellence
• Innovation
• Integrity
• Responsibility
• Professionalism
• Pride
10
C. MANDATE
11
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)
12
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
13
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
14
D. NATIONAL ENERGY
REGULATOR ACT, 2004 (ACT NO.
40 OF 2004)
15
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.
16
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
17
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)
18
19
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
20
Energy Regulator
FTRM primarily responsible for
Electricity Regulation
FTRM primarily responsible for
Petroleum Pipelines
Regulation
CEO
FTRM primarily responsible for
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
21
F. REGULATORY INDEPENDENCE
AND PROCESS
22
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
23
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
24
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
25
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.
26
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:
27
III. PUBLIC PARTICIPATION IN THE
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;
28
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.
III. PUBLIC PARTICIPATION IN THE
REGULATORY PROCESS (3)
29
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.
III. PUBLIC PARTICIPATION IN THE
REGULATORY PROCESS (4)
30
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
III. PUBLIC PARTICIPATION IN THE
REGULATORY PROCESS (5)
31
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
III. PUBLIC PARTICIPATION IN THE
REGULATORY PROCESS (6)
32
33
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
34
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.
35
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.
36
FUNCTIONS PRESCRIBED IN THE ERA
37
I. ELECTRICITY INDUSTRY
STRUCTURE AND CURRENT
STATUS
38
• 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
39
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
40
41
ESKOM GENERATION ENERGY AVAILABILITY
FACTOR
42
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
43
CUMULATIVE RENEWABLE ENERGY
CAPACITY UNDER REIPP PROGRAMME AS
AT 25 OCTOBER 2014
44
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
45
HISTORY OF THE ESKOM PRICE
46
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
48
49
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 Referred to as MYPD2
o Note: There was an interim price review during 2009
• Recently a third generation MYPD was approved with an
extended period of 5 years
o Referred to as MYPD350
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
ESKOM PRICE SETTING PROCESS (2)
• 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
52
ESKOM PRICE SETTING PROCESS (3)
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
53
MYPD COMPONENTS
54
REGULATION OF ELECTRICITY TARIFFS /
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
ESKOM PRICE SETTING PROCESS (4)
• From the above a suite of tariffs is then approved by the
Energy Regulator
56
ESKOM PRICE SETTING PROCESS (5)
57
REGULATION OF ELECTRICITY TARIFFS /
PRICES
Electricity Retail Tariffs (ERTSA) Determination including Municipal Wholesale
Municipal Retail Tariffs
RCA Balance
Eskom revenue Determination
• 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
59
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
62
REGULATION OF ELECTRICITY TARIFFS /
PRICES
Electricity Retail Tariffs (ERTSA) Determination including Municipal Wholesale
Municipal Retail Tariffs
RCA Balance
Eskom revenue Determination
• 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;
63
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
OVERVIEW: GUIDELINE INCREASE (2)
• 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.
65
OVERVIEW: GUIDELINE INCREASE (3)
• 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.
70
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
73
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)
76
INCLINING BLOCK TARIFF
77
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
• 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
POLICY / REGULATORY CHALLENGES (2)
• 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
POLICY / REGULATORY CHALLENGES (3)
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
INDUSTRY CHALLENGES (2)
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
INDUSTRY CHALLENGES (3)
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
INDUSTRY CHALLENGES (4)
• 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
INDUSTRY CHALLENGES (5)
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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