Liquid Petroleum Gas Regulation: briefing by Department of Energy

Energy

15 February 2010
Chairperson: Ms E Thabethe
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Meeting Summary

The Department of Energy told the Committee that gas was a viable alternative to many forms of energy. The task of the Department was to ensure that the product was readily accessible and affordable to all South Africans. However many challenges were identified ranging from cylinder management, high prices (retailers at times made a mark-up profit of over 176%), market collusion of industry prices and perceptions that gas was a risky form of energy. The Committee was told about the regulations which were before State law advisors to seek legal opinion on how best the Department could regulate the industry in order to ensure that the industry expanded. At present, the industry was not well regulated and retailers were not licensed or regulated. The government needed to do more, in partnership with stakeholders to ensure that a pro-poor policy was devised which could see the poorest of the poor also accessing LPM. High gas-appliance prices were identified as another impediment to encouraging people to use LPM. The Department said that once the market for LPM grew, it would be easy to convince manufacturers to lower their prices. A policy to provide poor households with free 15kg LPM was on the cards.

Meeting report

 

Mr Muzi Mkhize, Chief Director, Hydrocarbons: Department of Energy, said the White Paper on Energy of 1998 spoke to the need to provide cleaner, modern form of energy that would enhance a better life for all South Africans. The role of gas as an alternative means of quality energy had since been gaining momentum in South Africa. The Department’s briefing on Liquid Petroleum Gas (LPG) pilot project focused on challenges, regulation measures and goals to be attained by a successful implementation of the project. One of the key challenges identified for low LPG usage in South Africa was costs. In comparison to petrol, LPG was way too expensive.Retailers at times made a mark-up profit of over 176%. Another challenge identified was a shortage of cylinders to hold the gas. As prices were too high, people chose to use their reserves very sparingly and this created a great demand for cylinders. A suggestion was made to move towards measures of reducing high prices and to consider subsidising low income households (LIH) in order to make LPG more accessible and affordable.

In conducting the pilot project, approximately 90% of the households were sampled and provided with LPG resources for free. The findings revealed that there was a need for an improved distribution model to bring gas plants closer to the people. A large portion of the sample population said the costs of gas appliances were too expensive to invest in. Poor marketing of the project was also identified as an obstacle, with many households believing that a gas cylinder in the house was like keeping a ticking time bomb.

In order to determine an appropriate pricing model to curb exorbitant prices, the Department had since decided to draw up a document containing some regulatory measures that would ensure that among other things: the pricing structure of the industry was regulated, all market players obtained licences before being allowed to trade and the number of middlemen were reduced. The draft regulations were published in the Government Gazette for public comment. Key stakeholders such as Afrox, Total gas, Sapia, PRAF, LPGSASA also made submissions. The LPG regulations and working rules were then sent to State law advisers to solicit legal opinion. The need for price regulation and establishment of working rules was prompted by huge discrepancies in pricing models, tampering of cylinders, possible market collusion, the need to create greater demand, the need to grow the industry, and the need to promote cleaner, safer and affordable household energy carriers. 

Moving forward, the Department said it was working forward to perfecting a model for the control of distribution channels by existing LPG refineries, intensifying educational measures to end the perception of “bomb scare’’, devising a model to include LPG in the free alternative energy policy of government, better management of cylinders, greater cooperation with stakeholders and incorporating comments from State law advisors.

Discussion
Mr J Selau (ANC) asked for clarity about the outcomes of the engagements between the department and stakeholders. Which stakeholders did they engage and what input was given?



Mr Radebe asked how many job opportunities were created during the pilot project phase, how many would be created once the project was rolled out and what was the sustainability of those jobs?

Mr Mkhize replied that a thorough and comprehensive study of how many jobs would be created once the LPG project was implemented had not been done yet. What he could tell the Committee was that based on the particular pilot project findings, jobs likely to be created included per site was one site manager, two drivers, security guards and cashiers. A thorough study in this area would soon be conducted and the Committee would be briefed at a later stage specifically on job opportunities

Mr D Ross (DA) said the Department should commission a study specifically on the job opportunities and present to the Committee how many jobs would be created, even if that were given as estimates so that the Committee, in doing its oversight, could hold the Department to account when those targets were not met.

Mr S Radebe (ANC) asked how big were the sources of LPG, what the possibility of expanding the sources was and what monitoring strategy had been put in place. He also asked how the Department was responding through its educational campaigns to get rid of ‘bomb scare’ fears associated with using gas. While conceding that there were hazards associated with using any form of energy, he asked what safety precautions were there to ensure that those hazards were kept at minimum?

Ms N Mathibela (ANC) said the issue of ‘bomb scare’ needed to be addressed properly because even people like herself believed in the myth that gas appliances were a ticking time bomb.

Ms Neliswe Magubane
Director General for the Energy Department, said Mr Radebe was correct in pointing out that there is no hazard-free form of fuel. The educational campaigns planned by the Department would seek to address those fears and emphasise that LPG, if used properly and in accordance with safety measures, was one of the safest and most environmentally-friendly forms of fuel.

The Chairperson asked whom they had consulted as stakeholders. Were consultations centred on those stakeholders who were already in the industry? Or were wings spread to include those that had not yet entered the industry? She referred to the State law advisers who were busy reviewing the LPG regulations, saying the process was likely to remain unresolved since the State law advisers were known to be generally slow. There was a need to apply pressure on them so that they can quickly provide the required legal advice.

Ms Magubane replied that 28 February 2010 had been given as the deadline for their opinion. This was based on the communication which the Department had received from the State law advisers. The plan was to roll-out the project to other areas before winter.

Mr Greyling (ID) welcomed the presentation, saying he was one of those who had switched to using gas, which in his view was much better, efficient and user-friendly to the environment. He wondered whether there were enough gas resources in South Africa to sustain the initiative. Namibia and Mozambique had vast resources of LPG and South Africa could consider tapping into their resources if need arose. On the issue of accessibility of gas to poor households and the unavailability of gas cylinders, he suggested that perhaps in the long run, the Department should consider doing what was done in countries such as England where LPG was piped directly to households rather than being purchased through cylinders and canisters.

Ms L Moss (ANC) said her concern was that poor people were left in the cold when it came to accessing LPG. In most cases, the reasons were that prices were too exorbitant or that people stayed too far from terminals where LPG could be accessed with no means of transport to access it. How would poor people stand to benefit from LPG and how feasible was their plan to make it possible for them to be absorbed into the system?

Mr Mkhize said their study revealed that one of the greatest beneficiaries of a fully fledged LPG as envisaged by the Department would be women and children. Plans were in place to explore ways for suppliers to provide door to door services and how cell-phone alert system could be used to play a bigger role in facilitating communications between consumers and suppliers.

Mr Mkhize said indeed there were challenges that remained a stumbling block on the implementation of  LPG. There was a need to work hand-in-hand with other government agencies such as the Social Development Ministry in order to ensure that poor households were adequately subsidised to be able to afford the costs of LPG as well as the appliances.

Ms Magubane said her Department’s plans were to ensure that gas distribution points were moved close to the people to allow easy LPG access. She could not have agreed more with Mr Greyling that LPG was a better form of energy compared to other traditional forms of fuel for domestic usage. Citing President Zuma’s recent visit to Coppernhegen, she said the country had a responsibility to protect, promote and provide a safe and clean environment. There were discussions underway with Mozambique to find a way to allow South Africa to tap into their gas reserves.

The Chairperson said by the look of things the Department was happy with the outcome of the pilot project. She wondered however how the Department was planning to move beyond the pilot project to rolling out the plan to the rest of the country.

Mr Mkhize said it was important that the Committee was not misled by the outcomes of the pilot project. The pilot project was done on a small scale and had all the resources to sustain it, funded by the Department. The purpose of pilot projects was to learn and identify challenges and ways to improve the product or service before it was rolled out on a large scale. A report had been compiled and forwarded to Petro SA for their input as a key stakeholder in the implementation of the project. 

Ms N Mabhedla (ANC) said huge problems remained for those who live on state subsidies. There was an urgent need to put in place regulatory measures and to provide some form of relief for those who might not afford to purchase appliances. As soon as the industry was well regulated and demand for gas products increased, it would be easy to convince manufactures to lower their prices because they would benefit from bulk production.

Ms N Mathibela (ANC) asked whether the Department would discourage the use of commonly used forms of energy such as the township’s “basa-njengo-magogo’’ (coal usage).

Mr Mkhize replied that the Department would not just discourage the use of coal as a source of fuel without providing a viable, better and affordable alternative. It would not benefit anyone to tell people to stop using a particular form of energy and yet there is no viable alternative in place.

Ms Moss asked what the overall timeframe was for the Department to ensure that the LPG project was rolled out to the rest of the country. A long time had passed since work on this project had begun and it was time to start acting faster in delivering services to the people of South Africa.

Ms Magubane replied that she understood the frustrations, that perhaps this project should be at implementation phase already but there were processes and procedures beyond her Department’s control which needed to be completed. The Department of Energy would do its best to ensure that the project moved expeditiously and minimised delays. The opinion of the State law advisors was but one example of which her Department could not do much to ensure that it was provided speedily. 

Mr Greyling asked how municipalities could play a role in ensuring that LPG became a success. It was important to clearly identify, in order to reach out to poor households, what LPG was going to replace, be it paraffin, coal or electricity and how LPG would be a better alternative to those traditionally used methods. In order to do all that, an extensive educational campaign should be commissioned so that people understood exactly how they would benefit from using LPG. It needed more effort to convince people to stop using something they had been using for many years and change to something new.

Mr Mkhize said the spirit of co-operative governance placed an obligation on both national, provincial and municipal spheres of government to work together. There were discussions in place at inter-governmental level and with the Treasury to structure an attractive tax incentive model that would favour the usage of LPG and make it more attractive and affordable, even to poor people.

Mr Tseliso Maqubela, Deputy Director General, said it was critical to bear in mind that there would be unintended consequences in the restructuring and innovations associated with bringing gas closer to the people. For example, some of the initiatives they were considering would result in the phasing away of the role of the middleman, who could also be considered a job creator.

Mr S Radebe asked if there were any success stories in other parts of the world to draw inspiration from as far as LPG was concerned.

Mr Mkhize replied that one country that came to mind was Indonesia, which implemented an LPG programme and managed to move people from using paraffin to LPG within a space of three years. The government did so by distributing free 3kg cylinders to poor households and implemented laws to regulate the pricing of gas while at the same time keeping it under heavy state subsidy.

The Chairperson asked the Department to brief the Committee on the way forward and what the Committee should expect to see or hear from the Department regarding the project.

Mr Mkhize said the next important step his Department was looking forward to was engaging with the response from the State law advisers regarding the regulatory measures his Department had proposed. The legal opinion would be ready by 28 February 2010 and as soon as that response came through, the Department would communicate with the Committee to advise what the input of the State law advisers was.

The chairperson asked whether the Department had a monitoring enforcement team to ensure compliance with whatever regulatory measures were put in place. She also asked the Department to shed more light on the pilot project in Thembisile and Atteridgeville

Ms Magubane said the Department had inspectors in nine regional offices, three members in every province to cover all licencing matters. Retailing of LPG specifically was not well regulated and not an activity that needed one to have a licence in order to trade. There would soon be a process of regulation similar to that of regulating petrol. On the study in Atteridgeville and Thembisile, the Director General said they found that many people in Atteridgeville used electricity and were willing to switch to LPG had it not been for the high costs of appliances. In Thembisile, they had decided to provide the people in that area with basic appliances and they realised that once people had the appliances, they were very happy to use LPG for domestic usage. The challenge therefore was to embark on an intensive country-wide educational drive which would be supported by ensuring that the cost of the appliances was brought within an affordable range. 

Mr Greyling said a 176% profit mark-up from the sale of gas was a clear indication of massive market failure. There was an urgent need to regulate the market and one should thus not be surprised if the players colluded to fix prices at the expense of consumers. While they could not rule out market collusion, which would be in contravention of the Competition Act, one major challenge was that of vertical integration of the industry, creating a situation whereby the producer, retailer and distributor became one individual.

The Chairperson said if it were true that there could be market collusion, there was a need for the Competition Commission to carry out an investigation to see if the law was being violated. She thanked the Department good and detailed presentation, but said there was a need to have another follow-up meeting to clarify some of the issues that could be adequately addressed by the Department.

The meeting was adjourned. 




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