Liquefied Petroleum Gas (LPG) issues: Update by Department of Energy

Energy

22 August 2011
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy discussed the scenario after regulation of the maximum retail price of LPG supplied to residential customers, provided information on its pilot projects and transformation of the LPG industry and spoke about the way forward. The inaugural regulation of the maximum retail price of LPG supplied to residential customers started on 14 July 2010. Some stakeholders alleged that they were being squeezed out of business while others applauded the regulation and the concomitant price reduction. A Stock Taking Workshop had been identified and challenges had been identified which a Working Group were addressing. The playing field was not yet leveled for participation of BEEs due to administration fees charged by refineries and wholesaling commitments. The Department had to review the Magisterial District Zones (MDZ) pricing system. The revision of the LPG MDZ system was aimed at removing any inconsistencies in the determination of LPG transport costs through the various zones.

There was a review of the Maximum Refinery Gate Price (MRGP) and the Working Rules governing the retail price of LPG in the DoE’s 2011/12 Strategic Plan. It provided a firm basis to progressively look at the whole LPG value chain. The terms of reference formulated and research on international prices and pricing mechanisms were underway. The pilot plants were put in place to test the efficacy of the proposed approach. The aim was to switch users from electricity to LPG for thermal applications, and bottle filling plants had been constructed in various municipalities.

There was serious need for transformation in the LPG industry. The transformation was two-fold but interrelated: structural (the value chain) and participants (broad-based economic empowerment of Blacks / historically disadvantaged South Africans in the sector). T The parties to the Charter agreed that 25% ownership and control of all facets of the industry that the parties to the Liquid Fuels Charter (LFC) were seeking to bring about over a ten year period meant HDSAs owning in total, by the end of that period, not less than 25% of the aggregate value of the equity of the various entities that held the operating assets of the South African oil industry. The observation made regarding transformation in terms of the Liquid Fuels Charter was that “it had not happened”. The LPG industry players sometimes considered themselves to be outside of the scope of the Liquid Fuels Charter.

Members asked if the Gauteng pricing model focused on other inland areas such as Mpumalanga and Limpopo; who monitored the retail pricing; how the Department ensured that regulation was enforced; how it dealt with overpricing and those guilty thereof; what the Department would do if BEE stakeholders were not assisted to be full participants in the programmes. Members said the price of LPG was still a barrier for low income households and asked if the pricing model could be made more affordable for low income households. Members were committed the promotion of LPG as an alternative energy source. They noted there had been no mention of pilot projects when the Portfolio Committee met with PetroSA. The Department was asked if there was collusion in the industry or if it suspected any anti-competitive behaviour.

Meeting report

Liquefied Petroleum Gas (LPG) issues: Update by Department of Energy (DoE)
Mr Muzi Mkhize, DoE Chief Director: Hydrocarbons presented.

Retail price regulation
The inaugural regulation of the maximum retail price of LPG supplied to residential customers was started on 14 July 2010. Some stakeholders alleged that they were being squeezed out of business while others applauded the regulation and the concomitant price reduction. A Stock Taking workshop with relevant stakeholders was held on 23 November 2010. Concerns were raised and a working group was formed to address these. Stakeholders were requested to forward their inputs by 17 December 2010 but not all stakeholders submitted. A follow up meeting of working group representatives was held on 19 January 2011 and representatives were allocated to various working groups.

Stock Taking Workshop issues
These included:
▪ The LPG Maximum Refinery Gate Price (MRGP) was based on 93 octane movements within the Basic Fuels Price (BFP) mechanism whereas the import price of LPG was based on Saudi prices. This was included in the Department’s 2011/12 deliverables as a priority that had to be addressed.
▪ The non-regulation of the wholesale price meant that wholesalers could still charge higher prices which ate into the margins of retailers. Most retailers had franchise agreements with wholesalers and consequently did not have the option of sourcing LPG from other wholesalers with lower LPG prices. The caution here was limiting role-flexibility and “over-regulation”.
▪ The management and filling of LPG cylinders, cross-filling and hoarding of cylinders was still not adequately addressed. The major concern was who would take responsibility for safety issues when the filling of cylinders was done by various parties. 
▪ The playing field was not yet leveled for participation of BEEs due to administration fees charged by refineries and wholesaling commitments.
▪ Safety issues included the adequate incorporation and administration of the safety element in the LPG pricing structure. The LPG Association undertook to provide a thought-through proposal.
▪ The Department had to review the Magisterial District Zones (MDZ) pricing system. The revision of the LPG MDZ system was aimed at removing any inconsistencies in the determination of LPG transport costs through the various zones. This was included in the Department’s 2011/12 deliverables and stakeholders would be invited to make submissions.
▪ Zero rating for VAT on LPG was suggested by some stakeholders with adequate incorporation and administration of safety elements in the LPG pricing structure.
▪ On Domestic / Residential vs. Commercial Prices, some stakeholders were concerned that LPG sold to residential customers could actually be used for commercial activities. Earlier indications indicated that commercial customers got quantity discounts & therefore the matter should not have been an issue. Stakeholders needed to prove the contrary.
▪ The entity had to oversee the incorporation of a regular review mechanism of working rules, and set timeframes or trigger mechanisms for the revision of working rules. The Department had to see to the implementation of a framework for annual or periodic adjustments of particular price elements.

Maximum Refinery Gate Price (
MRGP)
There was a review of the MRGP and the Working Rules governing the retail price of LPG in the DoE’s 2011/12 Strategic Plan. It provided a firm basis to progressively look at the whole LPG value chain. The terms of reference formulated and research on international prices and pricing mechanisms were underway. Consultations with the LPG industry would commence once a discussion paper on the review of the MRGP and the Working Rules had been finalised. There was a review of the verification of allegations on losses in respect of importation (and local manufacturing) of LPG. All revised MRGP and Working Rules would be promulgated before end of 2011/12 fiscal year.

Pilot plants overview
These were put in place to test the efficacy of the proposed approach. Pilots were undertaken in Atteridgeville, Tshwane Metro, Gauteng [20,000 households], Tweefontein South and North, Thembisile Hani Municipality, Mpumalanga [10,000 households]. The aim was to switch users from electricity to LPG for thermal applications, and bottle filling plants had been constructed in various municipalities. The pilot projects helped the Department to gain policy insights, particularly related to energy security; economics (capex and opex, and LPG retail price for households / affordability); the holistic viewpoint – PESTEL (political, economic, social, technological, environmental and legal factors); and impediments and challenges. A service provider, SSER, was appointed in February 2007 to run the pilot and capture the lessons. For the closure of the pilot phase and further roll-out, PetroSA formally responded to the Department’s close-out option and undertook a due diligence. The due diligence was completed at the end of July 2011 and a formal report was expected before the end of September 2011. Engagements with involved municipalities were underway.

Transformation of the LPG industry and Liquid Fuels Charter
There was a serious need for transformation in the LPG industry. The transformation was two-fold but interrelated: (1) structurally – the value chain and (2) regarding participants – broad-based economic empowerment of Blacks / HDSAs (historically disadvantaged South Africans) in the sector.

The parties to the Charter agreed that 25% ownership and control of all facets of the industry that the parties to the Liquid Fuels Charter (LFC) were seeking to bring about over a ten year period meant HDSAs owning in total, by the end of that period, not less than 25% of the aggregate value of the equity of the various entities that held the operating assets of the South African oil industry. The parties to the Charter agreed that the measurement of the extent of the achievement of this target of 25% of the aggregate value of the equity would be based on the asset values per the audited accounts of these entities. The LFC was signed on 2 November 2000 at the Liquid Fuels and Petroleum Industry Empowerment Summit. It was a pioneer of all charters hence some shortcomings were understood in the context of it being the first charter. The LFC scope applied to the privately owned parts of the industry; exploration and production of petroleum; liquid fuels pipelines, single buoy moorings; depots and storage tanks; oil refining and synthetic fuel manufacturing plants, including lubricants; transport, including road haulage and coastal shipping; trading, including imports and exports; wholesale and retail assets / infrastructure.

The LFC strategic focus areas were on: Ownership: Financing, Sustainability, Access to Ownership of Joint Facilities; Control; Supportive Culture; Capacity Building/ Skills Development; Employment Equity; Preferential Procurement; Corporate Social Development; and Preferential Payment Terms. New empowerment with strong compliance monitoring and enforcement was required and imminent. The observation regarding transformation in terms of the LFC was that “it had not happened”. The LPG industry players sometimes considered themselves to be outside of the scope of the LFC. Scientific and independently audited reports on transformation in the LPG sector in similar fashion to the liquid fuels sector was required.
The LPG Industry was highly concentrated with a handful of industry players dominating the industry. Structural arrangements between refiners and marketers impeded the introduction of new entrants.

Way forward
There had to be improvement of data collection on the LPG industry transformation and monitor compliance. The entity had to follow-up on matters raised with the
Liquefied Petroleum Gas Safety Association of Southern Africa (LPGSASA), and review the empowerment dispensation in 2012. The Department still had to conclude the MRGP Review and finalise conclusions on the development of the strategy. The strategy still needed to be contextualised and pieces of puzzle had to be fitted together. The entity intended working closely with the LPG Industry stakeholders to address supply challenges including Transnet SOC Ltd (TNPA in particular for infrastructure) to implement the roll-out pilot concept.

Discussion
Ms B Blaai (ANC) asked if the Gauteng pricing model focused on other inland areas like Mpumalanga and Limpopo as well and wanted to know who monitored the pricing in terms of retail. She asked how the Department ensured that regulation was enforced and how it dealt with overpricing and those guilty thereof. She asked what the Department would do if BEE stakeholders were not assisted to be full participants in the programmes. The entity mentioned measures to be followed but did not indicate any timeframes.

A Member indicated the price of LPG was still a barrier especially for low income households. The Member asked if there were any means to change the pricing model so that it could be more affordable for low income households. People who used LPG could not see the content and therefore would not know whether the container was full or not. The member asked if the system could ensure that the level of the container could be determined.

Mr J Schmidt (DA) asked how the LPG would be in terms of supply and asked how the Pilot Project’s impact would be on households. He asked how the Department policed the maximum retail price and how the price was regulated.

Mr M Mkhize responded that the pricing model of LPG was twofold: there was a Coastal and a Gauteng pricing model. The Gauteng pricing influenced all inland pricing while the Coastal price determined the price on all coastal areas. The monitoring of prices had been an issue of concern and it was difficult for the Department to monitor all areas affectively. The entity had a Compliance, Monitoring and Enforcement unit to fulfill that task but lacked to staff to fulfill this task effectively. Companies also needed its own regulation mechanism to enforce compliance and monitoring. The notion of BEE needed to be assisted and the Department would appreciate any solutions in that regard. It was the aim of the Department to get all BEE players involved in the programmes and to assist with the challenges regarding BEE.

The Department did consult and engage various stakeholders but some had disagreements amongst themselves which posed serious challenges in moving forward. The entity had to engage the stakeholders individually to address the various challenges. An issue to be followed up was the finalisation of the MRGP before the end of 2011, but the consultation usually took time. The price of LPG was still a barrier but the Department was determined to see the prices being lowered, but the general increase in all energy carriers posed a challenge in the lowering of prices. At this stage entities were using weight to prove the quantity of gas but the Department noted it as a concern. Sometimes the entities made the mistake of not explaining the different types of gasses regarding the pilot projects, because there was natural gas and LPG. Gas exploration did not necessarily refer to LPG because Liquefied gas came from refineries and were the forerunner for gas in some instances. The Department was looking at further rollout of LPG plants, especially with PetroSA and noted that LPG had the ability to displace normal electricity. The Department requested to come back and present how the entire data system worked.

Mr J Schmidt (DA) understood that LPG had the ability to replace electricity but his concern was regarding implementation while he noted that consultation needed to be done. He did not see the actual reduction in price; it was a huge concern because people might have thought it to be cheaper. He expressed his disappointment regarding the practice.

Ms N Mathibela (ANC) asked what plans the Department had in place in bringing LPG closer to the people.

The Chairperson viewed the promotion of LPG with seriousness as an alternatives energy source. There was no mention of pilot projects when the Portfolio Committee met with PetroSA. He asked if there were no collusion in the in the industry or if the Department suspected any anti-competitive behaviour regarding regulation

Mr W Mkhize clarified that some slides indicated the maximum retail price and there was a formula to work out the retail price as indicated on some slides. The entity thought of bringing LPG closer to people in terms of pilot plants filling plants. It could also utilise the current pilot plants to fulfill that function. The Department could not confirm if there any form of collusion in the industry. The Competition Commission had done some investigation in the industry because of the various concerns. Transformation was important for the industry because it was not healthy when a handful of players were running the show.

The DG added that the impact on regulation also needed to look at the sustainability of the industry. There was room for anti-competitive behaviour in the industry and therefore the Department asked the Competition Commission to assist in that regard.

The Chairperson indicated that the Portfolio Committee would like to look at the environmental aspect and benefits of LPG. One of the reasons why the Committee invited the Department was to stay abreast with the various energy sources and its latest developments. However, the Committee would also be looking at other energy sources like biofuel and nuclear. He asked why the Department could not look at LPG from public hearings as a way forward because the current focus and perspectives were mainly from the Department. He understood that there were various myths surrounding the use of LPG and highlighted that it was important for those myths to be understood. He raised his concerns on the slow pace of transformation in the sector and he agreed that the Department should move from pilot projects to full programmes.

Meeting was adjourned.

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