National Energy Regulator of South Africa Strategic and Performance Plans 2012

Meeting report

National Energy Regulator of South Africa (NERSA) Strategic Plan and Annual Performance Plan 2012
Ms Phindile Nzimande, Chief Executive Officer, National Energy Regulator of South Africa, outlined the Strategic Plan and the Annual Performance of the Regulator (NERSA), noting that the mandate of NERSA was drawn from four pieces of legislation (see attached presentation for details). Not only must NERSA implement the current mandate effectively, it must also ensure that appropriate regulatory action would be taken in anticipation of the changed circumstances in the energy industry. NERSA also had a responsibility to ensure that the interests of both licensed entities and end users were balanced. The framework followed was in line with National Treasury (NT) requirements. NERSA’s funding was drawn from levies under three pieces of legislation.

The key achievements for 2011/12 were outlined. NERSA had approved 177 municipal tariffs, out of 184 lodged. It held public hearings on the licence applications by the 28 Department of Energy (DoE) Renewable Energy Independent Power Producer (IPP) preferred bidders, in different locations in the country. It facilitated the effective resolution of a dispute between Eskom and a municipality in Soweto.

In the Piped-Gas industry, Ms Nzimande noted that there was a distinction between pricing and tariffs. NERSA was tasked, by the Gas Act, with approving the methodology to approve maximum prices for the piped-gas industry. Stakeholder workshops were held before and after the approval of the methodology. Dialogue was conducted with key players in the piped-gas industry, to facilitate growth in this industry. One of the key discussions was whether there was adequate competition in the industry, and the players concluded that there was not.

In relation to the petroleum pipelines industry, an increase was approved of 31.58% in allowable revenue for Transnet, for the period 2012/13. A number of the larger oil companies were leaving the petroleum storage industry, leaving room for other players to enter. These new players had been approved to carry out this new function, but there were still not enough historically disadvantaged companies entering this industry.

Ms Nzimande outlined the strategic outcome-oriented goals (see slide 24 of attached document for full details), and explained the link between the NERSA goals and six out of government’s twelve national outcomes. NERSA’s strategic objectives included the establishment of the proper regulatory environment to facilitate investment in energy infrastructure, and ensuring an energy supply that was certain and secure for the current and future user needs. NERSA aimed to ensure fair competition within the energy industry, as well as regulatory certainty. It would ensure that energy was accessible to and affordable for all citizens. Finally, NERSA would be positioned as a credible and reliable energy regulator.

Six programmes had been established, and these were cross-cutting across all industries, who would be required to demonstrate their compliance. The Electricity Act enabled NERSA to set tariffs, but the Gas Act only enabled it to approve tariffs, while the Petroleum Act enabled NERSA to do both. When approving tariffs, the operator would apply to NERSA, with certain figures, and NERSA would then compare these to the standards set. Approval would be given if the proposed figures did not vary too much. Those six programmes were set out and described in slide 28 of the attached presentation. The strategic objectives, in relation to each of the electricity, piped gas and petroleum pipelines industries, were set out.

Ms Nzimande noted the prevalence of unlicensed operators, particularly in the petroleum pipelines industry, and stressed that NERSA was attempting to regulate and license them properly. NERSA also had to create a methodology for regulating other forms of gas that may yet to be discovered in this country, but existed in other parts of the world. These cross-cutting programmes were establishing NERSA as an effective and effective regulator. She noted that attempts were constantly made to ensure that NERSA benchmarked any regulatory decisions against international best practice; and determined the impact of regulatory decisions (see slide 34 for details).

The annual performance plans covering the period 2012 to 2015, broken up into the three industries, were presented in slide 36. In respect of the electricity industry, NERSA aimed to achieve timely processing of license applications, within statutory time frames. There was a need to had effective compliance audits, and to implement action plans. In the piped-gas industry, there had been a move to timely calculation of Sasol Gas prices, for the compliance report on pricing provisions. The emphasis on Sasol was due to the fact that it was a vertically integrated player, the first to bring gas from outside the country at that time, and in view of an agreement at that time, with a special dispensation. However, within this dispensation, there had been various instances where Sasol had not complied. She added that there were also various unlicensed actors who were importing gas into the country,  and that NERSA aimed to identify, investigate and ensure that they were registered. She noted that the legislation required key players in this regard to be registered, and not necessarily to be licensed.

NERSA had a cross-cutting objective, under programme 4, to ensure that complaints and investigations were processed timely.

In regard to setting of rules and guidelines, NERSA had to conduct stakeholder workshops. A historically disadvantaged individuals’ (HDI) scorecard was developed, approved and implemented. Many of the operators had implemented the regulatory reporting manuals (RRMs). She noted that there had been suspicions raised around unlicensed activity, but that some of the suspicions were unfounded, and based upon a misinterpretation of the activities being conducted. Pipelines were built over extended timeframes, and this posed some difficulty as to when tariffs should be reviewed (see presentation for further details).

Ms Nzimande noted that there were different processes and methodologies for harmonising regulatory processes in the various areas. There was, however, recognition of the need for harmony, particularly to limit the number of exceptions on the processes applied in the various industries.

Ms Nzimande then moved on to discuss the budget. She noted that the National Energy Regulator Act governed this area. The common-costs allocation ratio for electricity, piped-gas and petroleum pipelines industries was 58%:21%:21% respectively. Both the income and expenditure budgets were for R240.3 million, and there was a note that R28.3 million had been recovery from previous years from regulated industries, and had been approved by National Treasury.

She then moved on to note the various challenges that were faced by NERSA in the various industries. In the electricity industry, particular challenges related to the finalisation of the proposed revision of the Electricity Pricing Policy (see presentation for details). NERSA’s ability to effectively enforce compliance was constrained by a lack of policy around imposition of penalties in cases of non-compliance. She was pleased, however, to note that steps were being taken by the Department of Energy to address this issue. In the piped-gas industry, there were challenges in relation to regulation of certain piped–gas activities that were not specifically catered for by the Gas Act, largely in relation to Compressed Natural Gas (CNG). Tariffs were key to the funding of expansion of infrastructure in the State-Owned Companies, and this was a matter of concern for NERSA. She also noted that shortages of Liquid Petroleum Gas (LPG) were expected (see presentation for details).

Finally, Ms Nzimande outlined the plans for the future. NERSA would be monitoring the implementation of the second Multi-Year Price Determination (MYPD2) by Eskom, and would revise the rules of the MYPD2, if necessary, and would also start preparing for MYPD3. In the piped-gas industry, she highlighted the need for a review of the Gas Act, to address various problems, including licensing deadlines. Future plans for the petroleum pipelines industry were more fully detailed on slide 110 of the attached presentation.

Discussion
Mr K Moloto (ANC) noted that there was a risk identified of increased consumption of energy by China. NERSA’s response to this was an increase of the stock piles, but he wanted to know if there were guidelines on how stock piles would be increased. He also wanted to know why India was not included in this concern.

Ms Nzimande responded that there were guidelines as to Eskom and stock piling, and that there was regulation in that regard, as extra stock piles affected prices negatively. She then noted that the omission of a reference to India was erroneous and that India was in fact included in that category of high consumers of coal.

Mr Moloto suggested that, in regard to the European Union debt defaults, and the impact on emerging markets, NERSA had suggested the possible review of tariffs in line with this development, but he asked for more detail on how this would impact on tariffs in South Africa.

Ms Nzimande explained that the risk of the Euro debt default would in fact have an effect on the cost of capital, and inevitably the tariffs would then have to be reviewed to cover the shortfall.

Mr Moloto noted the mention of developments in the Arab world, including the fact that these could make gas less desirable and therefore impacting on prices. He asked that this be quantified.

Ms Nzimande said that in the United States, the prices of oil and gas were the same, meaning that the developments in the Arab world were likely to have an effect on prices in this country. This was due to the referencing that occurred when determining the price of gas. The discovery of oil in Africa usually did not imply a real effect on prices, as this was considered more as a benefit on the continent, as prices tend to stay in line with OPEC regulations.

Mr Moloto noted that the risk period was outlined as ending in 2011, and he asked whether the identified risks were still applicable in the petroleum pipelines industry.

Ms Nzimande commented that the reason why 2011 was named was that a portion of the pipeline that was due for completion was expected to experience delays, with the risk that it would not be completed on time. In fact, it was completed on time, and so that risk was eliminated.

Mr Moloto asked, in relation to electricity pricing and the cost of debt and equity of Eskom, whether Eskom, as the shareholder, had communicated the type of return that it expected. Furthermore, he enquired as to the debt equity ratio of Eskom, and wondered why NERSA would be interested in this. He also wanted to know what the timeframe was for the finalisation of MYPD2 and the eventual move to MYPD3. He wondered if NERSA was confident that the revised electricity pricing plans (EPPs) would be provided to NERSA in time. He also asked what “willing” meant and whether this was something that fell within NERSA’s scope.

Ms Nzimande said that NERSA was not in the same communications line as the operator, and that during the MYPD2 process, the shareholder had expressed an opinion that it would be happy to accept a lower return than the one anticipated. She also noted that a regulatory clearing account was set up, to ensure that customers continued not to be affected adversely. The normal timelines would apply, and MYPD3 was expected to come into effect on 1 April 2013. She said that it was possible to achieve “willing” compromise, and two applications that were fiercely contested were approved in recent times.

Mr L Greyling (ID) noted that Eskom had said that it wanted to submit a longer price determination model, and wondered if NERSA was ready to process this.

Ms Nzimande noted that Eskom was looking to move towards a longer term in terms of the MYPD2, but also noted that NERSA would like to proceed with caution as there were still challenges in establishing a longer term commitment.

Mr Greyling asked about the plans for storage of oil, and the plans to ensure that South Africa should be in a position of having 28 days storage of natural oil, and 21 days storage of crude oil. He wanted to know if the country was in fact in this position yet, or was moving towards it. He also wanted to know what kind of legislation was required to push the target of Eskom to build 70% of the new buildings, with the rest (30%) coming from IPPs. With regard to the crude oil Middle-East issue, he noted that most of South Africa’s oil came from the Middle-east, so he questioned the security of supply. In terms of LPG supply, he wanted to know what could be done to rectify the instability in LPG, especially since various industries made use of LPG.

Ms Nzimande said that many of these questions should be deferred to a later stage, as they were being dealt with by way of the current legislative process.

Mr Greyling asked whether NERSA was looking at removing licenses from municipalities that were not complying with regulations.

Ms Nzimande said that there were some limitations around withdrawal of licenses in cases of non-compliance. NERSA would need to approach the court to withdraw. However, it would welcome legislative amendments that would allow it to exert more power in ensuring compliance.

Mr J Smalle (DA) wanted to know what research was done around NERSA managing the risk around capacity of oil, and where this could be seen. He also asked if the value chain of the pipe-gas industry involved any activity in terms of gas storage, and wanted to know how this would affect pricing.

Mr Smalle asked if players who had not applied for new licences would still have to apply for maximum prices for NERSA’s approval.

Ms Nzimande noted that this was in fact often the way in which NERSA found out who the non-compliant players were, when they applied for approvals of maximum prices. However, NERSA was currently embarking on a process to determine for itself who the players were. The methodology on maximum prices had been approved up to 2014, and the new methodology would come into effect after that time.

Mr Smalle commented on the retention of professional staff in the organisation, and asked if this risk contributed to the increased consultancy fee. He also asked for justification on the increase in legal fees, and the increase in the numbers of temporary staff, and why they had not been made permanent staff.

Mr Zak Lombaard, Acting Chief Financial Officer, NERSA, noted that consultancy fees in the electricity industry increased from R10.4 million to R11.3 million, and this was largely due to the technical nature of the regulatory work that needed to be done. Another reason was that the projects undertaken were often ground-breaking initiatives, where similar work had never been done before. Commenting on the Capex decrease from R7.2 million to R5.2 million, he noted that capital expenditure was, by its very nature, items that were often bought on a once-off basis and need not be bought again. The increase of legal fees from R2.8 million to R3.3 million was a direct result of the cases in which NERSA was currently involved. He added that there had been very little litigation in  previous years, but this was now becoming an issue, owing to the major decisions that NERSA was now taking. The temporary staff fee increase from R1.8 million to R3.5 million was occasioned by the fact that the current structure did not fully support the operations of all the various divisions in NERSA. In addition, where less work was performed by consultants, it was passed on to temporary staff.

Ms Nzimande added that although the consultants were being used to fill intellectual gaps that existed in the organisation, attempts had been made to ensure that the right staff were attracted, appointed and retained.

Mr S Radebe (ANC) noted the issue of HDIs not being able to receive storage licenses, and wondered if they were going to be assisted in this regard.

Ms Nzimande asked that the Committee afford NERSA some time to investigate the matter, as there was currently no information available on that point.

Mr Radebe noted the intention to establish NERSA as an employer of choice, but wanted to know how NERSA would do this, given that it was already experiencing skills shortages – as evidenced by the recent resignation of the former Chief Financial Officer.

Ms Nzimande said that skills shortages were problematic in every organisation. NERSA would, however, continue to strive to attract and retain staff. She noted, in relation to the former Chief Financial Officer, that she had been an African female chartered accountant, who served at NERSA for over four years, which was a relatively long period of time in this industry.

Mr Radebe noted the potential shortage of LPG and the suggested move to a review of methodology, but asked in whose favour this methodology would be reviewed. With regard to operator regulation, he voiced concern as to whether it was in fact these operators who dictated to the regulator as to the manner in which they were to be regulated.

Ms Nzimande noted that operators were tasked with keeping operating costs low, and were limited to only charging consumers prices that they could afford. This meant that there was a need to maintain a balancing act, and NERSA and the operators were constantly trying to achieve the correct balance. NERSA’s actions were independent, and its recent actions in the price increases approved were testimony to its impartiality and independence.

Ms N Mathibela (ANC) noted that municipalities would have their tariffs approved by NERSA, in order to set their prices. She was concerned that where free basic electricity (FBE) was concerned, some municipalities electrified houses with only 20 amps of power, while the free basic electricity was set at 50 amps. She asked how this was allowed.

Ms Nzimande noted that NERSA approved the guidelines for tariffs and not tariffs themselves. She explained that the free basic electricity related to consumption and this was set at 50 Kw. She agreed that it was possible that some meters were 20 amp meters.

Mr D Ross (DA) wanted to know, in relation to the MYPD2 and the revision of methodology, if the cost of replacement of assets methodology was also reviewed. He wondered whether it was correct to assume that the funding of certain power stations would change with the introduction of MYPD3, and whether that was the determinant for the reduction of the proposed electricity tariff increases, from 25% to 16%. He noted that there might be developments in new legislation and cautioned against being over-hasty He asked also about the proposed legislative amendments, and asked about the extent of the proposed extension of the Minister’s oversight powers over municipalities, and whether these extensions were not more properly for NERSA. He also asked if the reduction in tariff increases meant that there would be a move to inflation-related prices. He then wanted to NERSA’s recommendation for the price path that should be followed.

Ms Nzimande noted that NERSA did not consider depreciation at all when determining the 16% increase, but rather looked at the return of the shareholders. NERSA was not in the position to answer questions relating to MYPD3, as this was still going through a legislative process.

The Chairperson asked that Members not try to pre-empt issues that were still to be discussed in the legislative amendment processes.  These amendments were still under discussion at the National Economic an Labour Council (NEDLAC).

The Chairperson asked what the relationship was between Electricity Supply Industries (ESIs) and Electricity Distribution Industries (EDIs).

Ms Nzimande responded that the term ESI was an all-encompassing phrase that covered generation, transmission and distribution. Reference to the ESI related to investment in the full value chain of electricity.

The Chairperson noted that there was no reference made to free basic alternative energy, and wondered what the reason was for this omission.

Ms Nzimande noted that FBE was a policy issue of the DoE, so NERSA was not in a position to answer to this.

The Chairperson asked if the DoE could indicate how far it had gone with establishment of end-user forums. He also noted that there was often reference was often made to public participation and community outreach, but wondered when communities would see an integrated programme, showing links with all stakeholders.

Ms Nzimande explained that the Electricity Regulation Act required all operators in the country to create end-user forums to ensure that operators interacted with their customers. Regional Electricity Forums had been formed in the past, and were useful also for other government departments to utilise. NERSA engaged with the DoE on community outreach, as it was aware that an integrated approach was the most advantageous.

The Chairperson asked how NERSA planned to increase and enrich its human capital.

Ms Nzimande said that it must be recognised that regulation was not a clearly defined profession, so NERSA conducted programmes through which employees could undertake university degrees, whilst also acquiring skills and training through the organisation.

Mr Smalle asked about the role of NERSA if municipalities were to enter into agreements with IPPs to purchase electricity from their generating plants, where the costs were at a mega-plex rate, and Eskom offered much higher incentives to the same generating plants.

Ms Nzimande responded that when municipalities entered into agreements with IPPs, Power Purchase Agreements (PPAs) still also had to be signed, and these had to be approved by NERSA. In doing so, NERSA would have to consider all the facts presented and act as required by the regulations.

Mr Smalle also noted that one of the programmes for ESIs was to ensure that municipalities were sustainable in terms of supply. He wanted to know what NERSA was doing to enforce this license agreement and if NERSA was willing to revoke licenses in instances of non-compliance.

Ms Nzimande said that NERSA would be willing to revoke licences if there was a need to do so, and it was empowered to do so. She noted that NERSA had also embarked upon an expensive Regulatory Reporting Manual project to ensure that there was an electronic interface between the regulator and the regulated entities. In areas where this was happening, there had been a lot of time saved in this regard. These projects had been implemented in the six metros in the country.

Mr Ross asked a question on price certainty and noted that many issues should be dealt with in the pricing policy, to ensure that there was certainty, and expectations were met. He noted that there was market sentiment in the international domain that was driven by the fear of lack of supply, that the public expected answers on this, and yet this Committee was unable to give people the assurances they wanted.

Mr Smalle sought an indication as to what research projects NERSA was undertaking, and when reports could be expected on them.

Ms Nzimande indicated that reports would be given on these in due course.

Mr G Selau (ANC) noted that there was currently more than one regulator in this country, and that NERSA stood alongside the Nuclear Energy Regulator and PASA. He wondered whether, once the IPPs’ role was effected, there would be a new regulator formed to cover them, or whether it was likely that one larger body would cover all forms of energy.

Ms Nzimande answered that it was likely that NERSA would be equipped to deal with regulation of other anticipated forms of energy, within the currently developed framework.

Ms Tandeka Zungu, Chief Operating Officer, Department of Energy, said that the issue would ultimately rest with the political heads, but the DoE would ensure that nothing would fall through the cracks.

She then added some comments on earlier questions. Commenting on storage capacity for refined products, she noted that there were no regulations that compelled the industry to store specific stocks, which meant that players could choose what stock they kept. There was a proposal to introduce a stocks policy, that would hopefully deal with this issue. The 20 Year Liquid Fuels Infrastructure Plan was also aiming to establish the capacity of the country, in order then to determine the best way for the Department to deal with such problems.

In relation to LPG being regulated by NERSA, she noted that the Director General of DoE was looking into consolidating regulatory powers of the Department.

In relation to the question on regional forums, she said that the Department could not, at the moment, provide a clear and definitive answer.

Commenting on the implications of the latest amendments to the Electricity Regulation Act of 2006, Ms Zungu noted that there were no new powers granted to the Minister, but rather that the Minister was granted the power to approve deviations from the Integrated Resource Plan. The Minister could only issue a section 34 determination with the concurrence of NERSA, so the Minister would not have unlimited powers.

The Chairperson then asked the Committee to keep a watchful eye on the issue of community outreach as well as the creation of end-user forums. He also noted that NERSA should have the requisite verification authority in order to be able to function accordingly.

The meeting was adjourned.