National Energy Regulator of South Africa 2012 Strategic Plan: briefing

NCOP Economic and Business Development

04 June 2012
Chairperson: Mr F Adams (ANC – Western Cape)
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Meeting Summary

Achievements in electricity regulation included the approval of 177 municipal tariffs and the revisions of nine tariff applications for 2011/12.  National Energy Regulator of South Africa (NERSA) also approved a revised tariff increase for Eskom of 16% instead of the originally approved tariff of 25.9% for 2012/13.  In distribution, the mediation between the Chiawelo community and Eskom was successfully completed after the adoption of the report, Testing of Disputed Electricity Prepaid Meters in Chiawelo, Soweto. 

Among its achievements in the regulation of piped-gas, NERSA devised a methodology to approve maximum prices for piped–gas.  Also, NERSA’s determination that there was inadequate competition in the piped-gas industry paved the way for the implementation of the maximum pricing methodology.

In the petroleum pipelines industry regulation, NERSA approved an increase of 31.58% in allowable revenue for Transnet for 2012/13 and approved storage facility tariffs for nine licensees.  It further approved three construction licences and one operational licence, while revoking eight licences from Chevron.

In regards to budget and funding for 2012/13, overall expenditures of R240 million were balanced by an overall income of R240 million.

As for the challenges facing the electricity industry, the finalised revision of the Electricity Pricing Policy had an impact on the Multi-Year Price Determination 3 (MYPD3) and on the Implementation of the Inclining Block Tariffs.

Challenges in the piped-gas industry included the regulation of certain piped-gas activities not being specifically catered for in the Gas Act, the monitoring and enforcement of Sasol’s compliance with the regulatory agreement, and the many hurdles faced by the private sector investment and infrastructure in terms of supply and off-take agreements.  Also, the lack of regulatory certainty had resulted in unfavourable consequences. 

Challenges in the petroleum pipelines industry included the regulation by different authorities of the supply chain, the security of supply of petroleum to the inland areas, and the possibility of tariffs used for capital expansion funding by some state-owned entities.  NERSA also faced difficulties promoting access to petroleum storage facilities by Historically Disadvantaged South African (HDSA) wholesalers. 

In terms of cross-cutting regulation challenges, some processes fell outside of NERSA’s control, such as outstanding legislative processes and insufficient data on licence and tariff applications.

In the future, regarding electricity regulation, NERSA planned to monitor and enforce compliance by all licensees, introduce more Independent Power Producers (IPPs), promote renewable energies, monitor the implementation of the MYPD2 by Eskom, and revise the rules for the MYPD2 when necessary.  Further NERSA aimed to streamline regulatory processes in the licensing and analysis of tariff applications.

In the piped-gas industry regulation, NERSA would work to educate customers in order to assist in the enforcement of market value pricing.  NERSA would also implement a compliance framework for licence conditions, conduct a study on the integrity of the gas pipeline network, and benchmark licence conditions.

In terms of the petroleum pipelines regulation, NERSA would monitor the escalations in costs and the delays in the construction of new infrastructure.  There was also a need to facilitate both the market entry by historically disadvantaged players and the access by third parties. 

In cross-cutting regulation, NERSA planned to conduct a customer education programme and manage the information asymmetry between NERSA and the licensees. 

Members asked questions regarding NERSA’s increased expenditures, the country’s security of gas supply and the ageing infrastructure, encouraging competition in an industry with monopolistic tendencies, NERSA’s reliance on consultants, and the adequacy of NERSA’s mandate and its programmes.  A Member considered it fortunate that Cabinet had issued a moratorium on the Shell gas exploration.  Water in the Karoo area was a scarce resource.  There were other options than Shell gas.  He challenged NERSA to be objective and practical  before pronouncing itself in favour of Shell gas exploration.

Meeting report

Ms Esther Viljoen, NERSA Senior Manager: Strategic Planning and Monitoring, presented the background, framework, vision, mission, values, regulatory principles, and mandate of NERSA (see presentation slides 3-10). 

The delegation presented NERSA's achievements according to the three industries it regulated: electricity, piped-gas, and petroleum pipelines.  First, in the electricity industry regulation, achievements in tariffs included the approval of 177 municipal tariffs and the revisions of nine tariff applications for 2011/12.  NERSA also approved a revised tariff increase for Eskom of 16% instead of the originally approved tariff of 25.9% for 2012/13.  Additionally, the Energy Regulator concurred with the determination made by the Minister of Energy in line with Section 34 of the Electricity Regulation Act (No. 4 of 2006) on the procurement process for renewable energy. 

Achievements in generation included conducting national hearings on the licence application by the 28 Department of Energy Renewable Energy IPP Programme preferred bidders.  NERSA also granted five generation licences.  In distribution, the mediation between the Chiawelo community and Eskom was successfully completed after the adoption of the report, Testing of Disputed Electricity Prepaid Meters in Chiawelo, Soweto.  NERSA also granted one distribution licence and revoked one distribution licence.


Second, in the piped-gas industry regulation, NERSA devised a methodology to approve maximum prices for piped–gas and held three stakeholder workshops to inform stakeholders on this methodology.  Also, NERSA granted five licences for the construction of gas transmission facilities, two licences for the construction of gas distribution facilities, two operation licences, and one trading licence.  Further, NERSA’s determination that there was inadequate competition in the piped-gas industry paved the way for the implementation of the maximum pricing methodology. 

Third, in the petroleum pipelines industry regulation, NERSA approved an increase of 31.58% in allowable revenue for Transnet for 2012/13 and approved storage facility tariffs for nine licensees.  It further approved three construction licences and one operational licence, while revoking eight licences from Chevron.

Ms Viljoen then listed NERSA’s five strategic outcome-oriented goals (see presentation slides 17-18), which were linked to twelve national outcomes (see slide 19).  From the strategic outcome-oriented goals, NERSA developed strategic objectives (see slide 20).  In order to achieve its outcome-oriented goals, NERSA would deliver on its strategic objectives through six structured programmes (see slide 21).  She then enumerated the Electricity, Piped-Gas, Petroleum Pipelines, Cross-cutting and Organisational programme strategic objectives (see slides 22-28).

In the Annual Performance Plan, each of the regulated industries had a number of Key Performance Indicators (KPI) per programme.  For Electricity, the KPIs were listed and broken down by year through 2014/15 in slides 31-45.  For Piped-Gas, see slides 47-61.  For Petroleum Pipelines, see slides 63-80.  For Cross-cutting Regulations, see slides 77-80.  And for Organisational Regulations, see slides 82-85. 

In regards to budget and funding for 2012/13, all the accounts for each of the three industries had to be ring-fenced.  All direct costs attributable to an industry were allocated to that industry.  The ratio of the staff compliment attributed to the industry-specific functions was used to allocate the remaining (common) costs to the respective industries.  The common costs allocation ratio for electricity was 58%, while it was 21% for piped-gas and 21% for petroleum pipelines. 

Electricity expenditures reached R137 million from an income of R115 million, and levies to be imposed on the electricity industry were 0.0447 cents/kilowatt hour.  In piped-gas, expenditures reached R51 million from an income of R47 million, while levies were calculated to be 34.98 cents/gigajoule.  Petroleum pipelines expenditures amounted to R51 million from an income of R49 million, while levies reached 0.2728 cents per litre.  The discrepancy between expenditures and income was due to permission from National Treasury to spend the over-recovery of R28 million from previous years.  Overall, therefore, expenditures of R240 million were matched by an overall income of R240 million (see slide 88).

As for the challenges facing the electricity industry regulation, the finalised revision of the Electricity Pricing Policy had an impact on the Multi-Year Price Determination 3 (MYPD 3) and on the Implementation of the Inclining Block Tariffs.  Apart from the regulations on the revised New Generation Capacity, promulgated in May 2011, no legislation or regulations had been promulgated regarding the Cabinet’s decision in 2007 that Eskom would be responsible for ensuring that adequate generation capacity be made available and that 30% of the new power generation capacity be derived from Independent Power Producers (IPP).  Also NERSA’s ability to enforce compliance was constrained by a lack of a policy to impose penalties in cases of non-compliance.  On the establishment of end-user forums, NERSA was awaiting the Minister of Energy’s prescription of the process to be followed in establishing end-user forums as stipulated in the Electricity Regulation Act.  The multiplicity of distributors of varying capabilities made the regulation of the distribution sector difficult.  Also presenting challenges were the security of supply and the possible imposition of a carbon tax in the future. 

Challenges in the piped-gas industry regulation included the regulation of certain piped-gas activities not being specifically catered for in the Gas Act, the monitoring and enforcement of Sasol’s compliance with the regulatory agreement, and the many hurdles faced by the private sector investment and infrastructure in terms of supply and off-take agreements.  Also, the lack of regulatory certainty had resulted in unfavourable consequences, such as the Petroleum Agency South Africa (PASA) awarding prospecting licenses to Shell, Sasol and others.  Then Cabinet decided to suspend shale gas prospecting, and, consequently, Sasol decided to invest billions of dollars in shale gas in Canada instead of South Africa.

Challenges in the petroleum pipelines industry regulation included the regulation by different authorities of the supply chain, which compromised the ability of coordinated regulatory oversight as a result of concurrent or adjacent jurisdiction.  The security of supply of petroleum to the inland areas and the possibility of tariffs being used for capital expansion funding by some state-owned entities also posed significant challenges.  Lastly, NERSA faced difficulties promoting access to petroleum storage facilities by Historically Disadvantaged South African wholesalers. 

In terms of cross-cutting regulation, some processes were dependent on other role players and fell outside of NERSA’s control, such as outstanding legislative processes and insufficient data on licence and tariff applications.  Also legislative gaps and information asymmetry hindered NERSA’s cross-cutting regulation efforts. 

In the future, regarding electricity regulation, NERSA planned to monitor and enforce compliance by all licensees, introduce more IPPs, promote renewable energies, monitor the implementation of the MYPD2 by Eskom, and revise the rules for the MYPD2 when necessary.  Further NERSA aimed to streamline regulatory processes in the licensing and analysis of tariff applications, as well as rationalising tariff structures, taking into account regional pricing and geographical differentiation.

In the piped-gas industry regulation, NERSA would work to educate customers in order to assist in the enforcement of market value pricing.  NERSA would also implement a compliance framework for licence conditions, conduct a study on the integrity of the gas pipeline network, and benchmark licence conditions.

In terms of the petroleum pipelines regulation, NERSA would monitor the escalations in costs and the delays in the construction of new infrastructure.  NERSA would manage as far as possible a tariff spike through tariff structures.  There was also a need to facilitate both the market entry by historically disadvantaged players and the access by third parties. 

In cross-cutting regulation, NERSA planned to conduct a customer education programme across all three regulated industries.  NERSA would also manage the information asymmetry between NERSA and the licensees, and it would also coordinate with other regulators with concurrent jurisdiction.  NERSA was also working to advise policy-makers of its views, policy gaps and mandate.   Lastly, NERSA would work to assess its processes and methodologies against the best world practices through regulatory analysis, research, benchmarking, and auditing.

Discussion
Mr D Gamede (KwaZulu-Natal, ANC) asked NERSA to explain the high rise in expenditures through the next two financial years, projected at 4.5% in 2013/14 and 4.0% in 2014/15.  He also asked how these increases reconciled with the projected 16% expenditure increase on the electricity sector.  Regarding the Midvaal municipality court case, how would this decision affect NERSA’s reported plan?  He also requested NERSA’s comments on whether gas was relatively expensive in South Africa, whether the industry was easy to regulate, and whether South Africa had security of gas supply.  What were the obvious aspects of the Shell gas exploration?  Would NERSA benefit from the new infrastructure plans set out by President Zuma?  How could NERSA encourage competition in the entire industry? Regarding the challenge for HDSA wholesalers to access petroleum storage facilities,  he asked why it was difficult to bring others into the industry.

Ms B Abrahams (Gauteng, DA) asked for an update on the current situation in the Chiawelo mediation.  Also, were there any education and training programmes in the communities?  What did NERSA mean by “block tariffs” in the Annual Performance Plan? What did NERSA mean by the creation of 20 “decent jobs” created by certain projects?  Lastly, she asked how NERSA was promoting companies owned by HDSAs to become competitive.

Mr A Nyambi (Mpumalanga, ANC) asked what provincial interests were being served by the 177 approved tariffs listed in NERSA’s report.  He then asked whether NERSA’s mandate and its different programmes were adequate or whether they needed revision.  He also asked for comments on South Africa’s ageing infrastructure. 

Regarding staff complements, in order to conduct proper oversight, he said it was necessary to have more detailed demographic data so that the Committee could assess whether NERSA was achieving the current Government’s objectives.  Lastly, he asked how much NERSA relied on consultants. 

Mr K Sinclair (Northern Cape, COPE) said that NERSA’s request of R20 million for consultant fees was unacceptable given that NERSA was supposed to be an independent and self-sufficient entity.  Also, why did NERSA revoke eight Chevron licences?

What was NERSA doing to address South Africa’s monopolistic environment with the major players, such as Eskom?  Regarding the construction of capacity generation facilities, was South Africa moving forward and addressing the energy supply challenges or was it on the brink of another blackout this winter?  Lastly, in regards to renewable energies and IPPs, how was NERSA promoting applicants to apply as IPPs? 

Mr Zak Lombard, NERSA Acting Chief Financial Officer, said the 4.5% increase in expenditures over the next three years was NERSA’s expenditure increase, whereas the 16% was Eskom’s expenditure increase on the electricity side.  The two figures were from different companies and did not relate to each other. 

Mr Gamede intervened and asked for further explanation on how come these two figures were not linked and whether these increases were projected due to inflation.

Mr Mbulelo Ncetezo, NERSA Executive Manager: Electricity Regulation, replied that Eskom’s expenditure increase was not linked to inflation; the increase was linked other areas, such as construction and acquisition of equipment. 

Regarding the Midvaal licence application, he said the case was still in court and NERSA was ready to participate in the case if necessary. 

Mr Thulebona Nxumalo, NERSA Head of Department: Gas Licensing, Compliance and Dispute Resolution, said that South Africa had been relying heavily on coal, since coal was cheaper than gas.  However, recent trends to maintain a cleaner environment (for instance, the Kyoto Protocol and other clean energy agreements) explained the global push for switching from coal to gas.  Regarding the cost of gas, NERSA was promoting the use of gas vehicles as opposed to petrol.  Given the amount of petrol that vehicles consumed, powering vehicles with gas was actually much more cost-effective. 

Gas was not easy to regulate.  NERSA regulated a number of elements within the gas industry, such as the construction of facilities (e.g. pipelines, stations).  NERSA also regulated the operation of pipelines, as well as gas treatment. 

Regarding the security of supply, South Africa’s main source of gas came from Mozambique.  The agreement called for Mozambique to deliver 120 million gigajoules per year to South African markets.  Additionally, South Africa received 35 million gigajoules of gas per year from Sasol Synfuels and Secunda.  NERSA was working to ensure security of supply in case something were to happen to the current supply.  For instance, NERSA was consistently monitoring gas explorations.  There was a current project for Shell gas exploration in the Karoo area, although, unfortunately Cabinet had declared a moratorium on this operation.  Also, two companies (one American and one Italian) discovered vast amounts of gas in Mozambique that South Africa should be able to take advantage of in the future.

Mr Sinclair intervened to say that there were multiple sides to this debate.  It was unfortunate that NERSA seemed to have made up its mind regarding the Shell gas exploration.  Being from the Karoo area, he considered it fortunate that Cabinet had issued a moratorium on the Shell gas exploration.  Water in that area was a scarce resource.  There were other options than Shell gas.  He challenged NERSA to be objective and practical about this issue before pronouncing itself in favour of Shell gas exploration.

Mr Thabo Ramanamane, NERSA Head of Department: Petroleum Licensing, Compliance and Dispute Resolution, replied that NERSA had licensed import facilities in Saldanha and expected more facilities in the Coega area, so NERSA had not pronounced itself for or against Shell gas exploration in the Karoo.  NERSA recognised the scarcity of gas resources throughout the country and was working to promote investment in this area.  

Ms Viljoen added that the context of the presentation was not to pronounce itself for or against the Shell gas exploration but to emphasise the consequences that flowed from regulatory uncertainty.

Mr Ncetezo said the new infrastructure plan would benefit the electricity regulation side by the creation of new railway lines to the power stations, given that trucks often damaged the roads.  This would also help to ensure that Eskom maintained its coal stockpiles.

Mr Thembani Bukula, NERSA Regulatory Member: Electricity, said the new infrastructure plan would benefit the gas industry by facilitating the supply of gas to the inland regions via new pipelines.

Mr Ramanamane said the new infrastructure plan would benefit the petroleum side by decreasing transportation by road and switching to pipeline or rail transportation (road was the most expensive mode, followed by rail, then by pipeline).  The hope was that the infrastructure plan would improve the rail system so that small importers could be better served by transporting by rail instead of road. 

Mr Nxumalo said that having one player dominating the market in the gas industry, NERSA was currently amending the Gas Act to allow new entrances to the market than currently possible.  The main issue was that there was an agreement allowing Eskom a dispensation period of 14 years (ending in 2014) that granted it certain privileges unavailable to others.  In 2014 NERSA would be in a much better position to level the playing field in the market.

Mr Ramanamane said, in terms of the petroleum industry, that NERSA focused on regulating infrastructure and attempted to encourage competition by enforcing compliance.  By monitoring the infrastructure access by the big operators, NERSA was able to determine whether there were state capacities that could be used by emerging operators.

Mr Ncetezo, in reply to Ms Abrahams’ question on the Chiawelo issue, said that Eskom’s pilot project that replaced conventional meters with pre-paid meters received many complaints alleging that the new meters were faster than the conventional ones.  However, studies proved that there were no discrepancies with the new pre-paid meters, as all the meters were operating according to the established standards.  It became clear that people did not fully understand how the Inclining Block Tariff (IBT) worked.  NERSA had devised programmes to educate people on how new meters worked and how to conserve and use power more efficiently.

He then replied to Mr Nyambi’s question on the geographical distribution of the 177 municipal tariffs by saying NERSA was in the process of approving licensing applications for municipalities.  Once this was done for the current year, NERSA would provide a booklet to the Committee with all the relevant up-to-date information.

Ms Viljoen highlighted that, at this stage, NERSA’s programmes seemed adequate.  Since the financial year had just started in April, NERSA would begin its financial planning for the next financial year in mid-June.  At that point NERSA would further assess the adequacy of its programmes.

As for the ageing infrastructure, Mr Ncetezo said that when NERSA approved tariffs for municipalities and Eskom, NERSA required 6% of revenues to go toward the refurbishment and maintenance of infrastructure.  Some entities complied and some did not, but NERSA was working to ensure compliance.  Additionally, NERSA encouraged infrastructure development in municipalities through investment projects. 

Mr Ramanamane added that, in the petroleum side, ageing infrastructure was being addressed by the new pipeline and by additional infrastructure construction projects in areas such as Durban. 

Ms Viljoen said that staff complement had increased to 177 (currently at 114).  With regards to demographics, NERSA faced different challenges.  Blacks made up 95% of NERSA’s personnel while 52% were female.  Thus, NERSA’s challenge was to incorporate more minorities.  NERSA was doing very poorly in terms of people with disabilities and currently had no staff members with disabilities.

In regards to Ms Abrahams' question on what NERSA meant by employing a target of 20 “decent jobs” per megawatt of renewable energy produced, Mr Bukula explained that “decent jobs” meant those jobs in construction operations that were just above “casual jobs,” such as mixing concrete, etc.

Regarding NERSA’s reliance on consultants, Mr Ncetezo said that, in the electricity sector, NERSA did not rely on consultants.  The one line item for R2.5 million in consultant fees listed in the report referred to future contingencies when, from time to time, consultants would be needed.

Mr Ramanamane added that, in the petroleum side, NERSA had only occasionally used consultants for developing a tariff methodology because this was a new benchmark for regulating the South African industry and specific expertise was required.  Once the methodology was developed, NERSA did not currently expect to use additional consultants in petroleum pipeline regulation.

Mr Nxumalo added that, in the piped-gas sector, NERSA used consultants only when absolutely necessary.  For instance, last year NERSA had a project where it had to use consultants to evaluate the integrity of the gas pipelines.  This work could not be done internally at NERSA.  This was a typical project where outsourcing to consultants was necessary to efficiently and effectively achieve NERSA’s goals.

Mr Sinclair was concerned that the report did not reflect the Heads of Departments’ explanations regarding consultant fees.  If NERSA did not actively use consultants, then why were consultant fees projected to increase in the next three years? (See page 183 of Annual Performance Plan)

Ms Viljoen replied that NERSA always had to use consultants because some of its work was very detailed but not done on a permanent basis, so it was more cost-effective to outsource to others with specific skills.  Also, most of the projected increase arose not from consultancy use by any of the individual industry regulators but on NERSA’s work on cross-cutting regulations.  NERSA needed consultants to develop data received from licensees, as NERSA did not have such skills in house and it was not cost-effective to employ people with such skills on a permanent basis.  Further, NERSA had only been regulating gas and petroleum industries for the past seven years, so those regulatory frameworks were not yet perfected.  Therefore, consultants were and would be necessary in the future to advise NERSA on how to more effectively conduct its regulatory responsibilities.

Mr Nyambi pointed that the problem was not in the need for consultants but in the way the information as presented.  In order for Members to conduct proper oversight, Members needed accurate, clear reporting, and the information contained in the report was different from what was being presented.

Mr Gamede added that this increased use of consultants also contravened the President’s call for minimising the use of consultants.

Mr Sinclair said it was troubling that NERSA was awarding bonuses as high as consultant fees (see page 183 of the Annual Performance Plan).  He asked why officials were getting bonuses if consultants were being used to do NERSA’s job.

On NERSA’s mandate review, Mr Bukula said that to most effectively regulate an industry it was necessary to control the entire value chain.  For instance, in electricity, NERSA regulated everything from generation to consumption, as covered by its mandate.  In the petroleum and gas sectors, however, NERSA only regulated a small percentage of the value chain, making it harder to effectively regulate those industries.  Thus, improvements in the mandate would be welcome.  NERSA had provided its input on the Gas Act and Electricity Acts to strengthen its mandate and enable regulators to do what they were intended to do.

The Chairperson commented that he had recently seen a study indicating that foreign refineries were superior to South African refineries, and pointed that pricing was putting South African refineries outside of the market.

Mr Bukula replied that NERSA did not regulate the pricing or the refineries.  NERSA only regulated the pipeline that moved petroleum from the coast inland and to the storage facilities.  If NERSA were to improve regulation of the petroleum industry, the Government would have to provide NERSA with the full regulatory value chain. 

In response to the questions regarding the industry’s monopolistic environment, Mr Ncetezo said that Eskom’s current monopoly arose from the market structure that the Government policy set up.  As such, this issue must be decided by the Government, and was nothing NERSA could do to address the core issue of the market structure.   

On the petroleum side, Mr Ramanamane said the problem was one of dominance by the major companies involved.  South Africa imported around 40-50% of its petroleum.  The main problem was that every discharge point along the new pipeline was connected to a storage facility owned by one of the major private companies.  The applicable laws were quite different for storage facilities, as laid out in the Act.  For instance, the pipeline was a common carrier, which accommodated everybody’s needs by allowing entities to access proportionate amounts.  With storage facilities, however, access depended on the availability of uncommitted capacity.  Therefore, this presented a challenge for regulatory purposes in terms of addressing the market dominance tendencies.

Regarding the construction of new generation capacity, Mr Bukula said NERSA had scheduled visits to both Medupi or Kusile power stations to ensure construction was progressing according to the set time lines and on track for completion by 2016.  Currently NERSA was not aware of any major delays, aside from Eskom’s 12-month delay.  Also, demand was consistently close to supply.  On days where shortage of 1 000 – 2 000 megawatts was projected, there were contingency measures in place to enable to avoid interruptions.  However, South Africa was in a tight situation that required error-free operations to generate every megawatt available.  For the next two years before completion of the first unit, the situation would continue to be tight.

Mr Ncetezo said that to encourage applicants to apply as renewable energy IPPs, NERSA was governed by the new generation capacity regulation, which required the Government (not NERSA) to invite applicants.  NERSA’s responsibilities came after the bidding process, at which point NERSA processed the licensing applications as it did any other licence application it received.

Mr Bukula added that the Department of Energy was in charge only of procurement, and then NERSA and Eskom were in charge of implementing all the agreements.  NERSA and Eskom must guarantee the investors’ revenue stream, and NERSA had approved three sets of documents to achieve this.   First, the MYPD allowed R12.2 billion for renewable IPPs.  Second, a cost recovery mechanism laid out the payment rules.  Third, the third-party access element ensured the non-discriminatory use of the transmission and distribution systems.  These three elements were put in place to ensure that renewable energy IPP applicants were able to access the system.

The Chairperson adjourned the meeting.

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