National Energy Regulator of South Africa Annual Report 2011/12

Energy

15 October 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The National Energy Regulator of South Africa (NERSA) presented its Annual Report for 2011/12, noting that it was a viable entity and, in its quest to become a world-class leader in energy regulation, it had undertaken many initiatives. It had continued the tradition of receiving an unqualified audit report for 2011/12. There was a matter of emphasis, mainly due to misstatement of previous year figures. Irregular expenditure amounted to R85 242 and fruitless and wasteful expenditure was R356.00. The actual expenditure for the period 1 April 2011 to 31 March 2012 amounted to R179.4 million. This represented an under-spending of 14.8% compared to the budgeted amount of R210.6 million. Its revenue had decreased, because it was largely funded by revenue from three sources under three different pieces of legislation and the calculation was based upon amounts transported. NERSA had achieved, overall, 66% of its planned business objectives. Details were provided of the specific activities under electricity industry regulation, piped gas industry regulation and petroleum pipeline industry regulation. In relation to electricity, NERSA approved 177 municipal tariff applications for 2011/12, and had revised tariff increases for Eskom, bringing this down to 16% from the originally-approved 25.9%. It had commissioned a study into the impact of the Inclining Block Tariffs, which found that these were benefiting the poor. 28 Independent Power Producer licences were granted in April 2012, after hearings held in the 2011/12 year, and it had successfully mediated the dispute between the Chiawelo Community and Eskom. In the Piped Gas Industry, a methodology to approve maximum prices was approved, as well as maximum prices for different categories. Seven licences were granted, and six revoked and thirteen notices of non-compliance were issued, with Sasol Gas having to reimburse four small customers. Workshops were conducted. In the petroleum pipelines industry, the Transnet tariff determination was approved, and the first tariff application from Chevron, a private pipeline operator, was also approved. All main oil companies had submitted applications for approval. Three licences were granted for construction and four for operations, with 80% being approved within the statutory deadlines. NERSA then detailed the courses it had presented, and outlined its achievements in re-election as Chair of the Regional Electricity Regulatory Association (RERA), and election to the membership of the Executive Committee of the African Forum for Utility Regulators (AFUR). The employment equity plans, procurement policies, and legal matters were detailed. Overall, NERSA concluded that its staff turnover had stabilized, that it had achieved its regulatory mandate and was refining regulatory practices and methodologies.

Members asked for further details around non-compliance in the piped gas industry, and the revocation of licences. They enquired why the disabled employee figure was so low, asked whether the staff resignations had affected NERSA’s functioning, and questioned what “sound” relationships meant. They wanted more detail about late submissions, and whether these could be addressed, and asked whether the pipeline from Durban to Johannesburg was operational, if the old one would be retired, and enquired about gas storage facilities. Members noted that although there was a preliminary finding that wildcat strikes had not affected the industry too badly, the full report was still awaited. Questions were also asked about future electricity prices, the effect of the further 19% increase application, how this would affect the Multi-Year Price determination, and the apparent uncertainty on IPP pricing. NERSA shared Members’ concerns about over-charging by resellers and would look into the matter.

Meeting report

National Energy Regulator of South Africa (NERSA) Annual Report 2011/12
Ms Phindile Nzimande, Chief Executive Officer, National Energy Regulator of South Africa, stated that in the 2011/12 financial year this entity (NERSA) had achieved 66% of its planned business objectives.

By way of introduction, she noted the planned objectives and detailed NERSA’s contribution to the government priorities and outcomes. She then detailed the specifics under each of its mandates.

Electricity Industry regulation
Ms Nzimande noted that NERSA had approved 177 municipal tariff applications for 2011/12, and had revised tariff increases for Eskom. It had recommended 16%, instead of the originally approved tariff of 25,9%. NERSA commissioned a study into the impact of the Inclining Block Tariffs and it was found that this was benefiting the poor.

NERSA conducted national hearings on the licence applications by the 28 “DoE Renewable Energy Independent Power Producer (IPP) Programme” preferred bidders. All 28 licences were granted in April 2012, within 90 days after receipt of applications.

NERSA also successfully mediated the dispute between the Chiawelo community and Eskom. after the acceptance of NERSA report on Testing of Disputed Electricity Prepaid Meters in Chiawelo, Soweto by all parties. It granted five licences.

IN relation to the IPP, she noted that NERSA had approved the first phase of 28 Independent Power Producers (IPP) licences, and the second phase of 19 IPPs, in 90 days instead of the statutory deadline of 120 days. NERSA had approved the Grid Code for Wind Energy Generation Facilities and the Transmission Use of System (TUoS) and Distribution Use of System (DUoS) charges for third party access. It amended the Grid Code in order to include a framework for wind generation. The Dispatch Rules would be finalised by the end of this financial year. 63% of business activities in this category had been completed.

Piped-Gas Industry Regulation
The methodology to approve maximum prices for piped-gas had been approved in the period under review. NERSA approved aggregated piped-gas prices for 2010 for different categories of customers in various provinces and had approved maximum prices for gas for 2010/11. It also approved compliance with regulatory discounts for 2010.

NERSA had, in this industry, granted seven licences and revoked six. Thirteen notices of non-compliance were issued after it was found that Sasol Gas did not adhere to licensing requirements in certain areas, and Sasol Gas re-imbursed four of its small customers after it became clear that Sasol failed to grant appropriate discounts prescribed.

NERSA also conducted three workshops, on Dialogues on Gas Infrastructure Development and Investment. Findings indicated that the market needed price-certainty around electricity, as well as regulatory or policy certainty around gas, and creditworthy off-taker in electricity generation.

In relation to the creditworthy off-taker, she said that it was found that the Eskom Multi-Year Price Determination (MYPD) had a cost recovery mechanism that would facilitate the use of gas generation.

Ms Nzimande said that, overall, 73% of planned business activities have been completed in this division.

Petroleum Pipelines Industry Regulation
Ms Nzimande stated that NERSA had approved the tariff determination of Transnet for the period 2012/13. Tariffs for 133 storage facilities had also been approved. The first tariff application from a private pipeline operator, Chevron, was received.

With regard to compliance monitoring, all the main oil companies had submitted applications for the approval of tariffs for their storage facilities. Licencees were starting to submit their allocation mechanisms and data in terms of the regulations to the Petroleum Pipeline Act.

Three licences for construction were granted and four for operations. NERSA had improved the time taken to consider the licences, and in this year 80% of applications were processed within the statutory deadlines, an increase from 56% processing in 2010/11. The target was 100% for 2013/14.

Overall, 85% of planned business activities in this unit were completed.

Cross-Cutting Regulatory and Organisational matters
Ms Nzimande reported that NERSA had presented courses that were attended by NERSA staff, representatives from relevant government departments and licencees. The courses were listed as follows:
-A-Z of Regulation (Foundation of Economic Regulation) and Regulatory Accounting
-Marginal Cost pricing in tariff setting
-Regulatory Impact Assessment
-Benchmarking

NERSA had been re-elected as Chair of the Regional Electricity Regulatory Association (RERA); and was also elected to serve as a member of the Executive Committee of the African Forum for Utility Regulators (AFUR).

Overall, 55% of planned business activities in this category have been completed.

Other matters
Ms Nzimande outlined some of the internal achievements and activities under other programmes. She said that NERSA had an approved Employment Equity Plan. Its approved procurement policy was aligned to the Public Finance Management Act (PFMA). During 2010/11 NERSA spent 60% of its procurement budget on Black Economic Empowerment (BEE) companies. There was, at the moment, work being done to develop a framework of how, in future, the monitoring and reporting of the contribution of NERSA towards BBBEE would be done.

In relation to legal matters, Eskom was asking for the review of a decision by NERSA to amend the licence granted to Midvaal Municipality. The amendments added more areas of supply for electricity, which were in favour of Midvaal. Costs incurred in this cases amounted to R202 292.58. Another application was brought against NERSA by Azola Recruitment Solutions to review the decision of NERSA to cancel its contract, on the basis that the Azola bid documents were submitted late, despite the fact that it was the successful bidder. Litigation costs would be borne by Deloitte, as it had handled the whole procurement matter on behalf of NERSA.

She noted that relations between the CEO, Regulator Members and senior management was sound.

Financial Report
Ms Nzimande was pleased to announce that NERSA had continued its tradition of receiving an unqualified audit report for 2011/12. The matter of emphasis was mainly due to misstatement of previous year figures. Irregular expenditure amounted to R85 242 and fruitless and wasteful expenditure was R356.00. The actual expenditure for the period 1 April 2011 to 31 March 2012 amounted to R179.4 million. This represented an under-spending of 14,8% on the budgeted amount of R210.6 million.

It was explained that NERSA was essentially funded under se
ction 5B of the Electricity Act, 1987, the Gas Regulator Levies Act of 2002 and the Petroleum Pipelines Levies Act of 2004. Actual levies collected amounted to R141.6 million, under budget, but this was due to the fact that actual volumes of products transported were below the volumes projected by the industry.

More detailed tables, graphs and figures on finances were presented (see attached presentation for full details). 

A number of additional slides were included in this presentation, setting out additional information that had been requested of NERSA. Some repeated the information under the regulatory aspects,
presented earlier. It was also noted that Rules had been published, pursuant to the legislation, on tariff methodologies for pipelines and storage facilities, a “Frequently Asked Questions” report and the financial indicators and beta used in the Weighted Average Cost of Capital calculation. A full outline was also included of the legal cases and costs related to each, and the arbitration award in the matter of NCP Chlorchem and Ekurhuleni Metro. Another slide listed governance requirements and NERSA’s role in transformation, both internally and externally.

Ms Nzimande concluded that the staff turnover of the organisation had stabilised over the years. The entity had undertaken various initiatives to refine regulatory practices and methodologies. NERSA had achieved its regulatory mandate through projects set for the 2011/12 financial year, and its work was continuing to have a profound impact on the lives of ordinary people and on the economy of the country.

Discussion
Mr J Smalle (DA) wanted to know what the terms of references or penalties were regarding non-compliance in the piped-gas regulation.

Ms Nzimande said the whole philosophy on this matter was that of self-regulation. Penalties could be imposed but NERSA had to go to court first. The regulatory framework was “light-handed”.

Mr Smalle wanted an explanation around the revocation of licences in the petroleum pipelines industry.

Ms Nzimande noted that revocation took place when oil companies had been selling their storages. Chevron, for example, had lots of storage facilities in Ladysmith and it was believed the company would not need those. It came down to a question of selling and buying.

Mr Smalle asked about the staff resignations, asking if these had taken place across the board, or at senior levels only, and if these were hampering the delivery of service.

Ms Nzimande responded that NERSA lost a Chief Financial Officer and a senior HR officer in this year. However, other resignations were in the support functions. The resignations were not affecting the ability of the entity to perform. Temporary staff had been employed, and the affected units were doing well so far.

Mr Smalle asked for more detail on the late submissions.

Ms Nzimande elaborated that NERSA had developed a new way of doing things and this was communicated to parties with whom it dealt. The companies asked for a postponement of six months. Had they given NERSA those reports when it wanted them, the entity would have got a qualified audit opinion.

Mr E Lucas (IFP) wanted to find out if the new pipeline from Durban to Johannesburg was fully operational and if the old pipeline would be retired. He further asked if the wildcat strikes had affected the industry.

Ms Nzimande explained that the pipeline was bypassing Ladysmith and going straight to Johannesburg. The original plan was to retire the old pipeline, but further investigations found it to be in good order. It was still going to be used because of its storage facilities. The impact of the strikes had not been that bad. Once a full analysis had been done, she would convey the details to the Committee.

Mr D Ross (DA) questioned if the electricity price path was going to be inflation-related, because there had been a reduction in percentage of price from 24, 9% to 16%. He remarked that the State has given an interest-free loan to Eskom, but Eskom had now made another application for a 19% increase.

Ms Nzimande said that she could not pre-empt what would happen in relation to electricity prices. On the second issue, she agreed that the application for a further increase would pose a severe burden on the country. Government had not said a word on this matter, except to maintain the “user pays” principle. NERSA was still looking at alternative models of funding but the strategy documents have not been completed.

Mr L Greyling (DA) asked if the review of the IRP would not have a significant impact on the MYPD3 for next year.

 Ms Nzimande said NERSA had received an extension application from Eskom and there was a version of the Integrated Resource Plan on the table.  Government was intending to start on the review process.

Mr Greyling said that having skimmed through the grid charges with regard to IPP, there seemed to be uncertainty on the price by sellers, though the regulator was keen on the matter.

Ms Nzimande indicated that guidelines were developed. NERSA had got a methodology for this and she suggested that the entities should apply and interact with NERSA. The framework was in place.

Mr S Radebe (ANC) commented that it had been found that resellers were over-charging people, and he asked how the regulator was planning to address that issue.

 Ms Nzimande expressed concern about the matter of over-charging and indicated that a consultative paper was being developed so that the Regulator could intervene on tariffs. 

Mr Radebe asked what exactly Ms Nzimande meant when she said the relations between the CEO, Board Members and senior managers were sound, as he did not think this was clear enough.

Ms Nzimande said that she meant, by “sound relations” that the relationship was fair and there was an understanding of the kind of work that needed to be done by each. There were normal work differences, but this had not affected the quality of work produced.

Professor S Mayathula (ANC) enquired why there were so few disabled people in the employ of NERSA.

Ms Nzimande agreed that NERSA needed to intensify its efforts, and there were plans to speak to the Minister responsible for that portfolio and see how more disabled people could be recruited.

Ms N Mathibela (ANC) commended NERSA for successfully mediating the Chiawelo conflict. She asked if there were enough gas storage facilities.

Ms Nzimande said this aspect was worrying. So far NERSA have received four applications for gas storage, and already had received one application for an inland facility. The largest concern, however, was along the coast. An application had been received from Coega in the Eastern Cape.

Mr K Moloto (ANC) wanted to find out about the plans in place to address the problem of metros not submitting reports in time.

Ms Nzimande explained that NERSA was trying to push municipalities to comply. Once legislation was reviewed, powers to act would be given to the Regulator. But, at present, there was nothing NERSA could do when municipalities were asking for a postponement.

The Chairperson commented that he was looking forward to the next engagement with NERSA so that it could brief the Committee about its involvement in RERA and how it was going about regarding energy regulation because it was a matter that was taken seriously by other countries. The Committee also wanted to know how it would improve on its achievements.

The meeting was adjourned.

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