National Energy Regulator of South Africa (NERSA) on its 2013 Strategic Plan

Meeting report

National Energy Regulator of SA (NERSA) Annual Performance Plan and Strategic Plan
Ms Phindile Nzimande, CEO of NERSA, explained that NERSA was a Schedule 3A Public Entity, established on 1 October 2005 in terms of the National Energy Regulator Act, 2004 to regulate the electricity industry, the piped-gas industry and the petroleum pipelines industry.

Achievements in 2012/13
For the year 2012/13 NERSA boasted about their high level achievement. In Electricity Industry Regulation, they approved an average annual increase of 8% in the revenue requirements for Eskom for the next five years; and received 183 out of 186 (98%) municipal and private distributor tariffs applications for 2012/13 and approved all for implementation. They had approved 47 Renewable Energy Generation licences within 90 days from application, instead of the originally legislated 120 days. NERSA had approved seven licences under the Short Term Power Purchase Programme (STPPP) as part of the short term mitigation programme during maintenance of Eskom generation fleet. Nine distribution licences were issued for connection facilities between Eskom delivery point and Independent Power Producer generation facilities.

In Piped-Gas Industry Regulation; NERSA approved the maximum prices of piped-gas for Sasol Gas in terms of section 21(1)(p) of the Gas Act, for the period 26 March 2014 to 30 June 2017 for various customer categories and classes; approved preliminary tariff assessment for Transnet Pipelines’ gas multi-year tariff determination for the Lilly Pipeline for 2013/14, 2014/15 and 2015/16. Five licences for the construction of gas distribution facilities were granted, two licences for trading in gas and one licence for the operation of a gas facility. It also amended five gas trading licences and five licences for the operation of gas facilities.

The approved price for Sasol Gas was significant in that there was a set price to use their pipeline, unlike before where they price discriminated on any grounds that they felt they necessary.

In the Petroleum Pipelines Industry, they approved an increase of 8.53% - as opposed to the 22% - in allowable revenue for Transnet Petroleum Pipelines for the period 2013/14, and made decisions on 60 storage and loading facilities. Eight construction licences and three operational licences were approved. Seven construction and storage licences were amended and 13 storage licences were revoked. 67 suspected unlicensed activities were investigated – only four of these did not require a licence. All the others indicated that they would apply for a licence

Strategic Plan (2012/13 – 2016/17)
The strategic outcome oriented goals of NERSA were in tune with its mandate and it was shown how these were reflected the 12 National Outcomes. Other Government Strategies were not completed at the time of finalisation of the Strategic Plan (2012/13 – 2016/17), these include the National Development Plan (NDP), Industrial Policy Action Plan (IPAP) and the Strategic Infrastructure Programme (SIP), however they would be taken into consideration in the new planning cycle starting in June 2013.

NERSA will deliver on its objectives via these six programmes that cut across all three regulated sectors: 
▪ Setting and/or approving tariffs and prices;
▪ Licensing and registration;
▪ Compliance monitoring and enforcement;
▪ Dispute resolution including mediation, arbitration and the handling of complaints;
▪ Setting of rules, guidelines and codes for the regulation of the three industries; and
▪ Establishing NERSA as an efficient and effective regulator.

When the organisation reports amongst themselves and with the Department; they plan, budget and report according to the above mentioned six programmes according to the three sectors.

Challenges, NERSA’s Response And Links To Programmes
Across all three industries there were challenges. For the Electricity Industry Regulation, the challenges were:  Demand and Supply, Transport and reliability, Distribution and reticulation and Access, affordability and investments. For the Piped-Gas Industry Regulation, the challenges were: Lack of credible gas anchor customers, Ensure that prices are equitable and competitive for all categories / classes of customers, Entry to and competition within the gas market, Loss of credibility and regulatory reputation can deter development of the gas market. For Petroleum Pipelines Industry Regulation: Construction delays have resulted in increased capital costs which will attract higher tariffs, Tariff increases may incentivise other modes of transport (road and rail) when pipelines need higher volumes, Security of supply of petroleum to the inland areas, Applicants for storage construction licences need to find areas of low/no competition to remain competitive, Promotion of third party access.

The regulator had to be responsive to and establish programmes to deal with these challenges. It went through each of these challenges and stated how NERSA had responded and what programmes it had instituted. It also looked at cross-cutting regulation and organisational challenges.
Annual Performance Plan (2013/14 – 2015/16)
Ms Phindile Nzimande outlined the Key Performance Indicators (KPIs) and targets for each of the six programmes for the three sectors and for cross-cutting regulation and the organisation for 2013/14.

Budget and Funding
NERSA's ring-fenced methodology was explained. According to Section 13 of the National Energy Regulator Act, all accounts for the three regulated industries have to be ring-fenced. The common costs allocation ratio for electricity, piped-gas and petroleum pipelines industries is 58%:21%:21%. The budget per programme and per sector was provided.

In conclusion, Ms Nzimande said that NERSA is conscious of the regulatory burden it imposes; it was striving for regulatory certainty to create a conducive environment for attracting orderly investment; filling legislative gaps was a priority; and its regulatory challenge was to balance the interests of suppliers and customers.

Discussion
The Chairperson said what one would have noticed was the significance of regulation in the energy sector. Regulation in the energy sector was fundamental not only to ensure compliance but also to have a very strong facilitative element with not only the suppliers that had to comply but also with investment in the industry and catering for customers.

Mr L Greyling (ID) said NERSA handled the tariff determination for Eskom particularly well and the country breathed a collective sigh of relief over the 8%, however it was not to certain if Eskom carried the same sentiments as they had been struggling to meet some of their commitments. There had obviously been a move from a three year to five year determination, which was good for certainty; however the concern amongst certain industry players was the rigidity of this new determination. Would revisiting it be entertained if Eskom suddenly felt that it was in a pressurised situation and asked NERSA for a bigger increase?

As the Committee heard last week the nuclear programme was now a non-negotiable. On Eskom’s application, an indication had been given as to what that would mean for electricity pricing going forward. It would mean a 20% to a 24% year on year increase for five years. If the nuclear programme was indeed non-negotiable and would have to be paid for during the current tariff determination, did NERSA foresee revisiting the tariff determination and could that leading to sharp price increases?

Regarding the BHP Billiton deal, which NERSA was now dealing with, Mr Greyling agreed with the process taken which was opening it up to public hearings. However, if necessary from the public hearing outcomes, would NERSA have the jurisdiction to revisit the deal even if the deal was signed off and Eskom had entered into an existing contractual obligation.

According to some in the industry, the tariff awarded for fuel tank storage  created a disincentive for fuel companies to store their petrol and this had led to shortages in some areas. Had NERSA investigated to ensure tariffs were not acting as a disincentive? According to the news lately there had been delays at Medupi. According to the contractors’ contract there were penalty clauses for delays. Could NERSA play a role in ensuring the penalty clauses were invoked? Could it indicate if penalties had already been invoked?

With regards to municipalities, he was glad to see that they allowed the customised Inclining Block Tariff (IBT), he was however conflicted about the IBT which was largely a problem due to the institutional arrangements around electricity. On one hand, it acted as an incentive for the residential user to be energy efficient but on the other, it acted as a disincentive for municipalities to encourage energy efficiency. If your high end user, adopted a very aggressive energy efficient route, it moved them down to the lower block of consumption and that would have a huge impact on the revenue of the municipality. He asked if NERSA had looked into this issue and the disincentives at that level and how best to approach it. Noting the mention of the Chevron pipeline, was it a new pipeline for construction or the one that currently connected with Saldanha? If new, what were the costs involved?

The Chairperson advised that the CEO need not respond to the BHP Billiton deal as it was a sensitive issue, and asked members to give NERSA space to conclude the deal. Once concluded they may invite NERSA, BHP Billiton and even Eskom to brief the Committee, and in the meanwhile Committee would do monitoring of its own. 

Ms Nzimande replied that it was always better to have longer control periods than shorter ones; it created certainty and sent firmer price signals. With longer control periods inevitably came the reopening of these types of determinations, the instances of reopening had very clear rules for Multi-Year Price Determination (MYPD) and once those were triggered, the regulator has to reopen the process. It could be reopened on application by an operator or the regulator could move to do so.  Currently, it could not be anticipated that they may be reopened. Looking at previous experience, there had been two three-year MYPDs, the first was reopened almost every year but things were better with the second period. Generally, the process was getting better at making projections, at sticking to what the regulator had promised. Should the triggers for reopening the MYPD3 be met, the regulator would have no option but to follow due process and reopen. It could not be said presently if nuclear would be the reason as the funding arrangements were not finalised. Ordinarily, the renewables could have been a cause for the reopening. The regulator would have to deal with the matter when it arose, but it would prefer to have longer control periods.

Regarding storage tariffs, it would be a surprise to learn that the level of tariffs acted as a disincentive for companies. The methodology utilised to determine the tariffs was a methodology to allow operators to recover their investment with reasonable returns. There was also flexibility in that two methodologies were allowed. There were other reasons why operators and oil companies had not been investing in storage, and they had to do with the global petroleum and crude product market. The matter may be more of a business issue rather than being a disincentive created by the tariff. However, NERSA was doing a regulatory impact assessment and it would look into the matter.

Generally the energy efficiency programme in the country was challenged; for starters the country needed to shift from a mentality of surplus. The issue was further complicated by the fact that electricity was a source of revenue for municipalities, 66% of municipalities were sitting with artificial revenue from electricity and they felt entitled to it. However, the regulator was looking into issues of energy efficiency in relation to municipalities and was in discussions with the Department of Energy (DoE) to ensure that municipalities were incentivised to encourage energy efficiency interventions. The implementation challenge with energy efficiency at this point was that municipalities did not fully understand some aspects. For instance they were not aware that they could access the Energy Efficiency Fund if they embarked on intervention strategies. The goal was for the appropriate efficient use of energy without harming those who were currently benefiting, like those municipalities that relied on energy for revenue. There had already been a shift with SALGA entertaining energy efficiency.

The Chevron pipeline application related to two pipelines, the one from Saldanha and another one from Cape Town harbour to the refinery. The annual revenue to be made out of that was R78 million, with 8.8 billion litres of crude to be stored and moved and the Regulatory Asset Base is 661 million. It was a reasonable investment that was an indication that the country was doing something right for an entity like Chevron to invest so much money in improving capacity on the pipelines.

Ms N Mathibela (ANC) thanked NERSA for the Techno Girl programme and its success in Limpopo and encouraged them to keep up the work, especial in rural areas. Regarding LPG storage, it was previously mentioned that Chevron had storage in Ladysmith. How far was NERSA with that and was it functional yet? Also, with liquid fuels, DoE indicated there was planned revision of legislation for the 20 year liquid fuels infrastructure, was there any progress on that?

Ms Nzimande replied there had been concerns raised previously about the LPG storage within Saldanha Bay, where a facility was being closed and the regulator had no alternative. However, there were developments coming through in the Eastern Cape through the Ngqurha area. Also an application was approved by one operator in Johannesburg to store LPG gas. There were also investments in the LPG sector that would ultimately result in infrastructure.

Regarding Chevron and the storage facility in Ladysmith, what had happened was that oil companies had reacted to another route; the new route bypasses the Ladysmith facility and was no longer required. However, there were new applications along the route of the new pipeline. Overall there was still high level of revocation on application which was an issue the DoE was looking into. The revision of the 20 year liquid fuel master plan was a programme of the DoE. NERSA, like all other stakeholders, had enjoyed the audience of the Department in raising issues.

Ms B Ferguson (COPE) asked if it was possible for the Committee to get a report from NERSA in the next six months on how they were doing with their targets and commitments, as they had highlighted a lot of work to be done. The Committee would monitor if they were on track with the work. Another concern was around municipalities and how NERSA was capacitating them to deal with service delivery hotspots, like water and electricity. The message needed to get across to all communities how things worked, for instance with the five year tariff determination and whether or not it was set in stone.

Ms Nzimande replied that NERSA had already filed quarterly reports to the Department on where they were with the various KPIs and would be happy to share the reports with the Committee or alternatively come and report to the Committee on a six monthly basis.

Municipal guidelines were an annual determination, generally during the year municipalities were not encouraged to reopen their determinations. However there was a basis to reopen a tariff determination.

As a regulator, NERSA had noticed capacity shortcomings and had worked with municipalities on what needed to be done. However the regulator could not lend capacity to the municipalities, as they were a regulator. In terms of messaging, the regulator encouraged responsible messaging. For instance in one community dispute in Soweto where people were unhappy with prepaid meters installed by Eskom, the community specifically requested the intervention of NERSA. The matter was resolved with the community acknowledging the meters were legitimate, so the regulator did play a positive role when specifically invited but it could not be present at all such instances.

Prof S Mayathula (ANC) referred to the licences approved and asked how many were actually received by NERSA? For instance, 47 licenses were approved however the presentation did not specify how many were received. Also there was confusion around benchmarking of regulatory decisions against international best practice. It had been stated that regulatory decisions were not benchmarked, however the presentation did state that NERSA was now benchmarking.

Prof Mayathula referred to Programme 6's Research on Sources of Energy and noted that the baseline stated that no work and research had been done. Also, Programme 4's Investigation of customer complaints stated that to ensure fairness and equity in the pipe gas market the baseline was "12 months to complete", that may prejudice the customer who may suffer harm from the alleged unfair practice. Yet Slide 94 stated  “100% of complaints received investigated and reported on within 60 days”. It was not clear if these were the same complaints that took 12 months to be completed or different ones. He noterd that he had taken the Committee to a village called Rhamrha, where according to government targets it would take 17 years to electrify the area. However NERSA had stated that it could be done by 2014. This begs the question which target was more realistic - the government framework target or NERSA?

Ms Nzimande replied that the 47 application that were approved were the only applications they received, everyone that had applied had their application granted. As a regulator, NERSA could not encourage people to apply but rather it had to wait for the applications.

She agreed that according to the original strategic plan submitted to the Committee, it stated that there was no benchmarking of NERSA decisions. Now one year on, the document was a year old and now one year on they could say that they were benchmarking. It had identified the need to benchmark and going forward there would be a baseline.

Regarding the electrification of rural areas, government set itself a 100% target for access by 2014. NERSA would then have to operate within government policy in their determinations to make an allowance for the electrification rate that would meet that target. However looking at the number of electrification projects now and how much had been delivered, that target was not likely to be met. All NERSA could do was to facilitate in meeting that target.

Mr S Radebe (ANC) asked for clarity on the 13 licences that were revoked, the circumstances of the revocation and most importantly if Historically Disadvantaged Individuals (HDIs) were affected and the measures in place to assist them. NERSA said that it contributed to service delivery under “National Outcome 4 as NERSA had created decent employment to contribute to economic growth. However it did not specify how many jobs were created and where - that was an achievement to be acknowledged.

Another issue was the challenge with the establishment of consumer forums, where it was proposed that a regulation should be issued by the Minister but it had not been issued yet. As the Portfolio Committee, one of its responsibilities was to ensure any glitches were unlocked. If the Department could explain to the Committee why there were delays in placing the regulation, then the Committee could assist with that.

Relating to the security of supply inland, NERSA had mentioned that they had strengthened their monitoring strategies to ensure that there were no shortages. The crisis was due to a lack of storage capacity inland. However, monitoring was not enough. There should be work done to increase storage capacity and security of supply.

Ms Nzimande explained that only major oil companies were applying to revoke their licences like Engen, BP and some of Chevron. No HDIs were involved, therefore no measures were in place as there had been no revocations by HDIs. There was information on the website to ensure that HDIs were aware of available opportunities in storage.

NERSA had only employed 156 people in the institution. However NERSA meant that by ensuring that there was continued investment in electricity infrastructure and other energy infrastructure, and therefore creating economic activity in the country, NERSA had created a precondition to the achievement of Outcome 4 at national level. Basically, NERSA did not play a direct role but rather a catalyst role in job creation.

There were discussions with the Department about the regulations that would facilitate the consumer forum. The Director General had recently instructed her team to ensure that the regulations were finalised. Until the regulations were in place to allow NERSA to enforce entities, at the moment the regulator could only persuade them to establish the consumer forums.

The Chairperson interjected that the focus should be on the opportunity cost. If you do invest in persuasion now, by the time you come to enforce this according to regulations, they would have already agreed and participated on their own volition, so that would make things easier.

Ms Nzimande replied that increasing storage capacity inland to prevent future bottlenecks could possibly be done. However the investors need to see the business case for doing that. What had happened was that all the players held back all at the same time about increasing storage inland. It was a question that the Department and NERSA were grappling with as they might be doing something wrong for them to pull back. Recently, some had indicated interest in investing in storage inland. The big investment that the country did want was to ensure that the pipeline was built.

Mr Selau said the Integrated Resource Plan (IRP) referred to a 2014 guideline. However this was after the production of the NDP which stated 98% of South Africans should have electricity by 2025. The Director General had confirmed that the NDP would then supersede the IRP. It would be nice when NERSA was addressing public representatives and making presentations as good as this to share what dreams they had about electrifying the country. The mandate merely stated what the regulator was and what it had to do, but nothing about their dream as a regulator. Also, the name of the body suggested that all things that deal with energy were regulated by the body, whereas there were other regulating bodies. Were there perhaps discussions about create one energy regulating body that would encompass all aspects of the sector?

Ms Nzimande said the issue of access to electricity was a universal matter and a government policy matter that NERSA facilitated. Conflict with documents and targets was referred to the government to clarify so NERSA could continue to facilitate at the bottom.

Even in Europe, the dream of regulators was evolving, initially the dream was to privatise and establish a competitive environment but rather than adopt principles from other countries there was a shift to implement what worked for the country independently. The dream of the regulators evolved with that of the country and they also took the lead from the energy policy landscape. Presently the dream of the regulator was to ensure fairness, access and ensure there were investments so that the dream of universal access was achieved.

Regarding a one-stop-shop energy regulator, generally energy regulators did not regulate the primary energy sources. By international protocol, nuclear regulators were required for safety requirements to deal with the many facets associated with nuclear such as nuclear waste. However the energy sector is vast and had many components and the many regulators had a crucial role to play.

The Chairperson said it was striking that one of the outcomes was cost effective tariffs that would encourage investment. At some stage Members needed to engage on that issue not only with NERSA but with other key players as well. On customer education, clean energy education and empowerment, it was not enough to merely say more could be done and that there was room for improvement. That was a given, the question should rather be on how effective had NERSA been in tapping into existing programmes in these initiatives.

One of the strategic goals was to establish a regulatory environment that would encourage investments, which would be what NERSA was certainly already doing. However were there any enhancement plans to contribute to the work already being done, given the pressures for more energy. The same went for compliance and how monitoring compliance could be enhanced. With the sector restructuring, did NERSA foresee how that may affect them; perhaps in a sense it could improve the efficiency of the regulator.

The Chairperson asked about Eskom’s approved transmission development plan and its relationship with ADAM and whether ADAM was within or outside that framework. Would the monitoring of the implementation of MYPD3 include municipalities? With the consumer forums that the regulator was holding, were they any different from the ones that Eskom held, perhaps their relationship was complementary and duplication should be avoided. Also with the new pipelines, would it take other fuels beyond diesel? He questioned the situation and status of the existing pipelines.

The Chairperson noted the CEO introduce the term  “common carriage” and asked for clarity on that term. Involvement of third parties was always an issue in any situation. Referring to cross-cutting regulation, there was reference to information asymmetry. This could possibly be an area that needed collaboration with the Department on data management or more of an internal exercise. The challenge of proper data was still real in government and specifically to the energy sector.

He commented that the harmonisation of regulatory processes, with the introduction of the amendments would address the shortfalls in regulation and legislation quite progressively. Reiterating the sentiments of Mr Selau, the Chairperson asked what NERSA’s dream was for 2020 to 2025.

There were plans to improve human resource policy and human resource planning, could the regulator comment on readiness for SIP in this regard or was it too early. Around enabling technology, reference was made to the improvement of ICT processes. How would that be factored into a smart grid. It was fine and great to look at growth and new forms of energy, but it was equally fundamental to look at efficiency.

Ms Nzimande said when acknowledging there was room for improvement they were admitting that they could be more creative with customer education initiatives and join with other entities to educate the customer - perhaps even moving from customer education to customer advocacy to empower the customer.

Some regulators have certain powers that NERSA did not have; they had been in touch with the DoE to consider amendment of laws to grant the regulator such powers. The system was still establishing itself, however the more equipped the regulator in the sector, the investments could be further encouraged.

The area of compliance monitoring could always be enhanced; the regulator was in communication with the DoE as far as they could assist with legislation, and on its own the regulator was always investigating about how it could improve. With any restructuring in the sector, the efficiency of the regulator would certainly be affected. There was still an outstanding Bill, but the regulator would react to any change in legislation as it came into effect.

ADAM and the transmission development plan fitted into and complemented one another; there was however room for more alignment. All three components of the values chain would have to be in order. Currently there was a synergy between the two which was what was needed.

Though there was a risk of duplicating Eskom’s customer forums, the forums were specific to each supplier. There was a case to be made for these to work together where there was proximity. To clarify what is meant by “common carriage”, this meant that the pipeline belonged to A, but B and C could also use it to carry their product.

Information asymmetry was a common phenomenon in the regulation sector where the entity would have more information than the regulator. The question was then how do you close that gap. NERSA collaborated with the DoE. Though NERSA had a working formula between the Department and Eskom, it was still a constant battle between regulators and the entities. In some instances, regulators had been forced to make assumptions due to entities withholding information.

The Chairperson expressed shocked that entities could withhold information. Then how accurate was “team energy” in energy planning? The Integrated Energy Plan (IEP) was fast approaching. How accurate then would the data used on it be? It was of great importance to have accurate and available data on line.

Ms Nzimande said harmonisation of laws was an ongoing process, there was scope for harmonisation and where possible the DoE had been approached to do so, however it was a work in progress.

The Chairperson suggested the CEO provide the Committee with a matrix of how that would ideally work, so that when the Members heard inputs from the regulator and the Department down the line, they had baseline information.

Ms Nzimande said, under enabling technology, the role of NERSA with smart grids was an operational issue, which would lead to a greater and better interaction of systems.

Unlicenced facilities were a concern as the regulator could not understand why entities thought they did not need licences; some entities even refused to take possession of their licences.  However those entities that the regulator had approached, they had been willing to comply and applied for licences.

Prof Mayathula asked if NERSA needed any assistance from the Committee as law makers. NERSA made reference to the Gas Act that need to be reviewed. What was the status of that and could the Committee assist in any way to fast track that? The same applied concerning the pipe-gas industry regulations and any assistance that the regulator required from the Committee to push through legislation side. It was concerning to hear that the regulator relied on consultants and he hoped that position had changed.

It had been stated that new entrants were discouraged by the perceived complicated licence application processes. He hoped that with the intervention on NERSA and as reflected in their presentation that the process was now simplified. There was a concern about South Africa not taking advantage of countries that had oil. Mozambique discovered gas. How would South Africa be taking advantage of that? Also clarity was needed on the ISMO Bill matter where it stated that NERSA would not be ready when the Bill was passed. Finally, he asked if there were weak provisions in the Gas Act that needed to be looked at.

Ms Nzimande said that although the law had not been passed, they had been able to persuade entities to comply with the regulator. The amended law was coming sooner or later and when it did, they would be forced to comply with forums - now it was still on their own accord. The Department had set up a task team, which included NERSA, to review the Gas Act and the regulator had made a submission on the gaps in the legislation.

Reliance on consultants had been reduced; however there would always be use of consultants for certain skills. The regulator was making use of existing staff for some of the functions that were previously handed over to consultants.

There had been significant improvements in the licensing process. It had definitely been simplified and it had advertised the steps on how it worked, and there had been results.

The Chairperson said the regulator had mentioned that their views were not taken into consideration and were not included. Also there was the question of readiness in certain areas. Could fragmented regulation be a factor in the confusion and in the manipulation of loopholes in the legislation. Fragmented regulation was sensed throughout government, especially in the energy sector.

Ms Nzimande said in drafting the strategic plan concerning risk factors, the wording was: what were the risk factors, what was the impact if the risk factors were not addressed and NERSA’s response in that instance. So with the amending of regulations, that was an Act that could be amended in terms of risk factors. Should there be no amendment to the legislation, NERSA’s response would be to conduct active regulator advocacy.

There were weak provisions in the Gas Act and the regulator had addressed these with the DoE and suggested how they could be improved on.

The Chairperson commended the regulator on its role as a facilitator, the forward thinking on the gas pricing process and the gas pricing compliance to enforce certainty.

Meeting was adjourned.