National Energy Regulator of South Africa 2012/13 Annual Report briefing

Energy

14 October 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The National Energy Regulator of South Africa (Nersa) briefed the Committee on its Annual Report for 2012/13. The Audit and Risk Committee also briefed the Committee on its audit report findings on Nersa. The Committee reminded Members that the Committee was under serious pressure to finalise the report for the Budget Review Process, but cautioned that there should not be mere compliance at the expense of quality consideration.

Nersa explained that it was a public entity established in October 2005, in terms of the National Energy Regulator Act of 2004. It regulated the electricity, piped gas and petroleum pipelines industries. It had established three governance subcommittees, namely the Audit and Risk Committee, the Finance Committee and the Human Resource and Remuneration Committee to strengthen its governance. In the 2012/13 year it had achieved 87% of its targets in 2012/13, and these were illustrated, with reference to what its strategic outcomes sought to achieve in terms of security of supply, supporting sustainable socio-economic development, facilitating investment in infrastructure, and being a credible and reliable regulator in order to create regulatory certainty. NERSA also contributed to strategic integrated projects, around green energy, electricity generation and electricity transmission and distribution. More than 90% of Nersa’s regulatory decisions were not questioned, proving that Nersa was a credible, predictable and consistent regulator. Nersa’s decisions were also benchmarked against international best practices.

The achievements from the 2012/13 financial year included Nersa’s approval of an average annual increase of 8% in the revenue requirements for Eskom for the next five years. It had issued nine distribution licences between Eskom and Independent Power Producers. It had approved the maximum prices for piped gas for Sasol Gas for three years. It hosted the first South African Energy Regulators Conference in August 2012. On the financial side, it collected levies of R204.2 million; R106.1 million from the electricity industry, R56.1 million from the piped-gas industry and R42 million from the petroleum pipelines industry. Its expenditure amounted to R198.4 million. This represented an under-spending of 14.6% compared to the budgeted amount of R231.3 million. Total irregular expenditure not yet condoned at the year was R2.7 million and fruitless wasteful expenditure was R1.2 million. It had never received a qualified audit outcome. However, there were matters of emphasis in this report. This was a result of SARS payments which were never recorded in the previous financial years, and the entities were busy with reconciliations to determine the final amounts owe. Some activities wrongly captured as payables in the previous financial periods resulted in the matters being classified as fraudulent activities, but this decision was later reversed after a fuller investigation. The Committee was also told of fruitless and wasteful expenditure of R1 222 related to interest charged on Telkom account, which was due to invoices received late, but this had been followed up by management.

The Audit Committee informed the meeting that there was a properly functional audit and risk committee and outlined the work that it was doing. It was developing a training plan, and had discharged the responsibilities set out in the Public Finance and Management Act. It explained the audit findings, and the corrective action taken, and also confirmed that all comments by the Auditor-General from the previous year had been taken into account. The Committee was satisfied that the internal control, risk management and governance processes were effective and that there were no deficiencies in the system. The electronic systems currently being developed would improve the efficiency of the process still further. It was noted that a permanent Chief Financial Officer had yet to be appointed.

Members agreed that Nersa’s work was quite admirable. Legislative constraints with regard to the Electricity Regulation Act (ERA) and National Energy Regulation Act (NERA) were raised as a concern, as it was clear that these would not be passed by this Parliament. There was quite substantial discussion was raised around Nersa’s risk management and what the audit outcomes in this regard were. Low performance in municipalities was also an area of concern, especially since the implementation of the inclining block tariffs was low and Members asked what interventions were in place to assist struggling municipalities. Nersa was asked to comment how the Eskom 8% tariff increase would affect Eskom’s sustainability and whether it had contributed to its declining credit rating. Members asked about the BHP Biliton contracts, but were told that these matters were sub judice and that a full report would be furnished once the matter was finalised. They asked what regulations mechanisms Nersa had in place for dealing with small scale embedded generation, especially pertaining to the licensing of these structures. Questions were raised also around the reasons for declining licences, the fluctuating interest rates and their effects on Nersa and what the suggestions were for addressing the rising costs of construction at Medupi and Kusile. More detail was requested on regulation issues being focused on, as well as the study on gas research. Use of time metering was explored, and Nersa was asked how far it was in developing a regional electricity grid for procuring large amounts of electricity. The comment was made that Nersa needed to play a more prominent role in the transformation of the sector.
 

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the team from the National Regulator of South Africa (Nersa). The briefing was stage six of part the budget review process and the Committee needed to finalise its report by Friday 18 November 2013. The Committee was therefore operating under tight schedules but he cautioned that the emphasis on compliance should not outweigh the need for quality work.

Mr Njikelana noted the apologies of the Minister and Deputy Minister, who were unable to attend the meeting. He also noted an apology from the Chairperson of the Audit Committee of Nersa.

National Energy Regulator of South Africa (Nersa) Annual Report 2012/13: briefing
Ms Cecilia Khuzwayo, Chairperson, Nersa, thanked the Committee for the opportunity to present the 2012/13 Annual Report and noted that Nersa was a Schedule 3A Public Finance Management Act, 1999. The public entity was established in October 2005 in terms of the National Energy Regulator Act of 2004. Nersa regulated the electricity, piped gas and petroleum pipelines industry. She said that during its term of office, Nersa’s Board had led the organisation to stronger governance through establishing three governance subcommittees, namely the Audit and Risk Committee, the Finance Committee and the Human Resource and Remuneration Committee. Nersa’s activities against planned activities therefore increased from 66% in 2009 to 87% in 2012/13. Improved performance could be attributed to rigorous monitoring of implementation of planned activities, strengthening the Board’s secretariat function and developing and implementing a Risk Management Framework. More than 90% of Nersa’s regulatory decisions were not questioned, proving that Nersa was a credible, predictable and consistent regulator. Nersa’s decisions were also benchmarked against international best practices.

Nersa’s mandate was anchored in four primary Acts:

•National Energy Regulator Act, 2004
•Electricity Regulation Act, 2006
•Gas Act, 2001
•Petroleum Pipelines Act, 2003

Strategic Plan 2012/13 – 2016/17
Ms Phindile Baleni, Chief Executive Officer, Nersa, explained that Nersa’s strategic outcome-oriented goals were vital in facilitating the achievement of the national socio-economic and socio-political development agenda. Nersa’s strategic outcome oriented goals were to:
- facilitate security of supply in order to support sustainable socio-economic development in South Africa
- facilitate investment in infrastructure in the energy industry to support sustainable socio-economic development in South Africa
- promote competitive and efficient functioning of the energy industry in order to sustain socio-economic development in South Africa
-facilitate affordability of and accessibility to the energy industry, to balance economic interests of all stakeholders, again in support of socio-economic development of South Africa and a better life for all
- position and establish NERSA as a credible and reliable regulator, in order to create regulatory certainty

NERSA also contributed to certain Strategic Integrated Projects (SIPs) from the National Infrastructure Plan (NIP). The first was Project 8: Green energy in support of the South African economy. Here, Nersa’s contribution included offering advice and comment with regard to cleaner fuels, driving renewable energy programmes and promoting the introduction of renewables and gas into the energy mix. Nersa also incorporated compliance with the National Environmental Management Act of 1998 and facilitated the transformation to a low carbon economy.

Project 9 involved electricity generation to support socio-economic development. Nersa contributed through regulating in a manner which facilitated security of supply, and set rules and frameworks that facilitated the building of new infrastructure. Tariffs and prices were also set and/or approved to reflect cost effectiveness, which encouraged investment. Compliance was also monitored through undertaking technical audits, leading to regular maintenance and refurbishment of infrastructure.

Project 10 related to Electricity transmission and distribution. Here, Nersa contributed by taking affordability into consideration when setting and/or approving tariffs and prices and by implementing agreements with business for electricity consumers. Reliability of supply was facilitated and the maintenance of infrastructure was monitored. Compliance with license conditions was also monitored.

Ms Baleni explained that Nersa also contributed to the metal fabrication, capital equipment and transport equipment sector, through the implementation of Energy Efficiency Programmes through a combination of minimum energy performance requirements and the compulsory labelling requirements for appliances. Nersa contributed to green industries through on-going gradual increment of local content requirements with every successive renewable energy Independent Power Producer (IPP) Procurement Programme bidding round.

In order to achieve its outcome oriented goals NERSA delivered on its strategic objectives through the six structured programmes, dealing with the following:

•Programme 1: Setting and/or approving tariffs and prices
•Programme 2: Licensing and registration
•Programme 3: Compliance and enforcement
•Programme 4: Dispute resolution including mediation, arbitration and the handling of complaints
•Programme 5: Setting rules, guidelines and codes for the regulation of the three industries
•Programme 6: Establishing Nersa as an efficient and effective regulator

Achievements:
Ms Baleni  proceeded to outline that in regard to the regulation of the electricity industry, Nersa approved an average annual increase of 8% in the revenue requirements for Eskom for the next five years. Under electricity generation, 47 renewable energy generation licenses had been approved. In addition, nine distribution licenses were issued for connection facilities between the Eskom delivery point and Independent Power Producer generation facilities. All Energy Efficiency Demand Side Management programmes had been evaluated for funding.

With regard to regulation of the Piped-Gas industry, the maximum prices for piped gas had been approved for Sasol Gas for three years, together with the transmission tariffs for 2014/15.

Nersa hosted the first South African Energy Regulators Conference in August 2012.

Financial performance:
Mr Zak Lombaard, Acting Chief Financial Officer, Nersa, explained that actual levies collected by Nersa amounted to R204.2 million, of which R106.1 million were from the electricity industry, R56.1 million from the piped-gas industry and R42 million from the petroleum pipelines industry.

The actual expenditure for the period 1 April 2012 to 31 March 2013 amounted to R198.4 million. This represented an under-spending of 14.6%, compared to the budgeted amount of R231.3 million. Total irregular expenditure not yet condoned at the year end was R2.7 million and fruitless wasteful expenditure was R1.2 million.

Audit Outcomes:
Ms Baleni said Nersa had never received a qualified audit outcome to the present. However, in this year, it received a Matter of Emphasis around the restatement of corresponding figures. The South African Revenue Services (SARS) was busy with reconciliation to determine if and how much money was owed by Nersa. Verification of assets was done twice a year.

Administrative matters
With regard to the staff profile, the gender profile was 54% for female and 46% for males within the entity. In regard to international relations, Nersa was the current Chair and Member of the Executive Committee of the Regional Electricity Regulatory Association of Southern Africa (RERA). The objectives of RERA were to build capacity and information sharing, to facilitate the Electricity Supply Industry Policy, legislation and regulation in the region and to promote regional regulatory cooperation.

Nersa was also a member of the African Forum for Utility Regulations (AFUR) and the Energy Sectoral Committee. AFUR focused on issues related to the regulation of the energy, telecommunications, and transport, water and sanitation sectors.

Ms Baleni, in conclusion, said that the work of Nersa continued to have a profound impact on the lives of ordinary people as well as on the economy of the country. The regulation of the three energy industries characteristically continued to pose challenges, because the Energy Regulator was required to balance the conflicting interests of licensees, consumer/end-users and policy makers. Nersa had, however, achieved 87% of its targets for 2012/13. Its staff turnover had also stabilised over the years.

Presentation: Audit and Risk Committee Report
Ms Thulisile Mashanda, Member: Audit and Risk Committee, Nersa, thanked the Committee for the opportunity to present the Audit Report for Nersa. NERSA was in the process of developing a training plan for all Audit and Risk members on audit, risk and corporate governance matters.

The Audit and Risk Committee discharged its responsibilities in accordance with the Audit and Risk Committee Charter, which was in line with the Public Finance and Management Act (PFMA). This Committee was, among other things, responsible for the review of:

•Effectiveness of internal control systems
•Effectiveness of the Internal Audit function
•Risk areas to be covered in the scope of internal and external audits
•Adequacy, reliability and accuracy of financial and performance information
•Monitoring compliance with applicable standards

She confirmed that for this year, Nersa received a Matter of Emphasis restatement on corresponding figures. This was a result of SARS payments which were never recorded in the previous financial years. SARS and management from Nersa were currently busy with reconciliation to determine the amount of money owed by Nersa. Activities which were wrongly captured as payables in the previous financial periods resulted in the matters being classified as fraudulent activities. However, a decision to reverse these activities was taken after the conclusion of the investigation into these activities. Fruitless and Wasteful expenditure of R1 222 related to interest charged on a Telkom account, due to invoices having been received late. Management followed up with Telkom, to ensure that the invoices were received on time.

Ms Mashanda explained that in regard to the Management Report, Nersa management had implemented all agreed action plans on findings from the Auditor-General from the 2011/12 audit. Management was therefore committed to continuously improving the internal control environment.

She commented that the internal control risk management and governance processes were effective. There were no material deficiencies within the system. The Audit and Risk Committee was satisfied with the robustness of processes and practices. However, she noted that management was in the process of developing electronic systems, which would improve the efficiency of the process and minimise risks. The Audit and Risk Committee reviewed un-audited and audited performance information and financial statements, and was satisfied with the evaluation processes on financial statements. The need for more robust oversight with special focus on shortcomings was identified by the Auditor General. However a permanent Chief Financial Officer still needed to be appointed.

Ms Khuzwayo believed, in conclusion that the entity had matured well as a national regulator.

Discussion
The Chairperson said Nersa’s work was quite admirable. However the legislative constraints had to be acknowledged and it should be noted that the Committee would not be able to handle the Electricity Regulation Act and National Energy Regulation Act before the end of the current term.

The Chairperson asked what was the South African Local Government Association’s (SALGA) response to Ekurhuleni’s model for the resale of electricity, and how would this model be implemented to the rest of the distributors?

The Chairperson said that Nersa’s achievements were worth noting, especially with regard to the reduction of internal constraints. However he asked how it had managed to achieve 90% performance with 90% expenditure and wanted it to share its methods for the efficient use of resources?

The Chairperson asked for comment from the Audit and Risk Committee’s analysis on risk management within Nersa.

Mr K Moloto (ANC) asked what Nersa’s remuneration policy was for providing bonuses to the Executive. He wanted more detail on what had happened with the Durban-Johannesburg pipeline failure. He asked why was the electricity license for the Karoo revoked, and the reasons why the 30 storage licences were revoked. Why were municipalities struggling with implementing the International Business and Trade (IBT) Partners and what were the reasons for non-compliance? What interventions were in place for assistance? How did Nersa manage the interest rate risk and how did fluctuations impact the rate?

Mr L Greyling (ID) said Eskom was not too happy with the 8% tariff increase and asked for comment on Eskom’s long term sustainability subsequent to this increase? Eskom’s credit rating had also been downgrading since the tariff increase. The booming costs at the Medupi and Kusile power plants were a serious concern and he wanted to know if Nersa was playing a role to ensure that these costs were kept in check.

Prof S Mayathula (ANC) asked that detail be provided to the Committee on the regulation issues which the AFUR had focused on, with regard to energy, telecommunications, transport, water and sanitation sectors, and asked what legislation had been approved.

Mr G Selau (ANC) noted the comments on the financial and audit position.

Mr Selau asked why there was a need to distinguish between the National Nuclear Regulator (NNR) and Nersa. Why were payments to Telkom delayed?

Mr Moloto called for an update on the process with regard to the BHP Biliton contract, and what kind of resources had been dedicated to look into these contracts, including whether any experts had been brought in. In relation to small scale embedded generation, he referred to the Black River Park which had the largest rooftop solar installation system. There were serious confusion with such installations; and he asked whether these installations were required to get licenses from Nersa first? What guidelines were in place for small scale embedded generation? On time of use meters, he asked what point of view regulation assumed. Commenting that most targets at municipal level were removed by the Minister, he asked about the national roadmap for electricity distribution? He asked that a copy of the study conducted on gas research be provided to the Committee. Finally, he wanted to know how far was Nersa in developing a regional electricity grid for procuring large amounts of electricity?

The Chairperson said the BHP Biliton matter was a very sensitive issue and Nersa needed to be careful when it responded to the questions. Nersa should be careful not be compromise itself, as there were legal implications still on this matter.

Ms Khuzwayo agreed that in relation to BHP Biliton, the contracts were sub judice, and no comment could therefore be made on them yet.

The Chairperson said Nersa would be invited to brief the Committee once the work on the BHP Biliton contracts was completed.

The Chairperson added that the agreements between South Africa and Mozambique and South Africa and the Democratic Republic of Congo raised a few concerns with regard to hydro power and gas. The country was about to enter into agreements with France on nuclear energy matters so he wondered how far Nersa was in leading these agreements on regulations. South Africa needed to move towards being a Green Economy. The costs for building Medupi and Kusile were rising even more, and the ballooning of Medupi costs was a tricky matter. He wondered if Nersa had any space to do a prudency audit at Medupi, which would be a very useful tool.

Mr Greyling asked about the sustainability of Eskom and the energy supply industry. He asked why this removed was from the targets.

Ms Khuzwayo noted, in regard to the questions about the staff, that the Department of Energy (DoE) had a clear remuneration policy. The challenge was that full-time regulators were remunerated in line with Director-General Salary scales and these were approved by the Minister. However the DoE was losing a lot of skills because the entity could not match the salaries of other entities in the sector, such as Eskom and Transnet. Developing the necessary skills was a lengthy process. The current term of Nersa’s executive would be coming to end at the end of the financial year.

Ms Mashanda explained the late payment of invoices to Telkom, by saying that strikes at the post office resulted in delays with the delivery of invoices to Nersa. In relation to risk, she said the process followed developed a framework for risk appetite as well as the impact of these risks. Risk champions were then appointed to the top ten risks identified. A risk report was generated on a quarterly basis.

The Chairperson asked how Nersa was performing in regard to analysing and managing risk properly.

Ms Baleni replied that Nersa conducted a preliminary quality assurance review on internal audit, measuring against international audit standards. This was done every five years. There were therefore findings pertaining to the internal audit function and the work of the audit committee. Nersa responded to the findings and the Institute for Internal Auditors was busy finalising the recommendations. The material would be shared with the Committee. Some of the issues raised were around risk management and here she said that new frameworks have been approved.

Ms Baleni said, in relation to the question on the Durban-Johannesburg pipeline failure, that the leaked and it therefore had to be fixed. This resulted in delays.

Ms Baleni said that the Karoo district municipality license was revoked because of reallocation of functions. In regard to storage licenses she explained that some oil companies were adopting different models, which meant that pipelines would follow different routes. Where these licenses were no longer valid, they were revoked.

The Chairperson said the trends were very interesting and the Department of Energy (DoE) needed to monitor these closely.

Ms Mashanda replied to the question on IBT and said Nersa had worked with each municipality and 80% compliance was achieved.

Ms Baleni added that a lot of municipalities were moving fast in implementing the IBT as this was in their interest, and only 20% had not implemented. These municipalities had, however, submitted their implementation plans and Nersa was working with them to facilitating proper implementation.

Mr Lombaard replied to the question on interest rate and risk management. In regarding to the management of risk, he said that Nersa was taking cash surpluses and depositing them into corporations for public deposits; Nersa then received 1.5% interest more than it would have received from keeping the money at the bank. The interest received amounted to about R1.5 million for the year.

Ms Baleni believed that Eskom would be sustainable over the five year period, regardless of Nersa’s tariff decision. Commenting on the observation around the downgraded credit rating, she said a general pattern had been observed that a lot of countries were downgraded. There were many more factors that influenced the downgrading, other than Nersa’s tariff decision.

Ms Baleni said that in regard to Medupi, Nersa had become involved because the customers ended up paying for the construction costs. A regulatory credit account was created to level the system. She explained that at the beginning of the construction at Medupi and Kusile, many other countries around the world were also constructing power stations, and their projects also experienced escalated costs. Nersa would look into Eskom’s circumstances in even greater detail.

The Chairperson said the consumer needed to be protected from these booming costs. Project management needed to be better monitored.

Ms Baleni agreed said that she needed more time to get proper and detailed information on small scale embedded generation, and this would be sent later to the Committee. In relation to time of use metering, she said peak periods shifted for different operators, and this was a seasonal issue. Municipalities were experiencing different needs in different seasons. Nersa was, however, working with municipalities to discourage peak usage. Nersa played no role in ensuring municipal sustainability. 

Ms Baleni explained, in regard to regional integration, that similar policies between markers were needed before a regional grid could be developed. Inter-regional relations were on the basis of bilateral trade agreements. The establishment of the NNR was mandated by the United Nations and South Africa needed to comply, and that was why a nuclear regulation entity had to be established separately.

The Chairperson asked why only one target was met from the ten targets under the End User Forum. He asked how Nersa planned to achieve information asymmetry. He also wanted to hear more on Nersa’s plans with regard to piped fuel.

Finally the Chairperson asked Nersa to provide the Committee with information on the research it had conducted on alternative energy sources.

Ms Baleni said the End User Forum project was dropped by Nersa, and entities worked with Nersa on a voluntary basis. The challenge with information asymmetry was a worldwide one, but Nersa had developed a regulatory reporting system for entities, and information shared online would be analysed for consistency. A Regulatory Reporting Manual was also circulated electronically.  Nersa would also harmonise the transformation of the sector, which had been very slow. Storage capacity was also an area of concern among petroleum companies.

The meeting was adjourned.
 

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