National Energy Regulator of South Africa on its 2013/14 Annual Report

Energy

15 October 2014
Chairperson: Mr Z Majola (ANC)
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Meeting Summary

The Portfolio Committee on Energy received a briefing by the National Energy Regulator of South Africa (Nersa) on its 2013/14 Annual Report. The presentation was led by the Chairman of Nersa, Mr Jacob Modise.

Nersa was a Schedule 3A Public Finance Management Act of 1999. The Public Entity was established on 1 October 2004 to regulate the electricity, piped-gas and petroleum pipelines industry. In executing its mandate Nersa endeavored to balance the conflicting interests of both entities and the end users. Nersa was an independent regulator, functionally reporting to the Minister of Energy. The key highlights during the 2013/14 financial year were that Nersa received a clean audit from the Auditor-General, 90% of the annual performance targets were met, Nersa reported a net surplus of R16 216 874, no irregular expenditure was incurred and the vacancy rate was reduced to 5%.

Nersa’s strategic objectives were to:

•Promote energy supply that was certain and secure for current and future user needs
•Create a regulatory environment that facilitated investment in energy infrastructure
•Promote competition and competitiveness within the energy industry
•Promote regulatory certainty within the energy industry
•Promote accessible and affordable energy for all citizens
•Establish and position Nersa as a credible and reliable regulator

Nersa collected actual levies which amounted to R 226.9 million received from the following sources; electricity industry R 127.6 million, piped-gas industry R 51.9 million and petroleum pipelines industry contributed R 47.3 million. The actual expenditure for the period 1 April 2013 to 31 March 2014 amounted to R 227 million. This represented an under-spending of 10% compared to the budgeted amount of R252.8 million. Fruitless and wasteful expenditure was R5, 47500, relating to interest charged for late payment of invoices while irregular expenditure was at R0.

With regard to the audit outcomes, Nersa received a clean audit from the Auditor-General. Nersa continued to grow from strength to strength since its inception in 2005, and the results of its work continued to have a profound impact on the lives of ordinary people as well as on the economy of the country. However the regulation of the three energy industries characteristically continued to pose challenges in that the Energy Regulator was required to balance the conflicting interests of licensees, investors, consumers/end-users and the policy maker. To deal with regulatory challenges, Nersa has undertaken various initiatives to refine regulatory practices and methodologies in its quest to become a world-class leader in energy regulation and will continue to do so.

Some of the questions raised by Members were: when would Nersa achieve a 100% absorption rate for its learnership and internship programme? What plans did Nersa have in place for improving the 5% vacancy rate? The majority of the discussion was around the 4% tariff price increase for Eskom; what participatory process was followed in this regard? Members argued that there was wide public speculation that some of the reasons for this increase was as a result of the ballooning costs at Eskom, some of which had not been prudently incurred such as running the diesel generators at far more capacity than they were allowed for, together with the delays at Medupi. As a result, consumers were now forced to pay for the inefficiencies at Eskom. Was this the case? What action was being taken around the BHP Biliton deal; what were the timelines? Would there be a participatory process? Another matter of contestation was that of the diesel generators being used by Eskom; these generators were being used because of a lack of planned maintenance by Eskom; what steps was Eskom taking in this regard? On the girl-child programme, according to the presentation, this was a nation-wide programme. How was this programme a nation-wide programme when it was centered in Pretoria? How was it reaching learners on the rural areas throughout the country? What criterion was used in the selection of these learners? What public participation activities was Nersa involved in and what were the outcomes?
 

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed Members to the meeting, together with the officials from the National Energy Regulator of South Africa (Nersa) and all other stakeholders present.

Briefing by Nersa on its 2013/14 Annual Report
Mr Jacob Modise, Chairman, Nersa, thanked the Committee for the invitation and introduced his delegation. He explained that Nersa was a Schedule 3A Public Finance Management Act of 1999. The Public Entity was established on 1 October 2004 to regulate the electricity, piped-gas and petroleum pipelines industry. In executing its mandate Nersa endeavored to balance the conflicting interests of both entities and the end users. Nersa was an independent regulator, functionally reporting to the Minister of Energy.

Nersa was funded through the following levies:

•The Section 5B of the Electricity Act of 1987
•The Gas Regulator Levies Act of 2002
•The Petroleum Pipelines Levies Act of 2004

Mr Modise explained that Nersa’s mandate could be summarised as follows: issuing of licenses and setting pertinent conditions, setting and/or approving tariffs and pricing, monitoring and enforcing compliance with licence conditions, dispute resolution and handling of complaints, setting of rules, guidelines and codes for the regulation of the three industries and registration of import and production activities, among others. The key highlights during the 2013/14 financial year were that Nersa received a clean audit from the Auditor-General, 90% of the annual performance targets were met, Nersa reported a net surplus of R16 216 874, no irregular expenditure was incurred and the vacancy rate was reduced to 5%.

Strategic Plan (2012/13 – 2016/17)

Ms Phindile Baleni, Chief Operations Officer, Nersa thanked the Committee for the invitation. She said Nersa’s mandate reflected governments’ key policy priorities. Nersa’s strategic outcome oriented goals were, within the limits of Nersa to:

•Facilitate security of supply in order to support sustainable socio-economic development in the country
•Facilitate investment in and access to infrastructure in the energy industry

Nersa also contributed to creating decent employment through inclusive growth by promoting companies that were owned and controlled by Historically Disadvantaged Individuals (HDIs) to become competitive and by regulating in a manner which facilitated security of supply. Nersa also contributed to facilitating transparent processes and public participation where the public was invited to make comments prior to decisions being made. In addition, Nersa’s Techno Girls programme was committed to exposing young girls to Nersa’s activity during school holidays. These girls were from grades 9 to grade 12. Ten girls were taken in during the 2014 intake.

Nersa was involved in the following SIPs; SIP 8 Green energy in support of the South African Economy, SIP 9 Electricity generation to support socio-economic development and SIP 10 which dealt with Electricity transmission and distribution for all.

Nersa’s strategic objectives were to:

•Promote energy supply that was certain and secure for current and future user needs
•Create a regulatory environment that facilitated investment in energy infrastructure
•Promote competition and competitiveness within the energy industry
•Promote regulatory certainty within the energy industry
•Promote accessible and affordable energy for all citizens
•Establish and position Nersa as a credible and reliable regulator

Ms Baleni said Nersa’s performance against predetermined objectives were as follows:

Electricity achieved 99% of its targets

Piped-gas achieved 100% of its targets

Petroleum pipelines achieved 83% of its targets

Cross-cutting Regulatory achieved 86% of its targets, and

 75% of Nersa’s organizational targets were achieved

In total, Nersa achieved 90% of its targets, an increase from the 86% achieved during the 2012/13 financial year.  Some of Nersa’s achievements were that Nersa approved 182 out of 186 municipal private distributor tariffs, the Consultation Paper on Electricity Resellers Tariffs Guidelines were approved for public comment, Eskom’s retail tariff structural adjustment for 2014/15 was approved, 17 Renewable Energy Generation licenses were approved. Other achievements were that a preliminary investigation into the load shedding of 6 March 2014 was conducted and two successful workshops on the Non-Financial Information (NFI) Regulatory Reporting Manuals were held with Eskom and the Association of Municipal Electricity Utilities (AMEU). Also, 202 inspections of suspected unlicensed activities were conducted 154 of these were deemed to be licensable.

Financial Performance

Ms Zanele Ngwepe, Chief Financial Officer, Nersa said Nersa collected actual levies which amounted to R 226.9 million received from the following sources; electricity industry R 127.6 million, piped-gas industry R 51.9 million and petroleum pipelines industry contributed R 47.3 million. The actual expenditure for the period 1 April 2013 to 31 March 2014 amounted to R 227 million. This represented an under-spending of 10% compared to the budgeted amount of R252.8 million. Fruitless and wasteful expenditure was R5, 47500, relating to interest charged for late payment of invoices while irregular expenditure was at R0. She explained that a central invoice recording and tracking system has been implemented as a measure to prevent reoccurrence of fruitless and wasteful expenditure.

Presentation: Audit and Risk Committee Report – Nersa
Ms Khomotso Mtimunye, Chairperson: Audit and Risk Committee, Nersa said Nersa received a clean audit from the Auditor-General. She explained that the committee’s functions were to:

•Consider quarterly management reports and unaudited annual financial statements
•Review the audited financial statements included in the annual report
•Monitor on a quarterly basis the implementation of agreed action plans on the findings by Internal Audit and the Auditor-General

She explained that 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 Management Act. Among other things the committee was responsible for effective internal control systems, effective internal audit functions, adequacy, reliability and accuracy of financial and performance information and monitoring compliance with applicable laws and regulations.

She added that the Auditor-General commended Nersa for submitting financial statements which were free from material misstatements. There was no significant or material non-compliance reported; Nersa received a clean audit. Management implemented all agreed action plans on findings from the Auditor-General from the 2012/13 audit.

Ms Baleni gave a breakdown of Nersa’s staff analysis. She explained that Nersa’s demographic profile - 87% of the employees were African, 10% were white, 2% were coloured and 1% were of Indian origin. According to the gender profile, 54% of the workforce was female and 46% were male. Nersa’s total staff complement was 180 employees with 159 of these vacancies being filled, with a vacancy rate of 21 (5%) and 13 employees had resigned. With regard to international activities, Nersa was the Current Chair and Member of the Executive Committee of the Regional Electricity Regulatory Association of Southern Africa (RERA), 12 of the 15 Southern African Development Community (SADC) countries had energy/ electricity regulators, of the 12, 10 were members of RERA.

In conclusion, she informed Members that Nersa continued to grow from strength to strength since its inception in 2005, and the results of its work continued to have a profound impact on the lives of ordinary people as well as on the economy of the country. However the regulation of the three energy industries characteristically continued to pose challenges in that the Energy Regulator was required to balance the conflicting interests of licensees, investors, consumers/end-users and the policy maker. To deal with regulatory challenges, Nersa has undertaken various initiatives to refine regulatory practices and methodologies in its quest to become a world-class leader in energy regulation and will continue to do so.

Discussion
The Chairperson thanked Nersa for the presentation.

Mr M Matlala (ANC) thanked Nersa for the presentation. He asked about the learnership programme which had a 66% absorption rate; when would Nersa achieve a 100% absorption rate? On the vacancy rate which was at 5%; he asked Nersa to elaborate on this. Lastly, he asked for clarity on the tariffs to Eskom which were recently increased to 12%.

Mr L Greyling (DA) informed Members that Nersa had been invited to explain the latest price increase to Eskom. He asked whether there had been any participatory process followed in this regard. It would be good for the Committee to get a document explaining why the extra 4% tariff increase was awarded to Eskom. There was wide public speculation that some of the reasons for this increase was as a result of the ballooning costs at Eskom, some of which had not been prudently incurred such as running the diesel generators at far more capacity than they were allowed for, together with the delays at Medupi. As a result, consumers were now forced to pay for the inefficiencies at Eskom. He asked that Nersa provide comments on this regard. He asked whether consumers could expect more increases during the coming year. Another matter which was a burning issue was that of the BHP Biliton deal; this matter had been sitting on the Minister’s desk for the past two years. What action was being taken around this; what were the timelines? Would there be a participatory process?

Ms N Louw (EFF) said the presentation from Nersa was highly compressed. She suggested that during the next briefing the presentation be broken down to highlight the short, medium and long term goals of Nersa. This would assist Members in conducted better oversight. According to the presentation, Indians and Coloureds were at a ratio of 2:1; what plans did Nersa have to balance these figures? What plans were there to sort out the high vacancy rate? She asked about the technical audits and the timeframes which were in place to sort out deviation findings; did companies come back and provide Nersa with feedback?

Mr J Esterhuizen (IFP) indicated that last year Nersa rejected Eskom’s application for an increase higher than 8%, however Nersa recently took a different turn and approved a further 4% increase. The consumer was already cash strapped yet the public was being put under pressure to pay for these increases. Eskom should be controlling its spending. The two main gas players in Saldanah were fighting over licensing which was acquired by Nersa; what was Nersa doing to remedy the situation? The public and the smaller players were negatively affected by this. He asked whether Eskom could not sell some of its underperforming assets to settle some of the entities debt. On renewable energy he said over 1600 Mega Watts of power could not be connected to the Grid (although Eskom was already paying R200 000 a month for this), there were still no transmission lines to connect these Independent Power Producers to the Grid. Nersa should be involved in such matters. On the diesel generators he said these were emergency generators and they could not keep up with the increased demand, these generators were being used because of a lack of planned maintenance by Eskom; what steps was Eskom taking in this regard?

Mr R Mavunda (ANC) asked about Nersa’s public participation programmes; how were these being conducted and where there any tangible inputs being received from the public? On the girl-child programme, he said according to the presentation, this was a nation-wide programme. How was this programme a nation-wide programme when it was centered in Pretoria? How was it reaching learners on the rural areas throughout the country? What criterion was used in the selection of these learners?

Mr Modise thanked Members for their interactions with the presentation. He said Nersa would be pleased to have another session with the Committee which would provide more detail around Nersa’s decision on the price increase to Eskom. Overview on the matter however would be provided to Members. He indicated that there was no official responsible for electricity present at the meeting.

Ms Baleni first responded to the question on Nersa’s learnership and internship programme. She argued that a 66% absorption rate was actually very high. Nersa was not looking to increase this rate to 100%, the programme was to provide learners with the necessary exposure within the working environment, and these learners would then be better equipped to find work elsewhere. On the vacancy rate, she said the reason for the vacancy rate was that the skills required within Nersa were very mobile, primarily because regulation was still very new within the country and there was high competition for these skills. In addition, Nersa could not compete with oil companies who offered higher salaries than Nersa. He said a 5% vacancy rate was quite good.

Mr Modise responded to the question on Eskom and said Nersa used the Multi-Year Price Determination (MYPD) to deal with future price determinations. This annual regulatory determination was to ensure regulatory certainty within the market. The reality was that Nersa did not add 12% to Eskom’s tariff; rather Nersa approved an additional 4% to the 8% which had already been approved for the next five years. He added that the Chief Executive Officer would provide more clarity on the matter.

Ms Baleni responded to the questions around Eskom. She said the regulatory clearing account dealt with over and under recovery given that the MYPD determination was done on projections as the Chairperson indicated. The amount was related from the MYPD 2 period which Eskom had made an application for. Eskom’s application was initially for R18 billion from the MYPD 2 and Nersa made an analysis, some of the costs were deemed not prudent and the amount was reduced to R7.8 billion which would have an effect of an extra 4% on the MYPD 3 determination, which was done via a public participation process. The reason why it was allowed for the money to be recovered in one year was that, among other things, the regulator considered the outer year of the MYPD 2 was the one year which seeked variation for adjusted and actual increases. Therefore the regulator saw it logical to allow the increase in one year. However the MYPD 3 would also be looked at over the year, together with any refunds.

The public participation process for an RCA balance had a rule which stated that if it was less than 10% of the total revenue the regulator did not need to open up a public participation process. She requested that the issue be dealt with in more detail when a representative from electricity was available to provide input. The detailed reasoning for approval would be made available to the Committee; this would be a very detailed document. She responded to the question on the BHP Biliton and said the process was taking longer than expected due to unforeseen court processes and Nersa was still looking into the matter. Nersa was therefore subjected to court timelines, however the court processes has reached some finality and these would be sent to the Committee in writing. She said the public participation process would still be maintained in this regard. She said the suggestion by Ms Louw would be taken into consideration and different timeframes would be indicated during presentations. However she indicated that as a regulator the work of Nersa was set; Nersa approved licensing all the time. On the vacancy rate she said there were plans within Nersa to minimize this, the issue was monitored by Nersa’s Human Resource Committee as a Key Performance Indicator for the entity, and it was therefore an important aspect. On the technical audits she said the licensing timeframes were given and reports would be submitted to the Committee.

She agreed that Eskom should control its debt and costs; however the entity still needed to be assisted in managing its debt. On the question on gas in Saldanah, the criteria for issuing licensing to entities was very clear. In this particular incidence both applicants met the criteria and Nersa issued the licenses. Nersa was aware of the contestation between the two parties, however a part of it was natural behavior and the regulator was dealing with the issue. On the question of Eskom selling its underperforming assets, she said this was a matter for policy making and Nersa could not dictate. In IPPs not being connected to the Grid, she said the IPPs provided Nersa with copies of their contracts with Eskom for connection to the Grid. In instances where they had to build, Nersa had provided the licensing for infrastructure. The regulator was confident that the approved Megawatts for Window 3 had been connected to the Grid. On the diesel generators, Nersa was also worried about the overuse of these generators by Eskom, and the situation was being closely monitored. Nersa’s observation was that there had been a drop in the utilisation of these generators, and this was being encouraged by Nersa. The matter was being dealt with very prudently.

Ms Baleni replied that Nersa used to run all its public participation processes in Nersa’s building, however this had changed and hearings were now being held across the country, in all nine provinces. Written and oral presentations were welcomed. Nersa had learned a lot from the MYPD 3 public participation process; one of the issues was the time in which Nersa held these discussions and this would be looked at to allow even for working people to attend during the day. Another was the venue; Nersa would be looking at holding these discussions in town halls to accommodate more people and to allow for broader discussions. People would also be allowed to use languages of their choice. Public participation could be proved through the registers which participants signed; however there was always room for improvement.  On the girl-child programme, the national character of the programme was that it was a programme run by a programme called Uweso, which had been endorsed by the United Nations and the former Department of Women, Children and People with Disabilities. The Department of Energy had also endorsed this programme. The design of the people who implement the programme was that employers targeted to work with schools would be employers located in the same radius as the schools. For example, in Limpopo Eskom was one of the first employers. Employers therefore needed to be local, in order to accommodate transport needs of the learners. The criteria were used in conjunction with the Department of Basic Education who selected the learners who participated in the programme; Nersa had very little say on the matter.

On Nersa’s component of Coloured and Indian employees, she said Nersa’s equity plan was under review by the Department of Labour. Feedback had been provided to Nersa and all aspects were being looked at to set new targets.

Mr Modise added that when Nersa distributed the reason for decision on the RCA, most of the questions Members asked would be included in the document. The “Reason for Decision” project was a public document and it was available on Nersa’s website. However a detailed presentation would be made available to the Committee. Nersa was committed to encouraging the development of industry and this was taken into consideration when making licensing decisions, in an attempt to encourage competition. He assured Members that the conflict at Saldanah would be resolved.

The Chairperson said the Committee had already had a discussion and agreement was reached that Nersa would be invited to brief the Committee again at a later stage, particularly on the electricity industry in general. The date would be announced.

Mr Mackay said he was a huge fan of Nersa as they represented one of the few efficient entities. The humility which Nersa displayed in their work in comparison to Eskom was quite refreshing. Nersa did world-class work, however what was a let-down was how Nersa communicated its work to the public. Nersa’s website was atrocious and it was not easy to access via a mobile device and cost a lot of data to access. It was therefore not helpful to mention that the document was available on the website for the public.  Nersa had done incredibly well despite all the political pressure. The “Record of Decision” must be made more available to the public in a clear manner, whether it was through clear advertising or other sources. He asked about the various interactions which Nersa has had with the Minister and National Treasury with regard to the price increases. What kind of conversations has been held? Would the minutes of these conversations be made available to Members? He sent big congratulations to Nersa.

Mr Greyling said he was interested to understand whether Nersa “grilled-down” on Eskom’s affairs. He was primarily interested in Eskom’s primary energy costs which had gone up quite radically, as a result of the contracts which Eskom had entered into around coal supply. To what extent did Nersa analyse these contracts? On the running of the powers stations, he said there had been major unplanned outages in Eskom, and a lot of these seemed to have occurred immediately after Eskom did its planned maintenance for a particular plant. To what extent did Nersa analyse the type of maintenance being done by Eskom? He asked about the Medupi power station, noting that there were two worrisome instances - one was when the turbine flew out the roof which was followed by another one. When would the report by the independent investigator be done? Was any insurance paid out? There was speculation that the insurance company was refusing to pay out stating the accident was a result of negligence by Eskom. He said Nersa’s announcement on embedded generation at municipality was a positive step. How would Nersa be going about this? Would municipalities be allowed to implement their own programme according to their own conditions?

The Chairperson warned that the presentation was about Nersa’s Annual Report and not on Eskom. Members were therefore asked not to overshadow the agenda of the meeting with issues relating to Eskom. There would be a dedicated date set to deal with issues pertaining to Eskom.

Mr Esterhuizen said fuel used on diesel generators amounted to around R 8 billion over these past two years. It was therefore not good enough for Nersa to simply “monitor” the situation. Nersa’s sole interest was to look after what was in the interest of the public.

Ms Mahambehlala said the meeting was not a “beauty contest” between Nersa and Eskom. Members were supposed to listen to Nersa’s presentation and seek clarity on the content. She asked for clarity on why Nersa was willing to invest in empowering these young girl-child learners and let these skills go so easily. She said Nersa already had 10 vacancies open; why were these skills not absorbed to fill these vacancies?

Mr Modise said Nersa would look into improving how it communicated to the public. He said questions which were not responded to would be responded to when Nersa returned to brief the Committee at a later stage.

Ms Baleni responded to the question on communications and said Nersa could have done better. The suggestions by Mr Mackay had been taken into consideration. With the MYPD 3, Nersa held a press conference where stakeholders could ask questions actively. On Nersa’s interactions with the Minister and other government departments, she said minutes of these task team meetings would be available through the various entities which invited Nersa to brief them on various matters. Nersa recognised its role as the regulator however the entity was always caught between conflicting interests.  Nersa would not allow the situation at Saldanah to get out of hand. Nersa would be guided by its own laws. On the vacancy rate, she said Nersa would love to retain the staff which it hired however there was no organisation which had a 100% retention rate. Once people had decided to leave, they had decided to leave. Nersa was also limited to use funds for vacant positions to counter offer existing employees who receive higher offers which Nersa could not compete with.

The Chairperson thanked Nersa for the briefing and he thanked Member for engaging with the presentation.

The meeting was adjourned.
 

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