NERSA on Regulation of Electricity, Piped-Gas & Petroleum Pipelines Industries

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed Members and the Deputy Minister from the Department of Energy (DoE) to the meeting, together with the officials from the National Energy Regulator of South Africa (NERSA).

Dr Wolsey Barnard, DOE Acting Director-General, said there was a Minister’s cluster meeting taking place in Parliament and the DoE was scheduled to make a presentation. He apologized that due to the DoE’s duel responsibility, he would leave the meeting early to attend the cluster meeting.

Ms Thembisile Majola, Deputy Minister of Energy, thanked the Committee for the invitation. She indicated that NERSA has briefed the Committee before, however the day’s meeting would be about getting the detail around how NERSA dealt with pricing, what influenced this and what some of the outcomes have been. The matter of pricing has been a topical one because energy security was a major focus for the country. It was therefore important that Members understand the elements which went into determining the Multi-Year Price Determination and more. She reminded Members about the National Assembly debate which would be taking place on the Grand Inga project and asked that all Members support the motion. The project was a very important one for the country and for the African region as a whole. She also indicated that she would need to leave the meeting early to attend the Minister’s cluster meeting.

The Chairperson accepted the apologies from Dr Barnard and the Deputy Minister for leaving the meeting early. He thanked the Deputy Minister for always making the effort to attend Committee meetings.

The Chairperson welcomed the presentation from NERSA and indicated to Members that the presentation was extraordinarily long.

NERSA presentation: Regulation of Electricity, Piped-Gas and Petroleum Pipelines Industries
Ms Phindile Baleni, NERSA Chief Executive Officer, thanked the Committee for the invitation to brief the Committee in detail about some of the work which NERSA was busy with. She agreed that NERSA had indeed prepared a very comprehensive deck of slides, 199 to be exact, however the presentation would not cover them all. She introduced the team from NERSA and explained that the presentation would deal with: institutional arrangements, regulatory independence and process, electricity industry regulation, petroleum pipelines industry regulation, the piped-gas industry regulation and NERSA’s planning and corporate development.

NERSA was a public entity which was established on 1 October 2005 in terms of the National Energy Regulator Act of 2004, to regulate the electricity industry, the piped-gas industry and the petroleum pipelines industry. In executing its mandate NERSA endeavored to balance the conflicting interests of both licensed entities and end users. NERSA’s mandate was anchored in four primary Acts:
•The National Energy Regulator Act of 2004
•The Electricity Regulation Act of 2006
•The Gas Act of 2001
•The Petroleum Pipelines Act of 2003.

The mandate of NERSA included issuing of licenses and setting pertinent conditions, setting and/or approving tariffs and prices, monitoring and enforcing compliance with license conditions, dispute resolutions, setting rules and guidelines for the three industries and registration of import and production activities, among others.

She explained that the National Energy Regulator Act combined the non-technical aspects of the Electricity Regulation Act, Gas Act and Petroleum Pipelines Act and repealed the provisions from the three Acts. The Act established a National Energy Regulator to administer all three Acts. With regard to NERSA’s institutional arrangements, the Minister of Energy appointed nine Regulator Members, four were full-time, five were part-time. NERSA had an approved staff complement of 177 employees, with six divisions each with a number of departments and five specialized units. NERSA’s regulatory principles were underpinned by transparency, neutrality, consistency and predictability, independence and accountability.

 To ensure regulatory independence, NERSA has developed regulatory mechanisms that made its decision-making process open, transparent, credible and predictable, as well as making its accountable for its decisions. NERSA ensured that public participation took place in all its processes through mechanisms such as public hearings, the MYPD3 experience, consultation papers, notices and papers, meetings and workshops.

Mr Mbulelo Ncetezo, Executive Manager: Electricity Regulation, spoke to the regulation of the electricity industry. The main enabling legislation was the Electricity Regulation Act of 2006 and its objectives are to achieve efficient, effective and sustainable development of the electricity supply industry within South Africa, safeguard and meet the requirements of present and future electricity customers and users, facilitate investment and universal access to electricity, and to promote the use of diverse energy sources among others.

With regard to the structure and status of the electricity industry he explained that the electricity industry was dominated by the vertically integrated incumbent, Eskom. Eskom was responsible for the generation of 96% of electricity in the country and 40% of electricity distribution. The Cabinet decision taken in 2007 for new generation capacity stated that Independent Power Producers (IPPs) generated 30% of electricity while Eskom generated 70%. Eskom was designated to be a single buyer. A total of 188 distribution licenses were handed out; 174 to municipalities, 13 to private distributors and 1 to Eskom. As at 5 October 2014, the Renewable Energy Independent Power Producers Programme generated 1 256 mega watts (MW).

With regard to economic regulation and the setting of tariffs, Eskom’s price reviews were determined on a multi-year basis, a process which was referred to the Multi-Year Price Determination (MYPD). The first MYPD was approved in 2005, lasting for a period of three years. The second MYPD was approved in 2010 and the third MYPD was approved in 2010 also lasting three years. MYPD 1 was interrupted twice by applications from Eskom due to changes in forecasts and estimates. MYPD 2 was reviewed in the third year and reduced from an average price increase of 25% to a 16% average increase. The regulatory approach followed in the MYPD process was based on the Rate of Return regulatory principles. With regard to Eskom’s price setting process, he said the average price was recovered from various customers at differing rates.

The Regulatory Clearing Account (RCA), he explained, was an account in which all potential adjustments to Eskom’s allowed revenue were accumulated. During the MYPD 2 period Eskom applied for a revenue shortfall of R 18 billion, however R 7.8 million was approved. The bulk of the RCA balance was as a result of the usage of Open Cycle Gas Turbines. The MYDP 2 RCA balance would be implemented in the 2015/16 financial year, resulting in the average of 12.6% instead of 8% being approved in the MYPD 3 period. On the municipal tariff process, he explained that on an annual basis distributors applied to the Regulator for electricity tariff increases. NERSA developed an annual municipal guideline and tariff benchmarks, based largely on the Eskom price increase. The tariff benchmarks were a tariff range which was a guide to municipalities on the appropriate levels that tariffs should be set. Licensees were required to annually submit their proposed price adjustments, which were then considered by the Regulator. NERSA strived to ensure that all tariff applications received were analyzed and approved by the Regulator before the implementation date.

With regard to licensing, the ERA required that anyone who was involved in generation, transmission, distribution, imports/exports and trading to be licensed by NERSA. The ERA stipulated that the licensing process should not exceed 120 days. NERSA currently had 334 licensees.

Dr Rod Crompton, NERSA Full-time Regulator: Petroleum Pipelines, spoke to the petroleum pipelines industry and its regulation and explained that South Africa’s regulated petroleum infrastructure was made up of 3310 kilometers in pipelines, over 8.2 000 cubic meters of crude oil, over 2.6 000 cubic meters in petrol/diesel/paraffin, 7236 cubic meters in Liquid Petroleum Gas and 14 port loading facilities. NERSA regulated marine loading facilities, storage facilities and pipelines. Upstream was regulated by Petroleum Agency of South Africa (PASA) and by the Department of Mineral Resources (DMR) while downstream was regulated by the DoE and by NERSA. The advent of petroleum pipelines and storage regulation has coincided with an unprecedented investment boom in the sector.

Some of the challenges facing regulation were:
•Oil pricing
•Oil exploration and retail price regulation
•Access and empowerment
•Storage access for third parties
•Overlapping jurisdictions
•Multiple regulators in the petroleum value chain
•Regulatory uncertainty for investors.

Ms Nomfuno Maseti, NERSA Full-time Regulator Member: Piped Gas, explained that the gas value chain comprised of these elements; exploration, production, processing, transportation, liquefaction, re-gasification and storage. A final product is then made available for end users. The institutional arrangements in gas were that upstream was regulated by PASA, which comprised of importing gas from Mozambique and from Sasol. Midstream was regulated by NERSA, which was comprised of transmission and distribution. Downstream was regulated by both NERSA and municipalities and this involved reticulation and trading. NERSA’s market structure for piped gas was a vertically integrated market structure, controlled by Sasol Gas, who owned about 80% of existing pipeline infrastructure. Sasol Gas had an exclusive position in the supply of gas to end users, with its existing pipeline infrastructure being concentrated in Gauteng, Mpumalanga, Free State and Kwa-Zulu Natal. However vertical integration could have the potential to  lead to inefficient outcomes in the market, increased barriers to market entry for new players, clouded access to gas supply and access to gas services, and constrained competitive conditions.

There were currently six licensed gas traders; Sasol Gas, Spring Light Gas, Reatile, NOVO Energy, NGV Gas and Virtual Gas Network. Over 400 customers were being supplied via pipelines in Gauteng, Free State, Mpumalanga and KwaZulu Natal. Gas was consumed for industrial, commercial, domestic, transport and power generation purposes. The gas industry was regulated in terms of the Sasol Regulatory Agreement until 25 March 2014. The expiry of the agreement paved the way for migration to the provision of the Gas Act. The objectives of the Gas Act were to:
• Promote orderly development of the gas industry
• Development of a competitive gas market, facilitate investment and promote competition
• Promote access to gas in an affordable and safe manner, promote historically disadvantaged South African companies, promote employment equity in the industry.

She explained that the Act made a distinction between tariffs and price; price was the charge for gas molecules, while tariffs were the charge for a network service. The new pricing regime was expected to bring about price transparency and reduce the number of pricing complaints from customers. However NERSA was currently not in a position to forecast gas prices going forward. Gas prices were regulated by the Sasol Agreement for the past 10 years. Some of the challenges in the industry were around NERSA’s limited regulatory mandate, policy issues and the lack of a focused gas strategy for growing the gas market. Some of the challenges and disputes facing gas storage and distribution were that there were no conventional gas storage facilities in the country, mandatory third party access in distribution and tariffs were not regulated, among others. The country was also faced with limited gas reserves, and there were major difficulties in securing finance for gas projects. Some of the challenges faced in the country’s gas sector continued to hamper development. The growing gas market required more gas and more infrastructure investment. Interdependence between electricity and gas also needed to be exploited.

Ms Baleni concluded that as indicated in the approved Annual Performance Plan (APP), NERSA was established as an efficient and effective regulator. NERSA was continuing to grow since its inception in 2005 and the results of its work continued to have profound impact on the lives of ordinary people as well as the country’s economy. The regulation of the three energy industries would characteristically continue to pose challenges in that the 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 recognized world-class leader in energy regulation.

Discussion
The Chairperson thanked NERSA for the presentation. He indicated however that the presentation was too long and Members had not anticipated that it would take the entire duration of the meeting to cover the presentation. He suggested that Members make process suggestions on how the Committee would deal with the presentation moving forward, seeing that there would not be enough time to engage with the content of the presentation.

Mr J Esterhuizen (IFP) agreed that the presentation was a very long one, however Members still had a number of questions for NERSA. He suggested that the meeting continue for a few more minutes.

Mr M Mackay (DA) suggested that questions be submitted to NERSA in writing and that NERSA be given a deadline upon which to respond by.

The Chairperson agreed with Mr Mackay that questions be submitted to NERSA in writing, latest by Friday 14 November 2014 and that NERSA submit responses the following Friday, 21 November 2014.

The meeting was adjourned.