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MINERALS AND ENERGY PORTFOLIO COMMITTEE
26 March 2003
NATIONAL ELECTRICITY REGULATOR; PETRO SA: STRATEGIC PLANS
Documents handed out:
National Energy Regulator presentation
Petro SA presentation
National Electricity Regulator website
Changes in the committee programme resulted in a misunderstanding in respect of time-slots for these presentations thus reducing opportunities for discussion on a range of significant issues underpinning developments in both the NER and Petro SA. Members were briefed on work being conducted by each of these entities within parameters set by the Department and the broader policy framework being developed by Government as a whole. Both presentations gave context and perspective, in particular, to the considerable and far-reaching implications of progress being made in the arenas of institutional transformation and black economic empowerment.
The Committee agreed on a follow-up meeting with the NER to explore the sensitive issue of price increases and the criteria used to assess applications for price increases. The Committee will visit the Petro SA head office to discuss the gas supply to the Mossel Bay refinery and the proposed gas transmission pipeline in a less public forum.
National Energy Regulator (NER) briefing
Mr Matjila, Chief Executive Officer of the NER, appraised committee members of the background to developments in the electricity industry as a whole and of the NER's plans for creating and maintaining a platform for the provision of efficient electricity services at the lowest possible price and in the best long-term interests of all electricity consumers. In keeping with government policy on promoting competition in the electricity generation, transmission and distribution markets, the NER has played a key role in supporting processes aimed at introducing new supply-side players in the arenas of energy generation and transmission and in restructuring and rationalising the supply and distribution industries.
Mindful of government imperatives in respect of employment equity, the NER continues to make concerted efforts to develop technical and management expertise amongst historically disadvantaged South African (HDSA) members of its human resource pool, ninety per cent of which is now black. In this regard, Mr Matjila referred to the NER's candidate regulator programme aimed at building human resource capacity in utility regulation. He also informed the committee of efforts underway to identify and appoint a black female general manager. Mr Matjila advised members that, in support of BEE, the NER's procurement policies seek to identify and provide opportunities for black-owned consulting companies in particular, encouraging project-based partnerships with non-BEE companies to facilitate skills transfer where necessary. In this regard, Mr Matjila undertook to quantify targets and results in due course.
Mr Matjila also undertook to keep members fully informed of investigations into allegations of misconduct on the part of the NER's chief executive officer, pending the receipt of a report on this matter and a Board decision on an appropriate way forward.
Mr Kevin Morgan, HOD Legal Department, informed members of the NER's Strategic Plan for the period 2003 to 2006, aimed at ensuring that resources are effectively and efficiently applied in regulating the evolving electricity industry outlined by Mr Matjila. He focussed, in particular, on the NER's response to the national integrated resource plan (IRP) for securing sufficient reliable ongoing capacity to meet future demands, and the role of the NER in regulating independent power producers (IPPs). Against this background, Mr Morgan referred to the restructuring of Eskom into competing generating companies and mechanisms for regulating the six regional electricity distributors (REDs) envisaged as well as the private electricity generators and separate transmission company to be introduced over time. He emphasised the NER's ongoing commitment to cost-efficiency and referred to the wholesale electricity pricing systems (WEPs) being prepared with this in mind, commenting that due consideration will nevertheless be given to poverty tariffs.
Mr Morgan also gave committee members some insight into the role of the NER in response to regional and international developments and, in particular, in the context of New Partnership for Africa's Development (NEPAD) objectives and the NER's participation in the African Forum for Utility Regulators (AFUR) and the Regional Electricity Regulators Association (RERA). He also drew the attention of members to plans for developing a regulatory framework for renewable energy.
With all this in mind, Mr Morgan advised the committee of a significant projected increase in expenditure during 2003/2004 to accommodate the accelerated institutional capacity development required in anticipation of regulating a restructured and expanding electricity industry. He also advised members of plans for developing a performance review system based on stakeholder expectations and perceptions of the NER and its service in protecting consumer interests.
Ms L Xingawana (ANC) congratulated the NER on its commitment to appointing a black woman as general manager, noting the extent to which developments in the electricity industry affect women in particular.
Mr I Davidson (DA) noted South Africa's reputation for supplying electricity at possibly the lowest price to consumers in the world. He asked how the likely price increases - needed to provide for industry restructuring and capital expenditure - are to be explained to the public who may well ask why costly transformation and restructuring are necessary in the first place. Had the growth in electricity demand been higher than anticipated, and if so, could this indicate shortcomings in the planning process? He asked for more detail on the rationale for the significant increase in projected expenditure.
Mr J Nash (ANC) asked for information on the renewable energy sources likely to require a special regulatory framework. He also enquired about progress in establishing the proposed REDs, what benchmarks were used in calculating a possible eight per cent increase in electricity price and to what extent the public had been consulted on this.
Prof I Mohamed (ANC) commented that an increase in the price of electricity could cast doubt on Eskom's commitment, as a wholly state-owned enterprise, to supporting government policy on reducing inflation. He asked how the NER can justify endorsing this.
In response, Mr Matjila referred to tensions in the relationship between Eskom and the NER in the context of the complex fiscal and legislative frameworks within which each operates. NER is committed to moving towards and incentive-based method of regulating electricity prices. With this method, penalties will be imposed for passing inefficiency-related costs onto consumers. There had been no announcement from Eskom of a price increase and statements by the media in this regard had been unfortunate. The process followed by Eskom in applying to the NER for permission to increase electricity prices the following year begins in April/May of the previous year. He assured members that, to date, no price increase proposal has been received from Eskom.
Mr Matjila reassured committee members of the reliability of research conducted pointing to the need for significant capital investment to ensure the long-term sustainability of electricity supply. He appealed to members to explain future electricity price increases to their constituencies against this background. However every effort will be made to minimise the impact of capacity development on consumers. The NER has no legislated obligation to consult members of the public on proposed price increases. However the utilities themselves have statutory obligations to engage stakeholders on this issue. The NER is committed to public education on price setting and the assessment criteria used.
The Chair suggested a further meeting for more discussion on price increases and the rationale for this. This would ensure proactive participation by the Committee in the application process for price increases.
Mr Morgan explained the rationale behind the privatisation of electricity generation, distribution and supply where the Government saw competition as a mechanism for improving efficiency. The Eskom monopoly will be divided into constituent parts of a larger power exchange or market place in which buyers and sellers of electricity will then interact. Power stations already compete within the Eskom power pool with improved efficiency and lower costs to consumers in mind. Regarding planning for growing demand, he referred to the IRP aimed at securing sustained electricity supply in response to future requirements, including those of heavy industry. Apologising for a lack of detail in justifying the projected increase in expenditure for 2003/3004, he undertook to provide this information in writing.
Regarding regulation of the renewable energy sector, Mr Morgan gave the example of the wind generator at Darling as one of the initiatives that need to be accommodated by the evolving regulatory framework.
On the question of REDs, Mr Morgan replied that these are to be introduced gradually over five years by way of a process managed by a holding company under the guidance of the Department
Returning to the issue of price increases, he noted internationally recognised methodology used by the NER to calculate an acceptable return. This and the incentive-based price regulating mechanism referred to by Mr Matjila will together determine ceilings on future price increases. Only once during the past fifteen years has an electricity price increase exceeded the inflation rate. He conceded that new capacity to secure sustainable supply is likely to place pressure on prices.
Mr G Oliphant (ANC) suggested that, noting time constraints, all further questions should be forwarded to the NER in writing.
The complex technical issues underpinning questions from Mr N Ngcobo (ANC) about renewable energy, nuclear energy, coal-based technologies, integrated energy systems and procedures for regulating the gas industry were noted by the Chair with a request for these also to be submitted in writing.
The Chair thanked NER representatives, apologising that full discussion had been curtailed due to time constraints. He promised a follow-up meeting on the sensitive issue of price increases.
Petro SA briefing
Mr M Tshume, Chief Executive Officer of Petro SA, began his presentation with an appeal for another opportunity to engage soon with the committee on the specific issue of gas availability to the Mossel Bay refinery and the need for a gas transmission pipeline to be constructed linking the Kudu and Ibhubesi of-shore gas fields to Mossel Bay via Cape Town with a view to supplying gas to an IPP in Cape Town as well as to the refinery itself and other industrial markets. Against this background he emphasised the need to secure a two-year supply of gas to the refinery at an affordable price, thereby ensuring ongoing, unsubsidised gas-to-liquid (GTL) transportation fuel production.
Mr Tshume then appraised committee members of Petro SA activities covering the entire upstream and downstream petroleum value chain. Noting the high fixed costs and low returns characteristic of the industry, he drew attention to the importance of containing operational expenditure in order to compete with other industry players and of entering the liquid nitrogen gas, methanol and other downstream petrochemical sectors by way of partnerships and synergistic acquisitions.
In closing, Mr Tshume highlighted other key challenges facing Petro SA, including:
- ensuring adequate support for high-risk upstream industries with BEE potential
- increasing the pool of technical and entrepreneurial expertise from HDSA communities to underpin expanding business along the value chain and in the retail sector in particular
- harmonising delivery imperatives with employment equity obligations
- streamlining procedural processes in respect of compliance with regulatory obligations in order to optimise opportunities for business expansion
- appropriately managing a maintenance-related plant shut-down in May in order to minimise losses and
- addressing the extent to which a licensing agreement with Sasol impinges on the ability of Petro SA to grow and generate income.
Noting upstream participation agreements successfully concluded with the oil producing states of Gabon, Algeria and Nigeria in keeping with NEPAD objectives for energy security, the Chair enquired why Sudan had not been included in this process.
Mr Tshume responded that international political sensitivities tend to dictate a conservative approach in respect of Sudan. In the context of identifying business opportunities beyond the region, however, he suggested that GTL technology could be utilised to optimise output from strategic gas fields in Iran.
Prof I Mohamed (ANC) requested clarity on the acronym ROACE and was advised that this is an abbreviation for return on average capital expenditure. The meaning of other acronyms used in the presentation were::
national oil company (NOC)
international oil company (IOC)
low-alcohol distillate (LAD)
low-alcohol kerosene (LAK).
Mr E Lucas (IFP) congratulated Petro SA on its impressive achievements in respect of transformation and turn-around, requesting greater detail in anticipation of its next meeting with the committee.
Mr G Oliphant (ANC) requested clarity on the licensing agreement with Sasol.
Ms F Mathibela (ANC) asked what is being done to manage the impact of HIV/Aids on employees and their families.
Mr N Ngcobo (ANC) referred to technological developments with implications for fuel and energy production in South Africa.
Mr J Nash (ANC) enquired when the proposed gas transmission pipeline is likely to reach the Ngqurha region.
Ms Mtsweni (ANC) requested a list of women entrepreneurs trained to date.
In response, Mr Tshume explained the serious implications for Petro SA of Sasol licensing restrictions, in terms of which a fee is levied by Sasol for a licence to manufacture fuel and petrochemical products. In particular, the Sasol licensing requirement prevents Petro SA from taking advantage of favourable spot market prices. He appealed to committee members for their assistance in negotiating a less onerous compromise with Sasol, suggesting a one-off fee and the possibility of partnerships in product development initiatives.
Ms K Kotsokoane, General Manager, Corporate Image and Communication, advised the members that policies on HIV/Aids inherited from Mossgas and Soekor are being reviewed and interventions by other progressive oil companies explored in order to develop an appropriate response to the pandemic. Meanwhile, Petro SA will continue to work in partnership with other organisations to address the crisis.
Mr Tshume assured the committee that plans to extend the existing pipeline to the Ngqurha region form part of proposals for piping gas to the Mossel Bay refinery.
Undertaking to provide a list of women entrepreneurs trained to date, Mr Tshume expressed concern about the extent to which BEE-related objectives are being undermined by the practice of fronting among non-HDSA sectors of the South African business community.
The Chair then asked if a meeting to discuss gas supply to the Mossel Bay refinery and the proposed gas transmission pipeline would need to be closed to the public in the interests of protecting sensitive information.
Mr G Olifant suggested that the Committee visit the Petro SA head office to discuss these issues in a less public forum.
In closing the meeting, the Chair reminded Petro SA representatives that, like Eskom, their company is a BEE flagship embodying the aspirations of the nation and it will be monitored closely by the committee with this in mind. In response, Mr Tshume endorsed the need for ongoing engagement with the Committee, emphasising that Petro SA must continue to operate as a profitable commercial entity if it is to fulfil its obligations as a mechanism for nation-building.
The meeting was adjourned.
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