NERSA Annual Report, with Minister & Deputy

Meeting report

The Chairperson welcomed the Energy Minister, Mr David Mahlobo, and Deputy Minister, Ms Thembi Majola. He noted that the NERSA Chairperson would leave early as he had to attend the Eskom public hearings.

Introductory Remarks by NERSA Chairperson
The NERSA chairperson, Mr Jacob Modise, thanked the Chairperson for agreeing to release him early to attend the Eskom public hearings and thanked the Ministry for their support. He introduced the NERSA delegation and stated that NERSA was running a clean ship financially with an unqualified audit opinion from the Auditor-General, as well as a special recognition for achieving the best audit among the entities for the fourth consecutive year. NERSA had achieved 98% of its performance objectives. He then invited the CEO Mr Chris Forlee to make the presentation.

Introductory Remarks by Energy Minister
The Minister, Mr David Mahlobo, thanked the Committee for the warm welcome he was accorded upon assuming office and apologised for not being able to attend the previous meeting. He was proud of NERSA's record in governance, leadership and the execution of their mandate in regulating the energy sector. He thanked the Committee for allowing the NERSA Chairperson to leave early as he had to attend important public hearings on the ESKOM request to revise electricity tariffs which was an important and emotive issue. Listening to the people was important as energy was the driver of the economy with current statistics indicating that the sector was contributing 34% to the country’s GDP.

Energy security must be achieved in an environmentally and economically sustainable way and there was need to transform the sector to make it more inclusive. Important international events were held in the country such as the recent Africa Oil Week where Africa’s potential in oil and gas were discussed with the hope that self-sustainability would be achieved. It was important for the country’s sovereignty and security to start producing its own oil and gas as these resources were sometimes used to exert political influence internationally. He disclosed that he met with the US Energy Secretary, Mr Rick Perry, and discussed issues of mutual benefit, as well as a delegation from Nigeria and Equatorial-Guinea, including experts and policy-makers, and a group of people that are developing technology for nuclear reactors called Generation IV International Forum. He was not going to change the energy policy of the country as it had already been established and would remain the same. The mission was to ensure energy security using sustainable means, transforming and becoming environmentally responsive by using renewable energy such as wind and solar energy, as well as non-renewables such as coal, gas and nuclear energy. In the following days, not weeks, they were going to conclude the Integrated Resource Plan (IRP) which had become an issue of public interest. There was an existing IRP 2010 but some refinements were being made to it after comments had been received from interested stakeholders and they would conclude by early November. Intensive or big users of energy had raised a number of issues that were being addressed before it is finalised. He was pleased with the performance of NERSA, thanked the team led by the Chairperson and CEO and hoped that the other entities in the department would be able to learn from them about good governance. He wished NERSA well in the process of the public hearings, acknowledging that there would be a lot of pressure placed on them. In the difficult economic climate, it was crucial to make prices affordable and to find a balance with other economic considerations. He looked forward to working with the Committee and coming before them to account for the operations of the Department of Energy.

The Chairperson thanked the Minister for his words.

In response to Mr Mackay raising his arm, the Chairperson said it was too early to ask questions. However, he  allowed him to go ahead and ask his question.

Mr G Mackay (DA) observed that a lot of what the Minister had to say had little to do with NERSA. The new Minister had indicated that the long-standing IRP which had been postponed for release from August 2017 to January/February next year had been moved forward again to this year. He asked if the Minister meant end of October or end of November. He asked what caused the change in the timeline. He asked if the Minister considered nuclear energy as an integral part of energy security.

The Chairperson intervened and said follow up questions would come later. He observed that regulatory bodies were doing well with their audit outcomes and he wondered why other entities were struggling. He asked if it was because of a difference in laws governing the regulators or size of the budget and organisation. It was important to look at that going forward. He reminded the members and informed the Minister that they had already agreed that on 28 November, the last day for meetings this year, they would have a meeting on the electricity distribution industry and state of infrastructure which would include Treasury. That would be a joint meeting as there were supply as well as distribution problems. They had identified 14 November which could be moved to 21 November depending on the readiness of the department to respond to big policy matters which needed to be clarified such as the IPPs, electricity pricing, petroleum products, plans for a refinery and Eskom. There was a whole range of issues where the position of government was not clear and he hoped that all those would be discussed then. What are the plans of government on the big issues? He would ensure that the Minister and Deputy Minister would be present.

The Chairperson released the NERSA Chairperson who thanked the Ministry and the Committee.

NERSA 2016/17 Annual Report
The CEO, Mr Chris Forlee, made the presentation on behalf of the Chairperson.

Overview of Performance
Among the key achievements of NERSA was that it received a clean audit for its financial performance and performance against predetermined objectives. 89% or 57 out of 58 planned targets were achieved. The only target that was not met was that of not paying creditors within the stipulated 30 days.

95% of the budgeted levy income was collected and 93% of that was spent on operational expenses. NERSA maintained a cash flow risk mitigation reserve which was equivalent to three months’ employment cost for all staff members and 4.5% of the annual operating expenditure budget.

NERSA Programmes
To achieve its goals, NERSA runs six programmes:
Programme 1 Setting and/or approval of tariffs and prices
Programme 2 Licensing and registration
Programme 3 Compliance monitoring and enforcement
Programme 4 Dispute Resolution, mediation, arbitration and complaint handling
Programme 5 Setting of rules, guidelines and codes for regulations of the three energy industries
Programme 6 Administration

Performance against Objectives
Electricity Industry Regulation: 100% of the objectives were met. 175 municipal and 12 private electricity distribution tariff applications were approved. The revised mechanism for the determination of ESKOM’s revenues and prices (Multi-year price determination / MYPD) was approved, as well as the service quality incentive (SQI). Ten licences were approved under the Renewable Energy Independent Power Producer Programme (REIPP) programme, 16 generation and 2 distribution licences were granted.

Piped-Gas Industry Regulation: Six price applications and two tariff applications were approved. A total of 25 operation, construction, trading and amendment licences were granted with the total value of the construction projects which had been granted licences totalling R72 million. A court judgment was granted in favour of NERSA on Sasol Gas’ maximum price and methodology for approval of maximum prices of gas.

Petroleum Pipeline Industry regulation: Tariffs were approved for 22 storage facilities and two pipelines. 42 licences were approved with the construction projects in 2016/17 totalling R1 560 million.

Human Resource Management: An organisational review was concluded in July 2016 and a new organisational structure was approved with a total of 246 positions. There were 43 vacancies in the organisation. The staff were made up of 56% women and 44% men. Implementation of the new structure commenced at the start of the 2017/18 financial year. A total of 67% staff underwent training

Funding
NERSA derives its revenue by imposing levies on the regulated industries following set out procedures. The electricity industry is funded through a levy imposed on licensed electricity generators based on the estimated generation capacity. The gas industry pays a levy imposed by users of gas pipelines while the petroleum industry pays a levy based on the use of petroleum pipelines. The licence fees for the electricity industry were invoiced based on actual volumes of 228 572 726 MWh against total budgeted volumes of 246 675 758 MWh. The difference in volumes is 18 103 032 MWh, which translates to under-recovery of levies by R12 197 823 or 7.3%. The volumes for the piped-gas industry were invoiced based on actual volumes of 182 567 070 GJ against budgeted volumes of 184 280 951 GJ. The variation in volume is 1 713 881 GJ and translates to an under-recovery of levies by R520 316 or 0.9%. Volumes for the petroleum pipelines industry were invoiced based on actual volumes of 16 858 593 652 Lt against budgeted volumes of 16 868 265 976 Lt. The variation in volumes (9 672 324 Lt) translates to an under-recovery of levies by R38 293 or 0.1%.

Statement of Financial Performance
Total revenue collected was R276 181 012 against operating expenses of 271 243 474 and the surplus for the year including banking interest was R17 454 186 compared to a surplus of R54 348 770 in 2015/16.

R27 230 was incurred as fruitless and wasteful expenditure as a result of an international conference that cancelled due to implementation of cost containment measures. Irregular expenditure of R4.6 million was incurred due to payment of salaries to full-time regulator members (FTRM) who salaries had not been approved by the Minister of Energy and Minister of Finance. The appointments were made on 1 May 2011. On 19 March 2014 the Minister of Energy approved the appointments and salaries subject to approval by the Minister of Finance. On 30 July 2014 the Minister of Finance refused to grant approval. On 1 April 2015 the salaries were frozen. All the affected regulators are no longer in employment with NERSA.

Discussion
Mr M Matlala (ANC) asked what kind of relationship NERSA had with ESKOM. There were many terminations of employment and massive resignations and only one employee who had retired. He asked for an explanation. In 2016/17, NERSA collected 95% of the budgeted yearly income and they spent 93% on operational expenses. He observed that there was a consistent under-collection of revenue in the electricity industry. In 2015/16, it was 4.5% and in 2016/17, the under-collection was 7.3%. He wanted reasons for this trend. The employment vacancy rate of 11% was very high and wanted information on the vacant posts. He made reference to the Auditor-General’s briefing to the Committee on 4 October which spoke about the NERSA irregular expenditure of R4.7 million. This was incurred as a result of the payment of salaries to full-time regulators who were not approved by the Minister and NERSA continued the payments.

Mr Matlala asked about the allegations that NERSA was colluding with ESKOM on pricing. He asked how true this was. He requested that NERSA update the Committee on all its court cases, especially those involving its pricing methodology and the outcome of those cases.

Mr Mackay sought clarity from NERSA and the Minister about an amendment to the NERSA founding legislation, the National Energy Regulator Act, concerning the proposed creation of an appeals board which apparently had been presented to Cabinet in 2015 but no information had been forthcoming about it. It would fundamentally alter the regulatory environment under which NERSA was established and allow for a politically appointed board which would place NERSA in an unsatisfactory position - in the mind of the Opposition. He asked for a progress report and if the current administration still intended to pursue it.

Mr Mackay said it was the first time that NERSA was appearing before the Committee this year and he asked what their interpretation was of the High Court judgment setting aside the nuclear deal and how they interpreted the court’s requirement of public participation. He was concerned by allegations that were raised by the Organisation Undoing Tax Abuse (OUTA) which, admittedly, had at times a reputation for being a cowboy organisation, but these allegations had the potential to undermine the confidence that the public had in NERSA as a regulator. He wanted a clear and direct response on these allegations.

Mr S Mbuyane (ANC) welcomed the presentation, as well as the remarks from the Minister. He asked about the report which spoke of the need to balance electricity needs with clean energy.

NERSA Regulator member, Ms Khomotso Mthimunye, replied that the irregular expenditure arose because the Regulator members were appointed a day before they had to sit and the Minister makes his appointment with the understanding that NERSA negotiates the employment contracts. The remuneration was supposed to be approved by the Minister of Energy in consultation with the Minister of Finance. A protracted process of negotiating the contracts took a whole year and after finalisation, NERSA went to the Minister of Energy for approval which he granted but there was still no approval from the Minister of Finance for another year. When Treasury approval was not forthcoming, the salaries were frozen. The regulators whose salaries were frozen came to the end of their term of office.

On NERSA’s relationship with Eskom, Ms Mthimunye replied that it was cordial; one that would be expected to exist between a regulator and a licensee. ESKOM is sometimes not happy with the decisions which NERSA makes, which was normal, as it was not the only stakeholder that NERSA regulates but she said NERSA has to balance the needs of the licensee and the users. Both entities understood and respected each other’s roles and did not encroach on each other’s territory.

On the OUTA allegations, Ms Mthimunye replied that NERSA had been accused of being one of the captured state entities and that NERSA works on the instructions of ESKOM. Media publications reported OUTA’s allegations that NERSA had allowed ESKOM to keep some coal costs secret. She clarified that what happened was ESKOM in its tariff application requested that some of the information on coal costs be treated confidentially and it provided reasons for this request. ESKOM was concerned that certain information, if publicised, could compromise its negotiations with the suppliers. That public documents do not have certain information, does not mean that NERSA does not have that information. When NERSA makes its assessments in arriving at a ruling, it will consider that information which is not available to the public. The court judgment found that NERSA had not gone through the required process of engaging the public in the applications that affect communities. NERSA had learnt something from the court ruling and in future it would abide by the requirements.

Mr Forlee, CEO, replied about the under-collection of levies and explained how the regulator arrives at the rates. NERSA gets a forecast annually from the licensee as to what they predict their volumes to be. The figures are then determined by the forecasts of the licensees but across the board there had been over-forecasts which explains the under-collection. He attributed this to the difficulties in the economy with some factors changing such as ESKOM had changed its methodology. However, more effort was needed in making the forecasts but it was impossible to get accurate forecasts which is why reserves are maintained. Over the years, they were generally over-recovering.

The Chairperson said in previous years there had been over-recoveries and only in the last year was there under-recovery which was pointing to something wrong.

On the vacancy rate, Mr Forlee replied that the 11% vacancy rate could be attributed to the structural changes that NERSA was undergoing which created uncertainty among the staff. It was creating a new organisational structure and there was a possibility that some positions would be abolished and some other new ones would be created and this potentially created job insecurity. They had started the process of filling the vacancies. He believed that staff turnover was quite standard and that he encouraged the staff to grow and join the industry as the organisation was small and they could make a greater contribution in the industry.

Adding to the discussion on the relationship between ESKOM and NERSA, Mr Forlee said sometimes it is adversarial and other times it is collaborative, especially when they work on issues of common interest. On the court cases on NERSA methodologies, he said in 99% of the cases the findings were in favour of NERSA except for one or two cases where there were appeals, but which eventually were in NERSA’s favour, meaning that the methodologies still apply. On the balancing of electricity needs and environmental sustainability, this was not for NERSA to decide. It is a Department policy matter but in terms of pricing, NERSA is involved.

Minister Mahlobo replied about the Amendment Bill to the National Energy Regulator Act and admitted that it was long over-due as it had taken more than four years. It was important to do a good job and maintain the integrity of the regulator and ensure that people have confidence in it. It was important to discuss the cost of energy in the country. Investors in the sector needed to recoup their investments but the price should not be a constraint on growth. He did not want to express his opinion on the matter because ESKOM had made an application for tariff adjustments and NERSA was following the law to ensure that the process is done correctly. There were many energy issues that needed to be discussed such as those raised by Mr Mackay but the discussions needed to be done in a comprehensive manner and not in a piecemeal manner.

Minister Mahlobo said many issues can be contested but what cannot be contested is that energy is central to the economy and to prosperity. He referred to the responsible use of energy so that future generations could have access to it. South Africa is blessed with mineral and other endowments but that does not mean that it will always be the case. The country had a choice of renewable energy resources and non-renewable energy resources. There was a space for renewable options like solar energy, but the question was if it was a sustainable option and of the magnitude required to meet the demand. Another option was hydropower. It is cheaper and cleaner even though it is capital intensive at the start. But the question is if there is enough water to make it viable. Another among the renewables is wind power. Then among the non-renewables there is nuclear power with the country having the advantage of possessing the minerals that can be enriched to power the reactors. Carbon fuels like coal are in abundance, and gas was available. To decide on the development of the options, it is important to begin the assessment with the source, generation, transmission, distribution, until the process reaches the end users. The whole value chain has to be assessed. However, the sources available cannot be used all the time. Some sources would have to be used by future generations and the policy was to use an energy mix. Demand would determine the type of sources of energy used at particular times.

Minister Mahlobo said affordability was another factor that determines the choice of energy source. Affordability was not just about the construction process but about the tariffs. Environmental concerns were important for sustainable development and the country is already a signatory to the Paris Accord and it must abide by the resolutions of the accord on emissions. He added that there was the issue of transformation which comes with a cost. The pace and scale at which you can implement any project would be made on the basis of demand. It was important to have certainty over the sources of energy which would be used if investment was to come into the country because investors require certainty on matters such as energy.

Minister Mahlobo reiterated that there was no policy change on energy, but there were still major issues to be addressed such as the IPP, hydropower plans with the Democratic Republic of the Congo, and wind power in certain parts of the country. There were some politics about some preferred suppliers, but he did not care who the suppliers were as long as there was a guarantee of constant affordable supply that was sustainable and environmentally responsive. There were three important components to energy: the political, security and economic components, and all three were equally important. He hoped that all outstanding issues would be resolved through the due processes. There would be an Energy Indaba on 21 November where people affected by energy policies and department decisions would be available, and after that they would speak to the people that drive the economy, so that when planning is done, it is done with the input of the entire country. Reaching consensus on energy matters was important.

The Chairperson said there was a need for certainty on many matters. He complained that it was difficult for the Committee to exercise its oversight role because of this lack of certainty. There was nothing wrong with changing decisions, but clear communication of the decisions was important. The nuclear programme had become controversial and there was a need for the department to state its position on the matter. Even people like Mr Mackay had said he was not opposed to nuclear generation as being part of the energy mix. They were not opposed to nuclear generation, but they were opposed to the cost of the nuclear programme.

Mr Matlala asked why the NERSA CEO was occupying several roles: chief executive and full-time regulator.

Deputy Minister, Thembi Majola, replied that there were four full-time regulators, including the CEO, and five part-time regulators. The other three full-time regulators are regulators for gas, petroleum and electricity. One of the things that the Amendment Bill, that Mr Mackay talked about, wants to achieve is to regularise the administrative position of the CEO so that the position is separated from the role of being a full-time regulator. Secondly, the Amendment Bill will create an appeals tribunal and a number of alterations have already been made to the proposed structure. Most people are proposing the setting up of a competition commission so that you have regulators who are working on a full-time basis so when there are complaints such as those raised by OUTA, those complaints could be lodged with the competition commission by appealing. The current structure has challenges and one of the weaknesses is that the CEO is responsible for all staff but most of these staff members report to the full-time regulators in the various industries. The new structure will address these problems. Part of the new structure will take away some of the powers that ESKOM possesses as ESKOM was its own regulator.

The Chairperson expressed happiness that something was being done to address the structural challenges facing the national regulator. For the sake of accountability there was a need for a separation of the roles. He thanked the Minister and Deputy Minister for their presence and input and he would like both of them to attend the 21 and 28 November meetings. He thanked the NERSA delegates and urged them to sort out the irregular expenditure.

The meeting was adjourned.