Petroleum Licensing: Department briefing; NERSA Report on Investigation into Western Cape Electricity Outages: briefing

MINERALS AND ENERGY PORTFOLIO COMMITTEE
23 August 2006
PETROLEUM LICENSING: DEPARTMENT BRIEFING; NERSA REPORT ON INVESTIGATION INTO WESTERN CAPE ELECTRICITY OUTAGES: BRIEFING

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Department of Minerals and Energy: Petroleum Licensing
NERSA: Report on the Western Cape outages for the period November 2005 to February 2006
Reports on the Viability of Establishing a National Red/7^th Red

SUMMARY
The Committee was briefed by the Department of Minerals and Energy on petroleum licensing. Some of the key objectives of licensing were the promotion of an efficient manufacturing, wholesaling and retailing petroleum industry whilst at the same time facilitating an environment that was conducive to efficient and commercially justifiable investment. Most of the ensuing discussion dealt with the controversial topic of petrol pricing.

The National Electricity Regulator of South Africa also presented its report on its investigation into the power outages that had plagued the Western Cape between November 2005 and February 2006. Members raised concerns over the recurrence of such outages and whether Eskom had taken active steps to avert them in the future. Questions were also raised over the ability of the Regulator to keep Eskom in check. Members were curious as to how Eskom would be penalised for financial losses suffered as a result of the power outages.

MINUTES

Department of Minerals and Energy (DME) Petroleum Licensing briefing

The Department briefed the Committee on petroleum licensing. The delegation consisted of Mr N Gumede, Chief Director: Hydrocarbons; Mr V Sibiya, Deputy Director: Licensing; Ms N Ndebele, Deputy Director: Promotions; Mr A Nandkishore, Chief Energy Officer and Mr P Bakane, Energy Officer. Mr Gumede commenced the briefing with a recap of the regulatory framework within the industry, specifically pointing out that petrol was the only petroleum product being regulated, whereas all other products remained unregulated. It was apparent that the regulatory framework tried to balance the effect that import control, pricing and licensing had on investment, transformation, consumer prices and security of supply. The fact that SA’s refining capacity was running out, the uneven treatment of company owned and dealer owned sites together with the over proliferation of service stations were identified as some of the current problem areas.

Mr Gumede noted that SA was already importing 70% of its crude oil since 2003 when SASOL’s supply agreement came to an end. However true this may be, he nevertheless felt that SA’s petrol price was globally competitive. It was felt that the subsidisation of petrol was not viable and that it was mainly producers of crude that went this route. It also came to light that SA refining capacity for diesel was diminishing and that it would have to be imported in the near future.

Mr Gumede undertook the second leg of the briefing that dealt with specifics on petroleum licensing. He systematically went through the definitions as contained in the Petroleum Products Act, 2003. Mr Gumede continued by outlining the objectives of licensing: the promotion of an efficient manufacturing, wholesaling and retailing petroleum industry whilst at the same time facilitating an environment that was conducive to efficient and commercially justifiable investment. The Act called for a retail licensing system that had a 10-year finite life. The intention was for an optimum number of efficient sites and to achieve equilibrium amongst all participants. The Act also specifically sets out who should apply for licenses within the refining, wholesaling and retailing sector. Mr Gumede went further to explain the application procedure and the criteria that the Department used before granting an application. Existing participants in the industry had up until 15 September 2006 to apply in order to be deemed a holder of a licence. It was pointed out that that even though 12000 applications were anticipated only 2500 had thus far been received. Failure to apply could lead to a fine of up to R1 million or imprisonment of not more than ten years.

Discussion
Mr J Combrinck (ANC) asked why petrol prices were lower in SA’s neighboring states even though SA supplied them. He also asked why fuel was not transported by rail. It would greatly reduce transport costs. It was additionally asked whether the deregulation of petrol would not lower its selling price.

Mr Gumede explained that certain countries’ prices were lower than SA’s because our petrol was taxed. He said that the taxation of petrol was a policy issue and that our tax amount was moderate when globally compared. Mr Gumede agreed that a shift to rail transport would be more efficient and cost effective. It was explained that the deregulation of petrol would not necessarily reduce the price. Liquid petroleum gas (LPG) was unregulated but it was being sold at four times the refinery exit price.

Mr C Kekana (ANC) asked why the price of locally produced petrol by SASOL was the same as imported fuel. He pointed out that even though smaller service stations were closing down the big oil companies were reselling those same service stations over and over again.

Mr Gumede felt it best that SASOL should answer the question. He did note that the issue was one of economics. If local prices were lower than imported prices, it would thus be more feasible to export such product. Mr Gumede responded that the reselling of unsuccessful service stations was an unlikely occurrence within the current regulatory framework.

Ms N Mathibela (ANC) asked why the use of diesel in newer cars was being encouraged when its supply could become a problem. She also felt that the empowering of women in the industry was not reaching those at grassroots level. It was felt that the same groups of women were being empowered over and over again.

Mr Gumede responded that diesel was becoming more popular because it was more efficient than petrol. The problem was that current refining capacity was geared more towards petrol.
Mr Gumede did not wish to comment on the discrepancies on the empowerment of women within the industry.

Mr L Greyling (ID) asked to what extent was diesel being subsidised. He also asked whether bio-diesel would be able to supplement diesel supply stocks. It was furthermore asked whether vegetable oil users would also have to be licensed.

Mr Gumede stated that diesel was being subsidised in a number of ways. The industry largely functioned on a cash basis and the price of diesel was possibly lower because the costs were mainly borne by petrol. It was noted that a strategy on bio-fuels was to be released in October 2006. The use of vegetable oil as an energy source for oneself would not require a license, however selling it would require one.

Mr E Lucas (IFP) said that unreasonable demands by oil companies on smaller service stations were the reason for many of them closing down. Many smaller service stations were financially crippled by oil company rules and regulations. He felt that smaller service stations could possibly survive if they were able to keep their overheads down by having the bare essentials, i.e. pumps and a canopy. Mr Lucas asked whether paraffin was regulated. He also asked what the reasoning was in wanting to cut down the number of service stations.

Mr Gumede agreed that higher rentals were primarily responsible for smaller service stations’ costs escalating. He added that in many countries fuel was sold as a secondary product in retail businesses. Mr Gumede said that limiting the number of service stations was an issue left up to the Minister to decide on. Paraffin was not regulated but a wholesaler would have to be licensed.

The Chair asked what contingency procedures the Department had in place to handle the bulk of last minute applications that were yet to be received.

Mr Gumede said that the Department was stepping up its communications on the issue through radio announcements and press conferences. The idea was to “get the word out there”.

Committee Report on National Regional Electricity Distributor (7^th RED)

The Chair placed the Committee report on the public hearings on the National Regional Electricity Distributor before the Committee. The Committee accepted the report and agreed for it to be submitted to the National Assembly for consideration.

National Energy Regulator of South Africa (NERSA) briefing

The National Energy Regulator of South Africa was launched in November 2005 and replaced the National Electricity Regulator. The NERSA provided the Committee with a detailed report on the Western Cape outages for 11, 12, 16, 23-26 November 2005 as well as those of the 18,19 and 28 February 2006. Each incident had been analysed and the results were as follows:

- The events of 11, 12 and 16 November 2005 mainly resulted from incorrect protection systems, operation and configuration causing transgressions of the license conditions.
- The events of 23-26 November 2005 resulted from the negligence and poor discipline of the responsible personnel.
- The events of 19 and 28 February 2006 resulted from inadequate transmission lines and substation maintenance practices and policies.

NERSA concluded that the corrective measures by Eskom since the incidents had occurred were adequate and effective and had resulted in the correct operation of the relevant protection systems. This in turn allowed for conformance to previously breached license conditions. Eskom had additionally furnished NERSA with a Western Cape Recovery Plan which provided for an additional generation of 1050 MW of power by 2007, the restoration of Koeberg Unit 1 and the acquisition of additional mobile generators etc. NERSA consequently found the measures outlined in the plan adequate to ensure the security and continuity of supply. These were adequate and sufficient for the short to medium term.

Discussion
Mr Greyling asked what guarantees existed that changes that were needed were in fact going to be implemented when in the past Eskom had made promises and had not implemented them. He also asked what the role of the National Nuclear Regulator (NNR) was in monitoring boric acid levels at Koeberg. It was additionally asked what penalties Eskom were going to pay given the huge losses suffered by businesses.

Mr C Matjila (NERSA Chairperson) responded that interactions with Eskom had intensified after the incidents and the positive spin-off had been that power outages had been averted in the past winter months. He explained that the thrust of the investigation was preventative but that NERSA also enforced compliance with legislation. The Electricity Act and the Electricity Regulation Act being the legislation referred to. Mr Majila noted that at the time of the outages the Electricity Act had still been applicable and it did provide for criminal charges to be laid against Eskom but the fine was only limited to R500. The bottom line was that the outdated Act still applied at the time. The Electricity Regulation Act only came into force on 1 August 2006. It did allow for a R2 million /day fine or 10% of annual turnover whichever was higher. The only problem was that the latter Act could not be applied retrospectively.

Mr Kekana felt that negligent individuals should be brought to book as the outages were at critical times, i.e. close to Christmas and the elections.

Mr Matjila stated that NERSA did not have jurisdiction over Eskom’s employees. Punishment of employees was an Eskom internal matter.

Adv H Schmidt (DA) commended NERSA for a job well done. He asked whether the penalties to be placed on Eskom would have a negative effect on the end consumer. Reference was made to a claw back penalty on Eskom of R300 to R500 million.

Mr Matjila explained that in the event that Eskom did not meet its demand targets the legislation allowed for money to be clawed back from Eskom in the following financial year. The claw back would impact on the profits of Eskom and not on its budgeted expenditure. Mr Majila noted that the benefit was thus passed on to the customer.

Mr Lucas was concerned about the recurrence of the outages and that penalties leveled on Eskom would have to be absorbed by the end consumer.

Mr Pokoela (NERSA) noted the concern and stated that NERSA intended to step up its monitoring processes.

Mr S Louw (ANC) reiterated that the financial losses suffered as a result of the outages were huge and he felt that Eskom should be heavily fined.

Mr P Hendricks (ANC), Member of the Public Enterprises Portfolio Committee asked what the relationship between Eskom and NERSA was. He asked whether NERSA conducted in loco inspections on Eskom or whether NERSA merely perused reports submitted by Eskom.
It was also asked whether the findings picked up by NERSA were as a result of routine inspections or as a result of the specific investigation carried out.

Mr S Mokoena (NERSA Chief Executive Officer) said that Eskom was a monopoly throughout the value chain. NERSA tried to keep Eskom in check by way of licensing conditions, legislation etc. He explained that NERSA interacted with Eskom on three levels: normal audits, ad hoc audits and the monitoring of plans and programmes. He noted that the investigation’s findings were within the legislative framework.

Mr Y Carriem (ANC), Chairperson of the Public Enterprises Portfolio Committee asked if there was a direct relationship between the events that had been investigated. He felt that the punishment leveled at Eskom should be in line with the punishment principles set out in the Public Finance Management Act (PFMA). The PFMA allows for negligent top government officials to be held liable for losses suffered. The penalties on Eskom would thus come out of the bonuses of Eskom management if indeed similar principles applied. Mr Carriem commented that Eskom had publicly responded to NERSA’s report and suggested that Eskom should perhaps address Parliament on the issue.

Mr Matjila responded that if Eskom was unhappy with the findings of the report, processes were in place for them to respond.

The meeting was adjourned.