Most European markets had 30-40 years closed access and no gas-on-gas competition.

This has facilitated infrastructure development

• Gas markets grow to maturity.
• Take-or-pay/ship-or-pay obligations could be honoured.

The RSA faces some unique gas challenges. For example Sasol is the "solution" (the only entity capable of offering a "base load" ) and the "problem" in that it controls the gas supply and the industrial market. International comparisons of market structure have limited applicability. With the exception of Germany, all European gas industries were previously started as state monopolies that, by definition, were not subject to competition. The only European gas industry to be started recently as a privately owned gas industry, Northern Ireland, introduced gas on gas competition for industry within 3 years and for residencies (i.e. distribution) within 8 years.

Sasol has a strong and entrenched market position and has also benefited by being a de facto gas monopoly during this period, first as a state de facto gas monopoly and later as a private unregulated de facto gas monopoly and without the usual mandatory obligation to supply customers within its designated area. Sasol has been selling gas since 1964 and may face only limited competition until the year 2014 because of the high qualifications for third party access to its pipelines in terms of the section 36 Agreement. Free of any mandatory obligation to supply and in competition with low coal and electricity prices, Sasol has had to or been able to "pick the eyes out" the market by concentrating on large customers and industrial parks where energy based on oil prices have been prevalent. By 1998 Sasol’s coal gas market was approximately the same size as the national natural gas markets of such countries as Sweden, Bolivia, Slovinia, Georgia, Latavia and Tajikstan, although obvious the Sasol market cannot be compared with the giant gas markets of the USA, Russia, the UK, Germany, the Netherlands etc. The volumes of coal gas available are limited so RSA has had to import gas. Does the Bill offer sufficient incentive to investors and sufficient protection to customers? We believe so.

The Bill should not be amended to strengthen Sasol’s position

In terms of the European Union Gas Directive, member states had to open 20% of their markets to gas on gas competition by the year 2000, including distribution areas. In fact, most of the member states had far exceeded these levels by that time:

100% market opening: the UK and Germany.

40% to 90% market opening: Sweden, Finland, Ireland, the Netherlands Belgium, Spain, Austria and Italy.

<40% market opening: France.

Delay until 2006 (10 years after gas is supplied commercially): Portugal and Greece.

N.B. membership of the European Union is conditional on compliance with the Gas Directive and East European countries such as Poland and Hungary have opened their markets to gas on gas competition.

Gas on gas competition is now the norm for privately owned gas industries throughout the world e.g. Canada, USA, Mexico, Argentina, Chile, Australia etc.

Sasol’s conclusions appear to be based on out-dated information

The Bill should not be amended to strengthen Sasol’s position

LIQUEFIED PETROLEUM GAS (LPG)

LPGas is cylinder (bottled) gas and cannot be classified as piped gas as envisaged by the Bill. It should therefore be excluded from the definition of gas.

If LPGas cannot be classified as a piped gas, it must be excluded from the definition of "gas" and consequently from the Gas Bill.

LPG in cylinders is not classified as piped gas as envisaged by the Bill. However, piped LPG is, and should be, classified as piped gas.

The company is extremely concerned that a whole set of new unrelated and non-compatible standards and regulations, which are not intended for, or applicable to, the LPGas industry, will be imposed on the LPGas business.

The LPGas Industry, therefore remains extremely concerned that a whole set of new unrelated and non-compatible standards and regulations, which are not intended for, or applicable to the LPGas industry, will be imposed on LPGas business.

The Bill is silent on Technical and Operating codes or standards. It is our recommendation that the American code ASME B31.8 "Gas Transmission and Distribution Piping Systems" with relevant amendments for local conditions be adopted and stipulated. This is essential to ensure the feasibility of an integrated pipeline network.

This resorts under the Department of Labour and gas pipelines are defined as gas fuel systems in terms of the Vessels Under Pressure Regulations of the Occupational Health and Safety Act, 1993.

The American code ASME B31.8 has already been approved for gas pipelines in terms of these regulations.

OVERSIGHT OF GAS TRADING.

The first issue that Texaco wishes to address is the level of oversight that is applicable to gas trading activities. Although Texaco accepts the fact that the Bill requires licensing of gas traders, and acknowledges that some level of oversight may be desirable, it believes that the level of oversight should be minimal, except with respect to end-use customers other than eligible customers. Gas trading will be subject to competition, except perhaps where a distributor may be awarded an exclusive license to operate in a geographic area, and market forces will accomplish much of what regulation would accomplish in the absence of competition. Texaco believes that registration would be adequate, in lieu of licensing, for sales to eligible customers.

Note: This would require the following changes to the Gas Bill:

1. Definitions:

‘‘tariff’’ means a written statement of rates and terms and conditions under which gas or gas services are sold to any end-use customer other than an eligible customer;

The Gas Regulator must, in accordance with this Act-

(a) (iv) trading in gas where sales are made to end-users other than eligible customers;

(b) gather information relating to the production, transmission, storage, distribution

and trading in gas where sales are made to end-users other than eligible customers;

(1) No person may without a licence issued by the Gas Regulator—

(c) trade in gas to end-users other than eligible customers.

Before considering an application for a licence in terms of this Act, the Gas Regulator—

(a) if it is of the view that the proposed construction of gas facilities or the proposed provision of gas services other than trading services should be altered to provide access to third parties, must inform the applicant of that view and request the applicant to supply reasons as to why the application should not be considered subject to the imposition of such condition;

(1) The Gas Regulator must decide on an application in the prescribed manner

within 60 days—

(c) trading in gas to end-users other than eligible customers.

(1) An owner of an operation involving any of the following activities must

register the operation with the Gas Regulator:

(c) the trading of gas involving sales to eligible customers.

(1) The Minister may, by notice in the Gazette, make regulations regarding—

(i) the publishing of information relating to uncommitted capacity by the holders of transmission or storage licences and the publishing of tariffs for gas supplied to end-use customers other than eligible customers by the holders of distribution licences;

Texaco’s argument is based on the premise that suppliers to eligible customers will be subject to competition. In terms of section 21 (1) (n) the Regulator may only set tariffs if there is insufficient competition. It is extremely unlikely that suppliers will be subject to adequate competition from other gas suppliers in the foreseeable future.

Oversight of gas trading is intended to ensure that: there will be no cross-subsidisation (section 21 (1) (a)), discrimination between customers and classes of customers (section 22 (1)) and discrimination in favour of undertakings related to the gas trader (section 22 (2)). The Texaco proposal would remove these protections for eligible customers. Texaco may be thinking of eligible customers as large customers but it is expected that the threshold consumption for eligible customers will be progressively reduced, possibly finally to zero, as is the case in Canada and the UK.

Cross-subsidisation cannot be monitored if eligible customers are excluded.

"EXCESSIVE POWERS OF THE GAS REGULATOR".

It is the state’s responsibility to ensure that the country’s infrastructure services (electricity, water, gas etc.) are provided, and the trend is for these services to be provided by the private sector on behalf of the state. The state remains the service authority (fulfilling its responsibilities to protect and provide for its citizens) while the private sector entity is the service provider (obtaining a fair profit and operating under the supervision of the state). Obviously the stronger the private monopoly, the stronger the regulation required.

It is recommended that the PPC accept the principle that "the stronger the monopoly the more the regulation; the greater the competition the less the regulation" as embodied in the Gas Bill.

The "excessive powers" discussed so far are powers of the Gas Regulator. It is important though that the Regulator will consist of five part-time members (clause 5(1)). There will also be a Chief Executive Officer (CEO) who will be responsible for the day-to-day management of the affairs of the Regulator and for administrative control over the employees which he himself appoints (clause 11(1)). Any experienced manager will understand that, almost inevitably, real power will gravitate into the hands of the CEO and, perhaps, one or two of his senior officials. He has the detailed knowledge. He will largely determine the agendas for Regulator meetings, control the submissions to and information before the Regulator and propose and steer the outcome. For firms in the industry the CEO will be the focus of power, the person who can effectively decide the life or death of the firm.

What is the likely effect of the powers in these circumstances?

An important object of the Bill (clause 2(b)) is to "facilitate investment in the gas industry". Can there be any doubt in anyone’s mind that the excessive powers described earlier are likely to frustrate this object? How many entrepreneurs or large firms will risk significant amounts of capital in such an environment of discretionary intervention in business decisions, temporariness and uncertainty? And if some do, how will that atmosphere influence the way they invest and do business? Will this "promote the efficient, effective sustainable and orderly development and operation" of the gas industry (the first object in clause 2(a))? In fact the extent of reliance on discretionary bureaucratic power in the Bill places the achievement of all the objects under threat.

A consideration that must carry weight with Parliament is the unhealthiness and danger of statutory systems that create an ideal situation, a temptation, for irregularities and corruption. This Bill illustrates such a situation. This is no reflection on particular persons, but on systems that wisdom and experience dictate should be avoided, despite noble intentions.

By the AHI’s argument all boards of directors are redundant appendages of corporate governance. The DME does not share this view. The structure of the Gas Regulator is in accordance with the King Code (chairman should be a non-executive director and not be the CEO), the Public Entities Act (CEO responsible for the conduct of business under the direct authority of the board) and the draft Protocol on Corporate Governance in the Public Sector.

The CEO is not part of the Board and does not have the vote for decisions of the Board.

The Board must make decisions in terms of section 10.

The rest of this argument has been dealt with previously but a comparison with the powers of Gas Regulators in other countries is relevant when assessing the "excessive powers" of the South African Gas Regulator:

• Elsewhere it is the Gas Regulator and not the Minister who promulgates regulations;

• Elsewhere the Gas Regulator sets tariffs for transmission, storage and distribution as a matter of course, whereas in South Africa the Gas Regulator can only enforce non-discrimination and the regulations on transmission and storage and must apply the inadequate competition test before setting tariffs for distribution;
• The principles being administered by the Gas Regulator are far more liberal than those elsewhere e.g. the Australia code, the European Gas Directive, the Mexican gas regulations all of which require third party access to distribution systems.

• Eligible customers and thresholds.
• Price setting procedures.

Someone has to govern. Someone has to make these decisions and the international practice is that they are made by the Regulator. Note: Mr. Hodges supported the Minister’s duty to make regulations. This would have the advantage of the decisions being subject to the stringent requirements of section 10 (decisions by the Regulator). However, some parties (including Sasol) have lobbied to reduce the discretionary powers of the Regulator and setting of thresholds for eligible customer and price procedures and principles will now be done by regulation by the Minister. Note that in terms of section 34 (2) before promulgating regulations the Minister must consult with the Gas Regulator; invite public comment; and duly consider the comments.

Regulator has unfettered powers in:

• Determining Prices/tariffs and terms & conditions of contracts.

• Interferes with commercial terms;
• No stated benchmarks;
• No compulsory recognition of market forces

• Awarding licenses and determining periods.
• Investigate, adjudicate and granting judgements and hearing appeal on its own rulings. (investigator, Judge and Jury)
• Determining levies & penalties.

Unfettered? Decisions by the Regulator are subject to the stringent requirements of section 10 and must be consistent with the principles of the Act and the framework of requirements and limitations.

On the contrary the Regulator is charged with promoting competition (market forces) and it is Sasol who advocating the delay in competition (i.e. true market forces) for both its transmission and distribution pipelines.

The Regulator will not be "hearing appeal on its own rulings" – section 10. Provision is made for High Court review i.e. ensuring that the Gas Regulator follows the procedures and principles of the Act. The Regulator will be the neutral administrator of the Act and the regulations in line with international practise. Is Sasol advocating that the gas industry funds an empire of separate investigator, judge and jury agencies? Not even the giant gas industries such as the UK find it necessary to have anything other than the normal regulator.

It is difficult to reconcile this statement with Sasol’s support for special dispensations.

SASOL’S CONCLUSIONS

True in certain parts of RSA. That is why Sasol is offered a special dispensation. Of the new gas industries with private ownership Chile introduced gas on gas competition from day one; Northern Ireland 3 years after first gas for industrial customers and 8 years after first gas for residential customers. By contrast Sasol has been selling gas since 1964 and, in terms of the section 36 agreement will not be facing competition before the year 2014. The danger of premature introduction of gas on gas competition seems remote.

Is Sasol suggesting that the criteria for eligible customers, pricing etc. for all phases of all gas projects be laid down in the Bill? This is hopelessly impracticable. The basic principles must be laid down in the Bill and these must be administered in a transparent and just fashion.

Other companies are prepared to invest in the gas industry without a special dispensation so this conclusion is not supported by the facts

By the time the special dispensation is over Sasol would have completed the major portion of the total investment (field, transmission pipeline, distribution network and Sasol plant conversion) and completely or almost completely repaid its loans. Incremental investment after that time would be minimal compared with the original investment.

PHASES OF REGULATION

Mr. Hodges

-Managing monopoly

-Injecting competition

-Exiting from economic regulation

• Exiting from competitive components to give to Competition Commission

Managing Monopoly

Monopolies (distribution) or partial monopolies (transmission) are often granted to attract investment in the early stages of the industry and must be balanced by appropriate consumer protection.

Third party access to distribution areas is a fairly recent development and is limited to mature gas industries such as Canada, some states in the USA, the UK, Argentina, Mexico, Australia and will be progressively implemented in the member states of the European Union. This actually forms part of the "injecting competition" phase and will require an amendment of the Gas Act and distribution licences at the appropriate time.

Injecting Competition.

This is achieved by:

• encouraging new sources of supply;
• progressively lowering the qualifying threshold for eligible customers;
• Introducing third party access to distribution areas.

Exiting from economic regulation

Practically all gas industries that do not have state monopolies are supervised by specialised gas or energy regulators (USA, Canada, Mexico, Argentina, Portugal, Belgium, Denmark, Finland, France, Greece, Ireland, Italy, Luxembourg, Spain, Sweden, Netherlands, UK). The exception to this rule is Germany, which has a very poor record for gas competition and has never had a specialised regulator. International experience is that combined regulators are used for mature gas industries and rather than competition authorities.

Third party access to distribution areas is not recommended at the initial stage because:

• it will be a disincentive to initial investment in infrastructure;
• a distributor will need to aggregate its market in order to obtain a favourable load profile to buy bulk gas at competitive prices – third party access would allow other suppliers to "cherry pick";
• there is no problem of the "supplier of last resort" as the distributor has an obligation to supply;
• for the foreseeable future there will be an insufficient number of suppliers to ensure competition;
• price regulation will substitute for competition during this period.

No action is required.

SASOL’S STAGES

Attracting Investors and Financiers

• Producers
• Transporters
• Distributors (marketers)

Take or pay, ship or pay commitments.

Needs aggregation of markets/base load.

Ability to meet long-term contractual commitments.

The "infancy stage" is recognised in the Eastern part of RSA and is recognised by section 36.

However, Sasol has a number of significant advantages in the initial stage of the project:

• 40 years of local gas experience;
• 1 400 km of gas pipeline covering three provinces plus access to Petronet’s 600 km pipeline from Secunda, passed Newcastle and Richards Bay to Durban;
• Almost half the natural gas from Mozambique will be sold to Sasol companies;
• For the rest of the gas it already has an existing and growing established market of 42 million GJ p.a. (equivalent to one million tons of oil p.a.);
• An agreement with the Ministers for market protection until the year 2014.
• Its gas will be produced onshore and it will therefore have lower production costs then any of its competitors;
• It will be fully integrated in all legs of the gas chain.

Respect original contractual commitments

Third party access to the pipelines and the markets (i.e. gas on gas competition) is a prerequisite to attaining all three of these objectives:

• The way to attract more producers is to give them access to the pipelines. This is especially important for smaller gas fields (such as those in Mozambique) that could not individually justify their own pipelines.

• There is no point in increasing transportation capacity if new producers are being denied access to the markets. The purpose of interconnections is to enable access to the rest of the system.
• The market cannot be grown aggressively if new producers are being denied access to the market

Contractual commitments are the responsibility of the contracting parties but must be made within the framework of the Gas Act e.g. must not be discriminatory.

Multiple producers/suppliers.

Fully interconnected transmission.

Legal and commercial commitments fully covered.

Mature markets.

Gas-on-gas competition

The so-called stabilising phase is merely a sub-set of the maturity phase.

Sasol would not commit itself to how long it would take to reach the maturity phase but from its maps it would appear that the maturity stage would entail all or most of the following:

• Pipelines stretching from Windhoek to Orangemund, Cape Town, Mossel Bay, Durban, Richards Bay, Secunda, Johannesburg, Bloemfontein, Sishen and back to Orangemund with other lines from Zimbabwe and Mozambique to the Johannesburg area.
• Coal bed methane produced in the Waterberg and Zimbabwe and natural gas in Mozambique and offshore of KwaZulu-Natal, Port Elizabeth, Mossel Bay, Sasol’s and Forest’s areas on the West Coast and the Kudu field.
• A market large enough to support the cost of the pipelines and to absorb the production of the many gas fields.

This would indicate that Sasol is proposing that gas on gas competition should be delayed for many decades and that gas monopolies will be the norm during the life-time of most of the members of the PPC.

Bill addresses the needs of a mature phase:

• Third party access to transmission and distribution.
• Gas-on-gas competition

Shortcomings - Infancy and Stabilisation

• Does not enable long-term commitments required to attract investors.

Sasol’s "stabilisation" phase would delay the mature phase for decades as new producers will need access to the markets (i.e. gas on gas competition), the pipelines will not be built without new producers and the market cannot grow without additional gas supplies.

The Gas Bill allows for the introduction of competition in the standard and internationally accepted way i.e. by gradually reducing the minimum consumption threshold required for a consumer to qualify as an eligible customer i.e. one who may buy gas directly from suppliers. For example gas on gas competition was introduced in Australia over a period of 4 ½ years starting with the highest qualifying limit varying from 10 000 GJ p.a. for New South Wales to 500 000 GJ p.a. for Victoria and reducing to zero for all states i.e. gas on gas competition for individual householders. Until now the highest ever qualifying limit has been for the European Union Directive i.e.:

0-5 years 942 500 GJ p.a.

5-10 years 565 500 GJ p.a.

After 10 years 188 500 GJ p.a.

These high limits were counterbalanced by automatic qualification as eligible customers by distributors and gas-fired power generators from the start.

Retain the current balance in the Bill favouring the initial stages.

SPECIA L DISPENSATIOS

Special dispensation could go a long way to address the infancy phase.

Government recognised the shortcomings and has allowed a special dispensation.

I

Sasol’s investor confidence concern is addressed by section 36.

The Sasol agreement was negotiated to enable Sasol to make investment decisions in the absence of specific legislation and not because the Government considers that the Bill it was drafting would have shortcomings – if this were the case then the Government would simply have changed the Bill.

The Gas Act (when promulgated) will do away with any need for special dispensations.

Retain section 36.

TARIFF SETTING

As in the case of any other businessman, flexibility of his price and conditions of supply are critically important to a licensee, who is also an investor. This is particularly significant in view of the interchangeability of the various energy sources. The steam boiler providing steam for say a bread baking plant or the burner on the bread baking oven itself, can easily be converted to use either pipeline gas, LP gas, fuel oil, diesel or illuminating paraffin as heating fuel / energy. Importantly, both the steam boiler and bread-baking oven can also use the ever-present choice of electricity as heating energy. The fact is that the energy industry, as far as heating applications are concerned, is unique in its ability to interchange between various energy sources. Numerous examples of such changes exist.

To tie a licensee’s hands in such circumstances by allowing bureaucracy to dictate his price and conditions of supply, is wrong. Bureaucrats do not suffer the consequences of their own wrong decisions. The investor does.

This AHI argument is based on two fallacies:

• The Gas Regulator would impose gas prices that would be too high to be competitive. In fact, the Gas Regulator’s aim would be to prevent monopoly abuse and not to maintain artificially high prices.
• That fuel switching is easy. The ability to switch fuels is limited by:

• There is a time, convenience and cost barrier to switching to a new fuel.
• The consumer will only switch fuels if he perceives that the price and supply trends of the fuels will make this worth while over a long period.
• It is possible to switch fuels at short -notice if the consumer has dual-fuel equipment but this equipment is expensive and a waste of scarce capital resources. This waste can be avoided if the consumer has the confidence that prices will not subject to abuse of market power by the licensee. This confidence is essential for the growth of the gas market in South Africa.
• Gas distribution networks cannot switch fuels and this physical limitation leaves gas distributors at the mercy of a monopoly supplier.
• The expense of household appliances inhibits fuel switching - this has been clearly illustrated in the electrification programme where coal stoves continue to be used despite the inconvenience and health hazard.

Section 10 of the Bill provides the necessary safeguards for decisions by the Gas Regulator.

Bureaucrats are by definition Government officials, whereas the Bill specifically excludes Government officials from the Gas Regulator. Two parties have to be considered – the investor and the customer.

• This argument should be rejected for the reasons given.
• It should be noted that the logical alternate fuel for small and medium enterprises is LPG and that this fuel is:

• Not regulated;
• Supplied by the companies that will probably be supplying the natural gas

The Regulator should retain the power to set tariffs where there is "inadequate competition".

• Competition Act provides sufficient safeguard
• Only necessary when Competition authorities have evidence of abuse of dominance.
• Benchmarks and criteria not defined.
• Major uncertainty.

Gas, like electricity, involves natural monopolies. They also require detailed knowledge and skills. Hence many countries have both competition and sectoral regulators. The granting of a monopoly cannot be de-linked from the price protection to the monopoly’s customers. It will be ineffective to have one body granting licences and the other supervising prices.

It is difficult to be specific in legislating for an industry that largely does not exist and regulation will also change as the industry develops, but the basic principles are laid down in the Bill, notably sections 2 (objectives: facilitate investment, the needs and interests of all parties concerned must be taken into consideration, affordable gas) and 10 (decisions transparent, explained, fair, subject to appeal etc.).

The Competition Act requires agreement on turf.

It is no answer to the problem (tariff setting) that a decision of the Regulator may be brought under review by the High Court (clause 10(3)). The Court is in no position to regulate prices and conditions.

Retain the review by High Court.

The Regulator’s power to "set tariffs" (i.e. rates, terms and conditions) must be removed from the Bill.

See clause 4(g) and (h), 21(1)(n) and 34(1)(5).

COMPETITION BOARD

The Competition authorities are adequately equipped in terms of their Act and infrastructure to deal with competition problems. If a licensee engages in any anti-competitive conduct, he can be punished in terms of the Competition Act and also incur civil liability to a person who has suffered a loss (section 65(6)). If his price is "excessive", he falls foul of section 8(a). "Predatory" pricing will be a contravention of section 8(c) or 8(d)(iv), and "price discrimination" is prohibited in section 9.

The disadvantages of bureaucratic intervention by controlling prices and conditions in an attempt to supplement competition policy and law, far exceed any benefits to be derived.

The whole point of having specialised regulatory bodies is that general competition law cannot always be applied to all industries. An example is the infrastructure industries, such as gas, where monopolies are granted for a period of time as an inducement to invest in the infrastructure and these monopolies are balanced by price regulation. Besides general competition issues, the Gas Regulator will also have to deal with the orderly development of the gas industry, mediating changes to pipelines and storage facilities, awarding of licences, demarcating exclusive geographical distribution areas, third party access to the gas infrastructure, expropriation etc.

The Gas Regulator will be no more or no less "bureaucratic" than the Competitions Board.

Since the Competition Act as a whole will apply to all licensees under the Gas Act, Parliament has to consider very carefully whether it is vvise to include provisions regulating competition in an industry specific Act like the Gas Act.

• If such provisions identical to provisions in the Competition Act a re included, nothing is added to what exists — but it is problematical that there then are two sets of identical provisions that appear in different Acts implemented by separate authorities.

Serious problems start when competition provisions in an industry specific Act differ from provisions in the Competition Act. In law both apply to the firms concerned.

After the Nedcor/Stanbic merger episode, involving the Banks Act and the Minister of Finance, the Competition Act was amended with effect from 1 February 2001 to provide for concurrent jurisdiction in a case where an act falls under chapters 2 or 3 of the Competition Act and is also subject to the jurisdiction of another regulatory authority such as the Gas Regulator (section 3(1A)).

The manner in which the concurrent jurisdiction is exercised must be managed, to the extent possible, in accordance with an agreement between the Competition Commission and the regulatory authority concerned.

Numerous problems and legal uncertainties arise from this concurrent jurisdiction", e.g. the two authorities have not entered into an agreement, or interpret it differently, or disagree about the outcome, or one of them acts on its own or deviates from the agreement.

With two masters protecting turf, this "concurrent jurisdiction" is at best a troublesome, arrangement — as the Registrar of Banks has recently explained in his Annual Renort.

.

Concurrent jurisdiction is a feature of the Competition Act, not the Bill. These arguments seem to be a plea to change Section 21 (1) the Competition Act (which would be unwise) and this is outside the scope of these hearings. Section 21 (1) of the Competition Act reads "The Competition Commission is responsible to-

(h) negotiate agreements with any regulatory authority to co-ordinate and harmonise the exercise of jurisdiction over competition matters within the relevant industry or sector, and ensure the consistent application of the principles of this Act;

(i) participate in the proceedings of any regulatory authority.

(j) advise, and receive advice from, any regulatory authority.

(k) over time, review legislation and public regulations, and report to the Minster concerning any provision that permits uncompetitive behaviour.

From the above it is clear that;

• The Competition Act makes provision for other regulatory bodies and there is no question of exclusive jurisdiction.
• The Competition Act calls for consistent application of its principles by other regulatory authorities and therefore it is logical and appropriate for the Gas Bill to refer to the wording of that Act.

South Africa must not re-invent the wheel – the need for a specialised Gas Regulator for privately-owned gas industries (especially in the initial stages of the industry when the infrastructure is being established and limited competition exists) is accepted world-wide. Price regulation is part and parcel of the Gas Regulator’s duties.

The Competition authorities deal with general competition regulation and it is the Gas Regulator who is specialised.

It is unclear why the AHI has assumed that the Gas Regulator will be out of its depth in view of the requirements of section 6. (2) of the Bill.

There is nothing to prevent cross-membership of the Competition and Gas Boards if necessary and there is also the provision in terms of 21 (1) (i) for the Competition authorities to participate in the proceedings of other regulatory authorities.

As mentioned previously the whole point of having specialised regulatory bodies is that general competition law cannot always be applied to all industries. An example is the infrastructure industries, such as gas, where monopolies are granted for a period of time as an inducement to invest in the infrastructure and these monopolies are balanced by price regulation.

The AHI recommendation to split jurisdiction between the competition and gas authorities should be rejected in favour of the principle of the Competition Act and the Gas Bill.

For the reasons given the attempt to prohibit discrimination by licensees in clause 22 is a weak shadow of principles in the Competition Act, particularly section 9. If licensees, like any other firms, discriminate, it is a matter for the competition authorities and not the Gas Regulator. The clause should be scrapped.

General provisions to the effect that the Regulator must exercise his power in such a way that competitive markets are promoted (clause 2(f)) or competition in the industry is promoted (clause 4(j)) are meaningful and co not create jurisdictional problems.

Section 22 of the Gas Bill supplements section 9 of the Competition Act and is applicable to access to pipelines as well as prices.

DEFINITION OF A GAS MONOPOLY

This argument is frequently employed by a local gas supplier and will undoubtedly form part of its submission. Taken to the limit this would mean that there are no gas or electricity monopolies anywhere in the world and that authorities throughout the world have wasted huge amounts of time, money and resources establishing regulators to control non-existent monopolies. The ability to switch fuels is limited by:

• There is a time, convenience and cost barrier to switching to a new fuel.
• The consumer will only switch fuels if he perceives that the price and supply trends of the fuels will make this worth while over a long period.
• It is possible to switch fuels at short -notice if the consumer has dual-fuel equipment but this equipment is expensive and a waste of scarce capital resources. This waste can be avoided if the consumer has the confidence that prices will not subject to abuse of market power by the licensee. This confidence is essential for the growth of the gas market in South Africa.
• Gas distribution networks cannot switch fuels and this physical limitation leaves gas distributors at the mercy of a monopoly supplier.
• The expense of household appliances inhibits fuel switching - this has been clearly illustrated in the electrification programme where coal stoves continue to be used despite the inconvenience and health hazard.

INVESTOR CONFIDENCE

It will be shown later on (par 9) that the Gas Bill in its present form will not attract investors quite the opposite —

and creates an environment conducive to corruption.

The power to intervene on highly uncertain grounds and prescribe prices and conditions, is prominent in these dangers.

This remark cannot be reconciled with the favourable reaction of international oil and gas companies to the Gas Bill.

Corruption flourishes in secrecy and uncertainty and this remark cannot be reconciled with the transparency (especially section 10), limitations and requirements imposed by the Bill on the Gas Regulator.

The grounds as laid down in section 21 (1) (n) are specific.

DESIRABLE FEATURES OF A REGULATOR

• "Independence" means independence to administer the Act within the limitations and requirements of the Act, the regulations and written government policy.

-Well resourced

• The Regulator will have to be funded from the fiscus in the initial stages to pay for training, equipment etc.
• International investors’ have stressed the importance to them of the transparency of the Gas Regulator’s decision process.

No action is recommended

No action is recommended.

• There is insufficient available capacity and the industry is too small to support the luxury of a two-tier system with a specialist appeal court. Decisions are subject to review not to appeals
• Licensing will be by application judged against the objectives of the Act and not by competitive bidding so the ICASA problems will not apply here.

No action is recommended.

ROLE OF THE MINISTRY

• Ability to decide on technical and procedural issues lowers regulator independence and exposes investors to political risk — also risk of capture indirectly by powerful firms

All liberal democracies face the threat of their politicians being "captured" by powerful interests. The Minister is responsible for broad policy and public investment.

No action recommended.

ONE ENERGY REGULATOR OR NOT?

-Potential advantages of a single energy regulator

• economies of scale and efficient resource use
• - electricity and gas face similar technical and economic regulation issues allowing lower total cost of regulation
• - one agency allows shared resources and shared learning-
• major regulatory effort for electricity is now, for gas in the future
• - improved coordination on energy issues
  - one agency improves information flows and coordination on energy issues. coordination necessary as industries are converging – increasingly compete with each other, plus gas an input into electricity generation
• -World Bank assessment of California crisis
• -one agency for gas and electricity as gas is becoming an important fuel in generation
• Lower risk of capture. Lower capture risks from industry — dealing with more firms and can rotate staff. Lower capture risks from politicians — report to different masters?
• Easier exit from regulation More likely to develop competition and exit regulation as still have other parts of the industry to regulate

Potential disadvantages of a single energy regulator

World practice

• Many started with separate regulators partly seen as very different industries or because no gas to regulate.
• Industry direction towards convergence and so trend to combine regulators into a single entity

The Cabinet has instructed the DME to investigate the feasibility of a single energy Regulator. and a study has been commissioned. In RSA electricity is a mature, large and well established industry. For gas the opposite applies.

• The energy regulator could regulate electricity, gas, petroleum pipelines. Possible models include:
• Each energy sector with its own regulator each with its own secretariat, with or without limited common membership of the boards.
• Separate regulators but with a shared secretariat, with or without limited common membership of the boards.
• An energy regulator with its own secretariat.
• Start with separate regulators (with or without limited common membership of the boards) and combine later.

N.B. Section 11 (5) of the Gas Bill makes provision for the Gas Regulator to appoint or make use of persons employed by other regulatory authorities as envisaged above. This gives the possibility of having a common secretariat while maintaining separate boards.

Gas is used for industrial, commercial and residential heating; a chemical feedstock; a reductant in the metallurgical industry, a motor fuel etc. and it appears that undue emphasis has been placed on the use of gas for electricity generation which accounts for 32% of the world’s total gas consumption. Supervision of the gas industry by the NER could be skewed in favour of electricity industry.

Training of the larger NER board (none of whom have experience in the gas industry and some of whom have other commitments) would cause additional delays in establishing the legal structure for the gas industry. If in future say gas and electricity Regulatory Boards were to be merged, the same persons could be appointed to both Boards.

Countries with energy regulators have mature electricity and gas industries (USA, Canada, Belgium, Denmark, Finland, France, Italy, Netherlands).

One case is known of separate gas and electricity regulators being subsequently combined into an energy regulator i.e. the UK, and this was done only after the re-structuring of the previous state monopolies was completed.

No case is known of specialist energy regulator being disbanded with supervision being left to the general competition authorities.

The large well-established privately owned gas industries of the USA, Canada and the UK, are supervised by energy regulators while the smaller less developed privately owned gas industries of Argentina and Northern Ireland are supervised by specialised gas regulators.