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KEY POINTS FOR DISCUSSION

Parliamentary Portfolio Committee on EnergyChief Executive Officer

15 October 2013

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PRESENTATION OUTLINE

A. Electricity Industry RegulationB. Piped-Gas Industry RegulationC. Petroleum Pipelines Industry RegulationD. Cross-Cutting RegulatoryE. Organsiational

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A. ELECTRICITY INDUSTRY REGULATION

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DOES NERSA ALSO REGULATE THE RATE AT WHICH MUNICIPALITIES CHARGE INDUSTRY?

• NERSA regulates the Municipal Tariffs (including the industrial tariffs) by using benchmarks and guidelines which are subject to public comment;

• There are problems with the tariff charged in some instances and NERSA is directing municipalities to change their tariffs to be more in line with the national norm; and

• NERSA ensures that municipalities submit a schedule of implemented tariffs which are then compared to the NERSA approved tariffs, to ensure compliance.

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WHAT IS NERSA’S ROLE IN REGULATING FBE AND WHAT FURTHER CAN BE DONE TO ENSURE THAT

IT IS PROPERLY REGULATED?• The Department of Energy (DoE) introduced the

Electricity Basic Services Support Tariff (EBSST) policy in 2003, which makes provision for 50kWh of electricity which is funded from the equitable share;

• However municipalities have their own indigent policy on who qualify for FBE which differ from each other;

• NERSA does not have the mandate to regulate the FBE; and

• COGTA is in the process of hosting capacity building sessions with Provincial Governments and municipalities on how to apply the indigent policy and the compilation of the indigent register.

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HOW IS NERSA ASSISTING MUNICIPALITIES TO MANAGE THE IMPLEMENTATION OF IBTs AND

ENSURE COMPLIANCE?• NERSA continues to engage with municipalities that are

struggling to implement IBTs in order to understand the challenges faced;

• During March 2013, NERSA revised the original IBT structure after taking into account stakeholder comments received;

• Municipalities that are not able to implement the approved structure are also advised to structure their own IBT blocks based on their customer mix; and

• Those municipalities that are not able to implement IBTs are required to submit motivation detailing the reasons of not being able to implement.

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PREVIOUS AUDIT FINDINGS OF ESKOM TRANSMISSION PROJECTS (1)

• In terms of the Electricity Regulation Act, NERSA bears the responsibility of ensuring that the South African Grid Code (SAGC) is implemented and complied with;

• To this end, NERSA undertakes annual audits of Eskom’s Transmission projects, approved in the previous year, for compliance with the investment criteria specified in section 7 of the SAGC’s Network Code;

• Previous findings (1):o The planning process was fully complied with. Eskom had fully

documented internal processes for effecting compliant processes;

o With regard to information gathering, a non-compliant finding was the timeline requirement for the production of a Transmission System demand forecast by end of August;

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PREVIOUS AUDIT FINDINGS OF ESKOM TRANSMISSION PROJECTS (2)

• Previous findings (2):o The evaluated projects complied with the technical limits and

targets for long-term planning requirement;o Eskom generally complied with the criteria for network

investments requirements, even though the following shortcomings were noted:

• Failure to issue the budget quote for the “Juno feeder bay project” within the specified 20 days;

• Eskom used internally approved parameters, instead of using economic parameters established through a NERSA approved process in accordance with section 7.7(5); and

• Although the Bighorn 2nd 400/275kV 800MVA transformer and the Greater East London Strengthening projects were economically justified, they were justified with customer interruption costs determined in the late 1990’s.

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CHALLENGES REGARDING THE ESTABLISHMENT OF END-USER FORUMS

• In terms of the Electricity Regulation Act, it is provided that NERSA may establish Customer or End User Forums and the Energy Regulator resolved to have the forums established by distribution licensees;

• Distribution licences would have to be amended to include the establishment of end user forums as a licence condition;

• In terms of the said Act, any change to a licence condition must be preceded by procedures prescribed by the Minster of Energy on how this should be done;

• These procedures have not as yet been prescribed;• NERSA is in communication with the DoE and proposed

draft procedures to the policy maker; and• The DoE is awaiting the finalisation of the Electricity

Regulation Amendment Bill before promulgation.

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B. PIPED-GAS INDUSTRY REGULATION

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WHAT CAN FURTHER BE DONE TO INCREASE THE USAGE OF GAS IN THE ECONOMY?

• The introduction of additional gas supply and new infrastructure would improve the growth of the gas market;

• Investors will not be willing to commit to capital projects, while industrial, commercial and domestic customers will not be willing to convert to gas-fired infrastructure unless they have security of supply;

• South Africa should therefore investigate the potential for diversifying its energy mix to include natural gas;

• It is a policy decision to diversify the energy mix, and the Government has indicated that gas should play a larger role; and

• This means that alternatives for gas supply should be investigated, which also brings Liquefied Natural Gas (LNG) into consideration.

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WHAT IS NERSA’S TAKE ON THE APPROVAL OF MAXIMUM PRICES RESULTING IN SASOL

CHARGING MAXIMUM PRICES TO NEW ENTRANTS? (1)

• The maximum price for gas is determined based on the price of basket of certain relevant energy sources;

• The Energy Regulator recognizes that the methodology for arriving at the maximum price of gas may be appropriate under the prevailing circumstances characterised by the existence of a single gas supplier, with the vast majority of the gas being sourced from a single imported gas supply;

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WHAT IS NERSA’S TAKE ON THE APPROVAL OF MAXIMUM PRICES RESULTING IN SASOL

CHARGING MAXIMUM PRICES TO NEW ENTRANTS? (2)

• However, where the licensee deems the maximum price to be materially different from its preferred and appropriate gas price in that it impacts the ability to compete and/or recover efficiently and prudently incurred costs and make a profit commensurate with risk, NERSA will allow the use of the ‘pass-through’ approach;

• This requires a cost-based price build-up, including at the least the cost of the procured or produced gas, and any transportation or regasification costs, to justify the price for gas applied for; and

• The onus is upon the licensee to provide NERSA with the necessary information to substantiate all the elements in the cost-build up required.

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C. PETROLEUM PIPELINES INDUSTRY REGULATION

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DOES NERSA PLAY A ROLE IN ASSESSING AND AUDITING SAFETY ASPECTS OF NEW AND

EXISTING FACILITIES?• NERSA sets as a condition of licence that the licensee

must comply with certain standards; • Internationally the most common and accepted set of

standards are those of the American Petroleum Institute (API) and NERSA sets the applicable API Recommended Practice standards. This applies to the construction as well as operation of a facility;

• SANS (South African National Standards) are also applied; and

• These standards that are specified in the Conditions of Licence are in addition to any other local requirements, such as those imposed by the terms of the land rezoning or those from the local fire chief.

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NATURE OF DISCREPANCIES IN INFORMATION SUBMITTED BY LICENCEES?

• The main area of discrepancy is in the area of reporting of the volumes back to NERSA. It is found that the information provided is not internally consistent;

• As an example, the ‘average closing dip’ for the month will be lower than the ‘minimum closing dip’, which is arithmetically impossible;

• Since there are a number of reporting points (one page per product per facility), NERSA deals with this on a one on one basis with the licensees, to resolve the incorrect manner in which they complete the forms; and

• As a result, the incidence of discrepancies is diminishing, although it still remains a problem.

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D. CROSS-CUTTING REGULATORY

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KEY LESSONS LEARNT FROM MYPD3 PUBLIC PARTICIPATION PROCESS (1)

• There has been a huge concern that the consultation process (public hearings) are mainly conducted in towns and cities where the majority of people from the disadvantaged areas don’t have access;

• NERSA will consider scheduling public hearings to include townships and rural areas;

• Number of public hearings conducted per province is not enough to cover the majority of people in the provinces;

• NERSA will consider having more than one public hearing in the provinces to ensure that many people participate in the process. However, this will also take into consideration the time and budget available for the consultation process;

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KEY LESSONS LEARNT FROM MYPD3 PUBLIC PARTICIPATION PROCESS (2)

• Only members of the panel are allowed to raise questions/comments and members of the public from the floor were not allowed to do so; and

• NERSA has introduced a system where members of the public were allowed to raise questions or comments by forwarding the questions/remarks to the public hearing Chairperson to ask on their behalf.

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INDEPENDENCE OF THE REGULATOR – WHY A RISK?

• Risk Description:o Failure to act independently from stakeholders may lead to investor and

customer uncertainty in regulated industries as well as the Energy Regulator not being taken seriously; and

o Regulatory capture or corruption of NERSA by but not limited to regulated entities may lead to decisions that may not stand the test of independence and fairness when taken on review.

• Root Cause:o Interference by Government;o Regulatory capture by licensees; ando Political interests / influence.

• Consequences:o Failure to act independently from stakeholders may lead to investor and

customer uncertainty in regulated industries as well as the Energy Regulator not being taken seriously; and

o Mandate creep.

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E. ORGANISATIONAL

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DETAILS OF IRREGULAR EXPENDITUREIncident Amount (R)

Continuation of services previously provided by the service provider

2 614 957

Extension of scope without prior approval 96 201

Services obtained without approval 52 761

SCM process not followed 6 384

Non compliance to NERSA’s sponsorship policy 338 073

Total 3 108 376

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ASSET MANAGEMENT• Errors occurred as a result of the migration to a new

computer system and incorrect application of the accounting standard with regard to assessment of the remaining useful lives of assets;

• The following action plan has been developed and is being implemented to address the asset management findings:o Reconciliation of Asset Register to Financial System on a monthly

basis; ando Asset Verification to be conducted every 6 month in the current

year and then quarterly in the 2014/15 financial year.

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INVESTIGATIONS• There were 2 investigations during 2012/13;• One investigation into irregularities relating to supply chain

management:o Continuation of services previously provided by the service provider

- photocopy and printer contract; ando This investigation is still ongoing.

• One investigation relating to the overpayment of Part-Time Regulator Members.

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LACK OF CAPACITY IN THE SCM UNIT

• NERSA is busy with a Business Process Analysis to streamline processes within the organisation and to highlight the critical vacancies (amongst others);

• NERSA will also conduct an Organisational Review starting from January 2014;

• A new electronic purchase order management system has been implemented;o The module is integrated with the financial system and allows for a

real time updating of purchase orders with payments made. This will streamline the processes within SCM.

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THANK YOUvisit us at www.nersa.org.za