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National Energy Regulator (NERSA)

Annual Report 2006/2007

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CONTENT• Structure of the Energy Regulator and the

secretariat• Vision, Mission, Values and Regulatory Principles• Strategic Objectives (2006/07)• Performance Against Objectives• Learning and Growth• Internal Business Processes• Customer• Financial• Conclusion

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STRUCTURE OF THE ENERGY REGULATOR AND SECRETARIAT/STAFF

• 9 Regulator Members– 5 part-time Members– 4 full-time Members

• Appointed by Minister of Minerals and Energy• Chairperson & Deputy Chairperson part-time• Full-time Regulator Members:

– Chief Executive Officer– 3 Regulator Members primarily responsible for each of electricity, piped-gas

and petroleum pipelines regulation

• 4 Divisions each with a number of departments– Headed by Executive Managers

• 5 Specialised Support Units– Headed by Senior Managers

• Executive Managers and Senior Managers report directly to CEO• Total staff complement = 143

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VISION

“To be a world-class leader in energy regulation”

MISSION

“To regulate the energy industry in accordance with government laws and policies, standards and international best practices in support of sustainable development”

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VALUES AND REGULATORY PRINCIPLES

VALUES REGULATORY PRINCIPLES

Passion Rule of Law

Spirit of Partnership Transparency

Excellence Neutrality

Innovation Predictability and Consistency

Integrity Independence

Accountability Accountability

Professionalism

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STRATEGIC OBJECTIVES (2006/07)

• To effectively and efficiently regulate the current electricity industry

• To develop an appropriate regulatory framework for the reforming electricity industry

• To promote and advise on appropriate legislation to regulate the future electricity industry

• To establish appropriate processes, procedures and systems to implement the Gas Act

• To establish appropriate processes, procedures and systems to implement the Petroleum Pipelines Act

• To effectively and efficiently monitor and administer the Sasol Regulatory Agreement

• To licence existing and new activities in the piped-gas and petroleum pipeline industries

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STRATEGIC OBJECTIVES (2006/07) (Cont)• To facilitate access to the petroleum pipeline infrastructure

• To develop and implement appropriate pricing and tariff approaches for the piped-gas and petroleum pipeline industries

• To promote investment in the energy sector

• To promote BEE and competition in the energy sector and to develop memoranda of understanding with government departments and other regulatory authorities with overlapping/concurrent jurisdiction

• To effectively contribute to the socio-economic development programmes of government.

• To develop regulatory rules and practices for efficient and effective regulation of the energy sector

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PERFORMANCE AGAINST OBJECTIVES• Of the 404 planned activities, 76 (19%) were removed by the

Energy Regulator before the end of the 2006/07 Financial Year (mainly during its mid-term review of the 2006/07 Business Plan and Budget held on 30 November 2006)

• Of the remaining 328 activities, 78% were executed as planned

• Key factors impacting on execution:– External factors such as the EDI/ESI restructuring process and

the late publication of the Regulations– High staff turnover– Late approval of the budget for regulating the piped-gas and

petroleum pipeline industries– Re-prioritisation of activities

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LEARNING AND GROWTH

• Highlights– Approved revised NERSA structure– Regulator Members attended the World Forum on Energy

Regulation III– Regulator Members visited FERC; New York State Public Utility

Commission; and Canadian National Energy Board– Approved Learnership Policy

• Lowlights– Resignation of 50 employees

• Objectives– Attracting, developing and retaining the requisite skills and

competencies

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LEARNING AND GROWTH (Cont.)Measure Target Initiative

Development of a NERSA training and development plan based on staff members’ Personal Development Plans

Conducting skills audit and development of a competency framework

Approval of the Learnership policy

To develop and have highly skilled staff members and retain them

Fulfillment of the regulatory mandate of NERSA with the required skills

Provision of local and international training and development for staff members

Commencement of the skills audit and development of a competency framework

Development of courses in preparation for the implementation of the learnership policy

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LEARNING AND GROWTH (Staff Analysis – Race)

Level African Coloured Asian White Total

Top Management

2

(50%)

2

(50%)4

Senior Management

4

(80%)

1

(20%)5

Professional & Middle Management

24

(77%)

7

(23%)31

Skilled and Technical

44

(88%)

1

(2%)

1

(2%)

4

(8%)50

Semi-skilled / Unskilled

19

(90%)

2

(10%)21

Total 93

(84%)

1

(1%)

2

(2%)

15

(13%)

111

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LEARNING AND GROWTH (Staff Analysis – Gender)

Level Male Female Total

Top Management 3

(75%)

1

(25%)4

Senior Management 4

(80%)

1

(20%)5

Professional and Middle Management

16

(52%)

15

(48%)31

Skilled and Technical 28

(56%)

22

(44%)50

Semi-skilled / Unskilled 4

(19%)

17

(81%)21

Total 55

(50%)

56

(50%)

111

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INTERNAL BUSINESS PROCESSES (Cont.)Measure Target Initiative

To ensure licensees comply with regulatory requirements via effective and efficient setting, monitoring and enforcement of license requirements

To quantify and put mechanisms in place to minimise the huge maintenance backlog

Completed Independent Technical Audits on 11 of the largest electricity distributors in South Africa

To develop and implement methodologies for determination of required revenues and tariff structures that take consideration of changes in the industry and customer needs

Establish Regulatory Accounts with emphasis on the separation between regulated and unregulated businesses for the energy industry in line with international best practices

Assessment of the effectiveness of the Energy Regulator and its Subcommittees

To provide consistency, predictability and stability

Enable an efficient collection of data sources so that the Energy Regulator makes informed decisions

Ensure that information collection is common to all regulated businesses

Avoid regulatory burden on all affected license holders

First Consultation paper on the 2009-2012 MYPD

Development of a Regulatory Accounts Manual that addresses common administrative procedures and instructions

Development of industry specific Regulatory Accounts Manuals for electricity, piped-gas and petroleum pipelines

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INTERNAL BUSINESS PROCESSES (Cont.)Measure Target Initiative

Number of rules regarding the regulation of the piped-gas and petroleum pipeline industries developed

To develop rules relating to the regulation of the piped-gas and petroleum pipeline industries

Development of two rules relating to licence applications and inspections for both hydrocarbon industries

Number of piped-gas and petroleum pipeline licences issued

To develop a licensing framework for piped-gas and petroleum pipelines

9 piped-gas licences were issued44 petroleum pipeline licences were issued

Compliance measure for all the licence conditions issued

To develop a compliance mechanism for petroleum storage, loading and pipelines

Completion of a draft compliance framework

Analyse pricing data from 2004 up to 2006

To determine compliance with the pricing provisions of the Mozambique Pipeline Agreement

Draft report on compliance with pricing provisions of the Mozambique Pipeline Agreement

To effectively contribute to the socio-economic development programmes of government : ASGISA, Universal access, Development Nodes

Identify areas of contribution Target regulation that is pro-developments through developmental tariff

Target regulation that is pro-poor through lifeline tariffs and free basic electricity tariff

Identify areas to direct regulatory interventions by supporting ASGISA; DME programmes and policies; Universal access initiatives; and adopt regulatory processes that complement government programmes

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INTERNAL BUSINESS PROCESSES (Cont.)Measure Target Initiative

Development of procedures and processes in support of the Energy Regulator

Assessment of the effectiveness of the Energy Regulator and its Subcommittees

Development of financial planning and management through policies, procedures, systems and processes

Development of human resources policies, policies, procedures, systems and processes

Development collection of data from regulated entities in line with NERSA policies, procedures, systems and processes

Full compliance by internal staff members and the Energy Regulator

Compliance with the National Energy Regulator Act, PFMA and Treasury Regulations requirements and Good Corporate Governance Practices

Compliance with DME requirements

Implementation of budget and monitoring procedures

Implementation of procurement monitoring procedures

Review and implementation of recruitment, leave and payroll policies, procedures, systems and processes

Procurement for the development of ICT and Disaster Recovery and Business Continuity plans

Review of Lincensing Information System for collection of data within the energy industry

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CUSTOMER

• Highlights– NERSA started regulating electricity on 17 July 2006– Submission to the PPC on the viability of establishing the

National RED– Commented on draft Regulations of the Gas Act and Petroleum

Pipelines Act– First NERSA Annual Report submitted to the Minister of Minerals

and Energy– Chairperson and CEO attended the Minister’s SOE’s Lekgotla

• Objectives– To establish effective and efficient pricing mechanisms that

balance the interests of customers, suppliers and the sustainability of the energy industry

– To develop, improve and sustain the good image of NERSA

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CUSTOMER (Cont.)Measure Target Initiative

To develop and implement methodologies for determination of required revenues and tariff structures that take consideration of changes in the industry and customer needs

Development of a draft tariff methodology for hydrocarbon industries

Consistency in the setting of tariffs amongst municipalities (Electricity)

Consultation paper developed and work shopped with stakeholders (Hydrocarbons)

Through a consultative process, provided a guideline percentage increase of 5.9% (Electricity)

Public awareness campaigns

Communicate socio-economic benefits of regulatory initiatives

Media relation’s programme

Dialogue with key stakeholders

Publish reports on the performance of NERSA and licensees

Internal communication programme

Sound relationship with all stakeholders in the regulatory environment

Facilitate information sharing and networking

Internal staff members and the Energy Regulator

Stakeholders and Customers

Compliance with the PFMA requirements

Stakeholder engagement

Customer relations, Customer Education and Customer Communication Forums

Complaints resolution

International Coordination and Partnerships

Resale of electricity

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INTERNAL BUSINESS PROCESSES• Highlights

– Finalised and submitted the Western Cape Power Outages Report– Approved the MethCap licence application for a co-generation plant– First Consultation paper on the 2009-2012 MYPD– Developed rules regarding the processing of hydrocarbon licence

applications– Awarded 9 piped-gas licences– Awarded 44 petroleum pipeline licences– Energy Regulator adopted the Operations Model– Completed and implemented the hydrocarbons Licence Application

System

• Lowlights– Municipal tariff applications not finalised as envisaged– Delays in awarding licences for piped-gas distribution and trading

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FINANCIAL• Highlights

– Published proposed levies for 2007/08 for piped-gas and petroleum pipelines

– Piped-gas and petroleum pipeline levies for 2006/07 approved– Received unqualified Audit Report from AG– Approved revised ring-fencing methodology– Improved budget management and reporting processes

• Lowlights– Delayed approval of the budgets for piped-gas and petroleum

pipelines industries regulation– Challenges relating to collection of petroleum pipelines levies– Under spending of the NERSA budget due to cash-flow concerns

(Surplus of R81.2m)– Defrauding of NERSA through the payroll

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FINANCIAL (Budget Variance Analysis (Combined))Budget Actual

Income

Levies R 163.4 million R 165.3 million

Other Income - R 0.3 million

Finance Income - R 2.0 million

Total Income R 163.4 million R 167.6 million

Expenditure Actual as a % of total operating expenditure

Employee Costs R 56.0 million R 41 million 47,5%

Other Operating Costs R 49 million R 29.3 million 33,9%

Fees for Services R 27.4 million R 10.0 million 11,6%

Regulator Members R 5.6 million R 6.1 million 7,1%

Total Operating Expenditure R 138 million R 86.4 million Actual as a % of total expenditure

Capex R 6.5 million R 4.4 million 4,8%

Total Expenditure R 144.5 million R 90.8 million

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FINANCIAL (Budget Variance Analysis per industry)Electricity Piped-Gas Petroleum Pipeline

Budget Actual Budget Actual Budget Actual

Income

Levies R 86.2 million

R 85.8 million R 39.3 million

R 39.2 million R 37.9 million

R 40.3 million

Other Income/Finance Income

- R 2 million - R 0.2 million - R 0.1 million

Recoupment from Piped-Gas and Petroleum Pipeline

R21.1 million

R21.1 million - - - -

Expenditure

Recoupment to Electricity

- - R 10.5 million

R 10.5 million R 10.5 million

R 10.5 million

Operating Expenditure

R 89.1 million

R 54.8 million R 25.1 million

R 14.8 million R23.8 million

R16.8 million

Surplus from Operations

R 18.2 million

R 54.1 million

R 3.7 million

R 14.1 million

R 3.6 million

R13.1 million

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FINANCIAL (Cont.)• Balance Sheet Items:

– Land and building has a carrying value of R21.7m– Capital expenditure: Computer hardware & accessories

(16%); Office equipment(40%); Computer software and licenses (19%); and Building (35%)

– Total assets have increased from R49,2m to R134,3m– The main increase in assets is reflected in accounts

receivable and cash and cash equivalents:• Accounts receivable increased by R41,8m• Cash and cash equivalents increased to R63,2m from

R22,7m• commitments for operating expenditure R20,5m

– (Main reasons: Petroleum pipeline levies and curtailment of expenditure

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CONCLUSION• NERSA is now successfully regulating the three industries having

taken over electricity regulation from NER during the year under review

• Staff levels have stabilised although there are still challenges of recruiting and retaining specialised skills and the disabled

• The Energy Regulator is consolidating the development of regulatory rules, methodologies and procedures in the regulation of the three industries

• NERSA received an unqualified audit opinion from the Auditor-General and weaknesses are being addressed

• NERSA is establishing itself as an independent and credible Regulator among stakeholders through decisions that contribute to the orderly development of the regulated industries

• Collection of levies in the new industries being levied is improving and spending is stabilising

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THANK YOU