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National Energy Regulator of South Africa (NERSA)Annual Report 2008/2009

3 November 2009

Presentation to the Parliamentary Portfolio Committee on Energy

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PRESENTATION OUTLINE

• Profile of NERSA• Structure of the Energy Regulator• Structure of NERSA Secretariat• Strategic Objectives • Performance Against Objectives: Overview,

Electricity, Piped-Gas, Petroleum Pipelines, Cross Cutting and Organisational

• Delays and Backlogs• Staff Analysis• Financial Performance• Conclusion

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PROFILE OF NERSA• The National Energy Regulator of South Africa (NERSA) is a regulatory

authority established as a juristic person in terms of Section 3 of the National Energy Regulator Act, 2004 (Act No. 40 of 2004).

• NERSA’s mandate is to regulate the electricity, piped-gas and petroleum pipelines industries in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006), the Gas Act, 2001 (Act No. 48 of 2001) and the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).

• NERSA’s mandate is further derived from regulations and directives issued by the Minister of Energy.

• NERSA was established on 1 October 2005 and began the regulation of the piped-gas and petroleum pipelines industries on 1 November 2005. The regulation of the electricity industry was taken over from the erstwhile National Electricity Regulator (NER) on 17 July 2006.

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STRUCTURE OF THE ENERGY REGULATOR• 9 Regulator Members

– 5 Part-time Members– 4 Full-time Members

• Appointed by Minister of Energy• Chairperson and Deputy Chairperson: Part-time• Full-time Regulator Members:

– Chief Executive Officer– 3 Members primarily responsible for electricity, piped-gas and petroleum

pipelines industry regulation• 9 Subcommittees of the Energy Regulator:

– Industry specific regulatory: Electricity Subcommittee; Piped-Gas Subcommittee and Petroleum Pipelines Subcommittee

– Cross-cutting: Policy Subcommittee and Regulator Executive Committee – Governance: Finance Subcommittee; Audit and Risk Subcommittee;

Human Resources Subcommittee; and Remuneration Subcommittee

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STRUCTURE OF NERSA SECRETARIAT• 4 Divisions each with a number of departments - headed by Executive

Managers:– Electricity Regulation– Hydrocarbons Regulation– Support Services– Corporate Affairs

• 5 Specialised Support Units - headed by Senior Managers:– Strategic Planning and Monitoring– Regulator Support– Internal Audit– Regulatory Analysis and Research– CEO’s Office Operations

• Total staff complement = 143 (the structure of the NERSA Secretariat was revised by the Energy Regulator on 30 October 2008, but is only effective from 1 April 2009 – revised staff compliment = 168

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STRATEGIC OBJECTIVES1. To implement relevant energy policy efficiently and effectively

2. To implement relevant energy law efficiently and effectively

3. To implement relevant energy regulations efficiently and effectively

4. To identify, develop and implement relevant energy rules efficiently and effectively

5. To establish the credibility, legitimacy and sustainability of NERSA as an independent and transparent energy regulator

6. To create an effective organisation that delivers on its mandate and purpose

7. To evaluate the Energy Regulator’s effectiveness

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PERFORMANCE AGAINST OBJECTIVES - OVERVIEW

• Of the original 437 planned activities by NERSA, 73 (17%) were removed by the Energy Regulator prior to the end of the 2008/09 Business Year

• The removal of the 73 activities was necessitated mainly due to: – processes being dependent on other role players and therefore

being outside of NERSA’s control– Re-prioritisation– Unexpected mid-term application by Eskom for a price increase for

the MYPD for 2008/09– Second application by Transnet for a tariff increase in one year– Human Resource Constraints

• Of the remaining 364 activities, 243 activities (67%) were executed as planned

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HIGHLIGHTS – Electricity Industry Regulation• On 12 May 2008, the Energy Regulator approved and adopted the

report on the inquiry into the national electricity supply shortage and load shedding for the period November 2007 to January 2008. The report was published on 19 May 2008;

• NERSA co-hosted the Electricity Distribution Maintenance Summit at Gallagher Estate in Midrand on 9 and 10 June 2008;

• On 18 June 2008, the Energy Regulator decided to allow Eskom to recover additional primary energy costs of R2.827 billion through the electricity tariff. This approval amounted to a 13.3% average increase additional to the 14.2% already approved on 20 December 2007 resulting in a 27.5% average increase year on year;

• One hundred and forty-seven (147) municipal tariff applications were approved for implementation from 1 July 2008;

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HIGHLIGHTS – Electricity Industry Regulation (Cont.)

• NERSA participated in the Government’s National Electricity Emergency Programme which is being implemented by the National Electricity Response Team;

• NERSA completed the Stage 5 analysis, entitled Risk Analysis, of the third National Integrated Resource Plan (NIRP3);

• Approval of the Renewable Energy Feed-In Tariffs (REFIT) and guidelines by the Energy Regulator on 26 March 2009;

• Approval of the Multi-Year Price Determination Rule Change by the Energy Regulator on 26 March 2009;

• Approval of the first electricity trading licence to Amatola Green Power by the Energy Regulator on 29 January 2009; and

• Approval of the Sappi generation licence and associated Power Purchase Agreement by the Energy Regulator on 26 March 2009.

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HIGHLIGHTS – Piped-Gas Industry Regulation

• Twenty-nine (29) licences for eighty-four (84) areas were awarded to Sasol Gas to operate existing distribution facilities in Gauteng, Free State and Mpumalanga

• In addition, licences to trade in gas in these areas were also granted to Sasol Gas;

• The Energy Regulator approved the granting of seven (7) gas distribution operation and seven (7) trading licences to Sasol Gas Limited for the following twelve (12) geographic areas: Alton Industrial, Clairwood, Mobeni, Jacobs, Merebank East, Stanvac, Prospecton Industry, Sapref, Canelands Industrial, Riverview Park, Umbogintwini and Mandini;

• Spring Lights Gas was also granted a licences to trade in gas in KwaZulu-Natal;

• Thirteen (13) distribution construction licence application were granted;

• Two (4) transmission pipelines construction licence application have been granted;

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HIGHLIGHTS – Piped-Gas Industry Regulation (Cont.)

• The Energy Regulator discontinued certain indices and approved alternatives to the discontinued price indices. The indices are used to calculate the Sasol Volume Weighted Average Gas Price (SVWAGP).

• Determination of the Special Regulatory Dispensation Period of between 9.18 to 9.68 years starting from First Gas (26 March 2004), after completion of the 2003 work program;

• Calculation and publication of piped-gas prices (price cap for 2006/07, maximum and minimum prices for 2007/08, discounts for customers for 2007/08 and average prices per province as required by the Regulations);

• Stakeholder consultation as well as a public hearing took place on the piped-gas tariff guidelines, which was subsequently approved after year end; and

• Determination and consultation of the ROMPCO tariff;

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HIGHLIGHTS – Petroleum Pipelines Industry Regulation

• Approved a licence for the construction of storage facilities at the King Shaka International Airport in Durban to the Airports Company of South Africa (ACSA);

• The Energy Regulator also granted ACSA a construction licence to for additional storage capacity at the OR Tambo International Airport to address the expected increased air traffic during the Soccer World Cup in 2010;

• On 26 March 2009 the Energy Regulator granted a construction licence to Sasol Oil Ltd for a pipeline to transport petroleum components from Sasol Secunda refinery to the Natref refinery in Sasolburg to ensure security of supply in the inland area;

• In total thirty-seven (37) operation licences were granted – twelve (12) for storage facilities, fifteen (15) for airport storage facilities; one (1) for the Natcos pipeline system in Durban; one (1) pipeline operation licence to BPSA from Sapref refinery to the Durban International Airport; and eight (8) were operation licences to smaller petroleum resellers for existing storage facilities located in five provinces;

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HIGHLIGHTS – Petroleum Pipelines Industry Regulation (Cont.)

• The Energy Regulator granted operation licences for marine loading facilities for the first time to BP, Shell and Engen jointly for three facilities in Durban harbour and to BP, Shell, Sasol, Total and Engen jointly for the Single Buoy Mooring facility offshore in Durban;

• Approval of the future Petroline tariffs for five (5) years by the Energy Regulator on 18 June 2008;

• Approval of the second amendment to the Tariff Methodology for the Petroleum Pipelines Industry by the Energy Regulator on 18 June 2008;

• Approval of the Transnet Pipelines tariff for the 2008/09 financial year by the Energy Regulator on 31 July 2008;

• Approval of Transnet draft tariff determination for 2009/10 by the Energy Regulator on 29 January 2009; and

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HIGHLIGHTS – Cross-Cutting Regulatory

• Approval of the Benchmarking the Energy Regulator Stage 2 report: Benchmarking NERSA against international best practice, by the Energy Regulator;

• The Energy Regulator approved on 31 July 2008 the Regulatory Reporting Manuals with emphasis on the separation between regulated and unregulated business in line with international best practice for all three regulated industries; and

• The implementation of the Regulatory Reporting Manuals has started with a number of licensees submitting their implementation plans.

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HIGHLIGHTS – Organisational• Development of an IT master plan that will give effect to the

implementation of a data warehouse and business intelligence (BI) in the organisation;

• Approval of Rules and Procedures of NERSA meetings by the Energy Regulator on 26 March 2009;

• The Energy Regulator revised the Terms of Reference of the Regulator Executive Committee and the regulatory subcommittees on 26 March 2009;

• The Energy Regulator approved the outstanding elements of the Operations Model on 30 October 2008;

• The Energy Regulator approved the revised structure of the NERSA secretariat on 30 October 2008 whereby the staff compliment increases from 143 to 168;

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HIGHLIGHTS – Organisational (Cont.)• Approval of the following policies by the Energy Regulator:

– Supply Chain Management Policy including the delegation of authority matrix;– Debtors Management Policy;– Asset Management Policy;– Travel, Accommodation and Related Allowances Policy;– Cell phone, Landline telephones and Data Card Policy;– Levies Invoicing and Collection Policy / Procedure; and– Fraud Policy.

• The Auditor General issued an unqualified/clean report on NERSA’s Financial Statements for the 2007/08 Financial Year;

• Completion, approval and submission of the Strategic Plan (2009/10 – 2011/12) and Business Plan with Budget (2009/10) to the Minister of Minerals and Energy;

• Completion, approval and submission of the NERSA Annual Report for 2007/08 to the Minister of Minerals and Energy as well as the tabling of the report in Parliament; and

• Completion, approval and submission of the quarterly performance reports, including the management accounts to the Minister of Minerals and Energy in the new revised format.

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DELAYS AND BACKLOGS

• Delays in publication of Electricity Supply Statistics because of a lack of information from licencees;

• Final stages of the NIRP3 was delayed due to resignation of project leader and modeller at the consultancy;

• Sasol Gas and Transnet Pipelines’ licence application to operate transmission pipelines could not be completed due to outstanding information; and

• Similarly petroleum pipelines operating licences backlog could not be fully eliminated.

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STAFF COMPLIMENT

Division Number of posts Number of posts filled

Vacancies

Electricity Regulation

41 30 11

Hydrocarbons 20 16 4

Support Services 30 27 3

Corporate Affairs 28 22 6

Special Support Units

24 22 2

Total 143 117 26

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STAFF ANALYSIS: STAFF MOVEMENTSTermination type Number

Death

Resignation 14

Expiry of contract 0

Dismissal – operational requirements

1

Dismissal – misconduct 0

Dismissal – poor work performance

1

Dismissal – ill health 0

Retirement 0

Recruitment 24

Total 40

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STAFF PROFILE / EMPLOYMENT EQUITYOccupational

bandMale Female Total

African Coloured Indian White African Coloured Indian White

Top management 3 0 0 0 2 0 0 0 5

Senior management 8 1 1 1 4 0 0 2 17

Mid-management 22 0 0 4 9 0 1 5 41

Skilled technically & academically

8 1 0 3 24 0 0 1 37

Semi-skilled 3 0 0 0 14 0 0 0 17

Total43 2 1 8 52 0 1 8 117

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FINANCIAL PERFORMANCE • Financial Management and Accounting at NERSA is governed by:

– PFMA– Treasury Regulations– Generally Accepted Accounting Practices (GAAP) with the

prescribed Standards of Generally Recognised Accounting Practices (GRAP) issued by the Accounting Standards Board replacing some equivalent GAAP statements

• Approved budget for the period 1 April 2008 to 31 March 2009 was R149 539 429

• Actual Expenditure for the period 1 April 2008 to 31 March 2009 was R119 730 327

• Deficit as at the end of the financial year was R3 382 087

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FINANCIAL PERFORMANCE (Cont.)

• Ring-fencing methodology– According to Section 13 of the National Energy Regulator Act– All direct costs – allocated directly to the three regulated industries– All common costs allocated on the following principle:

• 60% electricity industry• 16% piped-gas industry• 24% petroleum pipeline industry

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FINANCIAL PERFORMANCE (Cont.)Consolidated Budget Variance Analysis

Budget (R’000) Actual (R’000)

Income

Levies 112 876 110 030

Other Income 0 6 318

Expenditure 149 540 119 731

Employee Costs 54 139 50 831

Operating Costs 50 577 39 791

Fees for Services 33 258 22 013

Capex 4 647 990

Regulator Members 6 919 6 106

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FINANCIAL PERFORMANCE (Cont.)

• Operational Results:

– R 65.3 million, R 19.4 million and R 25.3 million was collected as levies from the electricity, piped-gas and petroleum pipeline industries respectively (totaling R110.00 million)

– Expenditure incurred of R119.8 million was within the approved budget

– Net deficit for NERSA for the year ended 31 March 2009 was R3.382 million

– Other income consisting of interest was R6.318 million

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FINANCIAL PERFORMANCE (Cont.) • Operational Results (Cont.):

– The ratio for current assets to current liabilities is 8.4:1 which indicates that NERSA is a viable entity as a going concern

– Operating expenditure includes rental under operating leases for office equipment, variable costs and notional depreciation charges

– 36.1% of capital expenditure was spent on acquisition of computer hardware and accessories, 11.9% on office equipment and the rest on computer software and licenses as well as motor vehicles

– Land and building is fully paid up and owned by NERSA with a carrying value of R 38.5 million as at 31 March 2009

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FINANCIAL PERFORMANCE (Cont.)• Expenditure categories in relation to actual total expenditure

– Operating Expenses = 33.2%– Employee Costs = 42.5%– Fees for Services = 18.4%– Regulator Members = 5.1%– Capex = 0.8%

• NERSA received an unqualified audit opinion from the Auditor General

• The audit did however raise the following emphasis of matter:– Irregular expenditure

• Action plans arising from the audit findings are being implemented and reported on to the Risk Subcommittee of the Energy Regulator.

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CONCLUSION

• Most activities of NERSA are responsive• Programmes and projects are dependent on external stakeholders• NERSA is making a contribution in meeting the Government’s target of

10 000 GWh of renewables by 2013 through REFIT• The main effort in piped-gas regulation and petroleum pipelines was in

licensing regulation• Tariff methodologies for the regulation of the three industries have been

developed and/or reviewed .• NERSA is adopting best regulatory practices through benchmarking• The filling of positions in the new structure need to be accelerated; and • NERSA obtained a clean audit report and is a going concern

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Thank You www.nersa.org.za