1 NERSA ANNUAL REPORT 2011/12 Portfolio Committee on Energy Chairperson and Chief Executive Officer 16 October 2012

1

NERSA ANNUAL REPORT 2011/12

Portfolio Committee on EnergyChairperson and Chief Executive Officer

16 October 2012

2

PRESENTATION OUTLINEA. IntroductionB. Key Objectives for 2011/12

I. Strategic ObjectivesII. Contribution to service delivery through link to the twelve National

Outcomes of Government

C. Performance Against Pre-Determined ObjectivesD. AchievementsE. Financial PerformanceF. Staff AnalysisG. Additional Information RequestedH. Conclusion

3

A. INTRODUCTION

4

INTRODUCTION

• The National Energy Regulator (NERSA), a Schedule 3A Public Finance Management Act, 1999 (Act No. 1 of 1999) Public Entity was established on 1 October 2005 in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to regulate:o Electricity industry (Electricity Regulation Act, 2006 (Act No. 4 of 2006))o Piped-Gas industry (Gas Act, 2001 (Act No. 48 of 2001))o Petroleum Pipelines industry (Petroleum Pipelines Act, 2003 (Act No. 60 of

2003))• In executing its mandate NERSA endeavours to balance the interest of

both licensed entities and end users/consumers

5

B. KEY OBJECTIVES FOR 2011/12

6

I. STRATEGIC OBJECTIVES

1. To create regulatory certainty in the energy sector;

2. To protect the interests of the public and the customers;

3. To create a dispensation for fair competition for industry players;

4. To create energy supply certainty; and

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

7

II. CONTRIBUTION TO SERVICE DELIVERY THROUGH THE LINK TO THE TWELVE NATIONAL

OUTCOMES

• NERSA’s Strategic Objectives are linked to the following National outcomes that the Minister of Energy has entered into a Performance Agreement with the President: 2. A long and healthy life for all South Africans;

4. Decent employment through inclusive economic growth;

6. An efficient, competitive and responsive economic infrastructure network;

8. Sustainable human settlements and improved quality of household life;

10. Environmental assets and natural resources that are well protected and continually enhanced; and

12. An efficient, effective and development oriented public service and an empowered, fair and inclusive citizenship.

8

OUTCOME 2: A LONG AND HEALTHY LIFE FOR ALL SOUTH AFRICANS

• NERSA contributes through: o Offering advice/comment with regards to cleaner fuels;o Driving renewable energy programmes and promoting the introduction of

renewables and gas into the energy mix;o In determining electricity pricing, NERSA has set aside 3.2c/kWh in the

second Multi-Year Price Determination (MYPD2) for the Electrification Cross-subsidy;

o Taking affordability into consideration when setting and/or approving tariffs and prices;

o Implementing inclining block tariffs to protect the low income electricity consumers; and

o Regulating in a manner which facilitates security of supply.

9

OUTCOME 4: DECENT EMPLOYMENT THROUGH INCLUSIVE ECONOMIC GROWTH

• NERSA contributes through: o Licensing and the setting and/or approving of tariffs and prices. In this

manner NERSA creates pre-conditions towards the achievement of this outcome;

o Setting renewable energy selection criteria, specifying that twenty decent jobs for every megawatt produced are required; and

o Promoting companies that are owned and controlled by Historically Disadvantaged Individuals (HDIs) to become competitive.

10

OUTCOME 6: AN EFFICIENT, COMPETITIVE AND RESPONSIVE ECONOMIC INFRASTRUCTURE

NETWORK

• NERSA contributes through: o Regulating in a manner which facilitates security of supply;o Setting rules and frameworks that facilitate the building of new infrastructure;o Setting and/or approving cost reflective tariffs and prices that encourage

investment;o Facilitating 3rd party access to facilities; ando Monitoring compliance and undertaking technical audits leading to regulatory

efficiency.

11

OUTCOME 8: SUSTAINABLE HUMAN SETTLEMENTS AND IMPROVED QUALITY OF

HOUSEHOLD LIFE

• NERSA contributes through: o Facilitating access to electricity / energy services;o Facilitating reliability of supply;o Monitoring maintenance of infrastructure;o Compliance monitoring to licence conditions; ando Dispute resolution, including mediation, arbitration and handling of

complaints.

12

OUTCOME 10: ENVIRONMENTAL ASSETS AND NATURAL RESOURCES THAT ARE WELL

PROTECTED AND CONTINUALLY ENHANCED

• NERSA contributes through: o Incorporating compliance with the National Environmental Management Act,

1998 (Act No. 107 of 1998) into licence conditions;o Promoting energy efficiency in licencees and in the NERSA building;o Saving of electricity (MYPD1 and MYPD2);o We have concurred with determinations made by the Minister of Energy in

line with section 34 of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) regarding Open Cycle Gas Turbines in order to give effect to the Integrated Resource Plan (IRP);

o Monitoring the implementation of the IRP; ando Facilitating the transition to a low carbon economy.

13

OUTCOME 12: AN EFFICIENT, EFFECTIVE AND DEVELOPMENT ORIENTED PUBLIC SERVICE AND AN EMPOWERED, FAIR AND INCLUSIVE

CITIZENSHIP

• NERSA contributes through: o Transparent Processes;o All Decisions and Reasons thereof are made public through being published

on the web site;o The Public is invited to make comments prior to decisions being made

(written or in public hearing);o Customer education;o Training and development of staff and stakeholders;o Clean Energy Education and Empowerment; ando Corporate Service Investment – Luvuyo House.

14

C. PERFORMANCE AGAINST PREDETERMINED OBJECTIVES

PERFORMANCE AGAINST PRE-DETERMINED OBJECTIVES

15

Executed As Planned

Not Executed As Planned TotalDelayed due to external

Delayed (Other)

Electricity Industry Regulation

69 (63%) 28 (25%) 13 (12%) 110

Piped-Gas Industry Regulation

32 (73%) 5 (11%) 7 (16%) 44

Petroleum Pipelines Industry Regulation

125 (85%) 13 (9%) 10 (7%) 148

Cross-cutting Regulatory and Organisational

132 (55%) 3 (1%) 106 (44%) 241

Total 358 (66%) 49 (9%) 136 (25%) 543

16

D. ACHIEVEMENTS

ACHIEVEMENTS - ELECTRICITY INDUSTRY REGULATION (1)

17

• Tariffs:o Approved:

• 177 municipal tariff applications for 2011/12; and• revised tariff increase for Eskom for the period 1 April 2012 to 31 March

2013 of 16% instead of the originally approved tariff of 25.9%.o Commissioned a study into the impact of the Inclining Block Tariffs and it was

found that it benefitted the poor;o Concurrence of the Energy Regulator with the determination made by the

Minister of Energy in line with section 34 of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) on the procurement process for renewable energy; and

o Held six provincial workshops on electricity resellers / trading.

• Generation:o Conducted national hearings on the licence applications by the 28 ‘DoE

Renewable Energy IPP programme’ preferred bidders. All 28 licences were granted in April 2012 within 90 days after receipt of applications (thirty days less than statutory deadlines.

ACHIEVEMENTS - ELECTRICITY INDUSTRY REGULATION (2)

18

• Distribution:o Successful mediation of the dispute between the Chiawelo community and

Eskom after the acceptance of NERSA’s report on Testing of Disputed Electricity Prepaid Meters in Chiawelo, Soweto by all parties.

• Licensing:

Generation Distribution

Licences Granted 5 1

ACHIEVEMENTS – PIPED-GAS INDUSTRY REGULATION (1)

19

• Pricing and Tariffs:o Determination of “inadequate competition” as contemplated in Section 21(1)(p)

in the Gas Act, in the piped-gas industry. The determination is a condition precedent for the implementation of the Methodology to Approve Maximum Prices for Piped-Gas which was also approved in the period under review;

o Approved:• Aggregated (average) piped-gas prices for 2010 for different categories of

customers in various provinces; • maximum prices for Greenfields customers for 2010 and for distributors

and reticulators for 2010/11; • minimum prices for Gas for 2010/11; • compliance with regulatory discounts for 2010; and • price capping mechanism for 2009 and 2010.

o Approved the following transmission tariffs:• ROMPCO’s quarterly transmission tariffs; and• Transmission tariff for Transnet Pipelines for the pipeline from Secunda to

Durban South (Lilly Pipeline) for 2011.


20

• Licensing:

• Compliance Monitoring:o Notices of non-compliance:

• Issued 13 notices of non-compliance following findings that Sasol Gas did not adhere to licensing requirements in certain areas; and

• Sasol Gas reimbursed four of its small customers after a finding that they failed to grant appropriate discounts prescribed.

Construction Operation Trading Production

Licences granted

7 9 7

Registered 3

Licences revoked

6


21

• Complaints Resolution:o The following complaints were resolved (three of which led to notices of non-

compliance):• Vaal SanitaryWare;• Terranova;• Supreme Heat Treatment; and FG Gallo.

• Othero Conducted three workshops on Dialogues on gas infrastructure development

and investment:• Findings:

o Price uncertainty;o Regulatory / policy uncertainty; ando Creditworthy off-taker (most likely electricity generation).

ACHIEVEMENTS – PETROLEUM PIPELINES INDUSTRY REGULATION (1)

22

• Tariffs: o Approved:

o Transnet’s tariff determination for the period 2012/13; ando Tariffs for 133 storage facilities.

o The first tariff application from a private pipeline operator (Chevron) was received.

• Licensing:

Construction Operation

Licences Granted 3 4

ACHIEVEMENTS – PETROLEUM PIPELINES INDUSTRY REGULATION (2)

23

• Compliance Monitoring:o All of the main oil companies have submitted applications for the approval of

tariffs for their storage facilities; ando Licencees are starting to submit their allocation mechanisms and the data in

terms of the Regulations to the Petroleum Pipelines Act.

Summary table on licensees implementing Regulatory Reporting Manuals:

Total licensee covered in Phase 1

Licensees added in Phase 2

Cumulative total licensees covered

in Phase 1 & 2

NumberMarket Share Number

Market Share Number

Market Share

Electricity9 (4%) 89.8% 0 (0%) 0% 9 (4%) 89.8%

Piped-gas6 (50%) 75% 6 (50%) 25%

12 (100%) 100%

Petroleum Pipelines 3 (9%) 29.5% 7 (21%) 13.5% 10 (30%) 42.9%

TOTAL 18 (7%) 65.8% 13 14% 31 (12%0 79.8%

ACHIEVEMENTS – CROSS-CUTTING REGULATORY (1)

25

ACHIEVEMENTS – CROSS-CUTTING REGULATORY (2)

• NERSA presented the following courses that were attended by NERSA staff, representatives from relevant government departments as well as from licencees:o A-Z of Regulation (Foundation of Economic Regulation) and Regulatory

Accounting;o Marginal Cost Pricing in tariff setting; o Regulatory Impact Assessment; ando Benchmarking.

26

ACHIEVEMENTS – ORGANISATIONAL

• NERSA has continued its tradition of receiving an unqualified Audit Report for 2011/2012;

• NERSA has been re-elected as Chair of the Regional Electricity Regulatory Association (RERA); and

• NERSA has been re-elected to serve as a member of the Executive Committee of the African Forum for Utility Regulators (AFUR).

27

E. FINANCIAL PERFORMANCE

28

FINANCIAL PERFORMANCE (1)

• Financial Management and Accounting at NERSA is governed by:o Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA);o Treasury Regulations; ando South African Standards of Generally Recognised Accounting Practice

(GRAP) issued by the Accounting Standards Board.

• The following legislation sets out the funding mechanisms for NERSA:o Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987);o Gas Regulator Levies Act, 2002 (Act No. 75 of 2002); and o Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004).

29


• Actual levies collected amounted to R141.6 million, received from the following sources: o Electricity industry – R67.8 milliono Piped-Gas industry – R42.2 milliono Petroleum Pipelines industry – R31.6 million

• The under recovery of the levies, compared to the budget is due to the actual volumes of product transported being below the volumes projected by the industry.

• The actual expenditure for the period 1 April 2011 to 31 March 2012 amounted to R 179.4 million. This represents an underspending of 14.8% compared to the budgeted amount of R210.6 million.

30

FINANCIAL PERFORMANCE (3) • In order to comply with Section 13 of the National Energy Regulator

Act, 2004 (Act No. 40 of 2004) which states that accounts for the three industries need to be ring fenced, the Energy Regulator approved the ring-fencing methodology as follows:o All direct costs are allocated directly to the three regulated industrieso All common costs allocated on the following principle:

• 58% electricity industry

• 21% piped-gas industry

• 21% petroleum pipelines industry


Actual Budget Variance

REVENUE 146 569 096 154 908 375 (8 339 279)

Levy Income 141 636 976 147 408 375 (5 771 399)

Other Income 4 932 120 7 500 000 (2 567 880)

EXPENDITURE 179 425 811 210 591 101 31 165 290

Remuneration 110 829 661 124 891 411 14 061 750

Other operating costs 53 453 564 59 166 999 5 713 435

Consultants 15 142 586 26 532 691 11 390 105

Net Deficit for the period (32 856 715) (55 682 726) 22 826 011 31

32


• Expenditure categories in relation to the other expenditureo Operating Expenses = 30%o Employment Costs = 57%o Consultant fees = 8%o Regulator Members remuneration = 5%

• Total irregular expenditure not yet condoned at year end was R85 242 and fruitless and wasteful was R356.00

• NERSA received an unqualified audit opinion with an emphasis of matter from the Auditor-General for the 2011/12 financial year

• Matter of emphasis – misstatement of previous year figures

33

F. STAFF ANALYSIS

STAFF ANALYSIS (1)

34

Occupational Levels MALE FEMALE TOTALA C I W A C I W

Top Management 1 0 0 0 3 0 0 0 4Senior Management 1 0 0 0 2 0 0 1 4Professionally qualified, experienced specialists and mid management

35 1 0 2 15 0 1 5 59

Skilled technical and academically qualified workers, junior management and supervisors

18 1 0 3 32 0 0 2 56

Semi-skilled and general worker

3 0 0 0 20 0 0 0 23

TOTAL PERMANENT 58 2 0 5 72 0 1 8 146Percentage (%) 40% 1% 0% 3% 49% 0 1% 5%Temporary Employees 6 0 0 0 9 0 0 0 15TOTAL 64 2 0 5 81 0 1 8 161

35

STAFF ANALYSIS (2)• Total staff complement = 177• Total strength = 146 (82%)• Vacancies = 31 (18%)• Resignations = 14 (9.6% out of staff strength)• New employees = 22• Demographic profile of NERSA staff (permanent and temporary):o African – 90%o Coloured – 1%o Indian – 1%o White – 8%o Male – 44%o Female – 56%o People with Disabilities – 0%

36

G. ADDITIONAL INFORMATION REQUESTED

37

ADDITIONAL INFORMATION REQUESTED (1)

• Update on establishing regulatory mechanism that will ensure appropriate access to the electricity transmission grid to IPPs:o Approved the Grid Code for Wind Energy Generation Facilities;o Approved the Transmission Use of System (TUoS) and Distribution Use of

System (DUoS) charges for third party access; ando Amended the Grid Code to the following effect:

• To include a framework for wind generation; and

• Dispatch Rules – to be finalised by the end of this financial year.

38


• Progress on facilitating gas infrastructure investment:o NERSA hosted dialogues on gas infrastructure development and

investment. These confirmed that the market needs:• Price certainty;

o Approved Methodology for Approval of Maximum Prices, 2011;o Current market value pricing (ends in March 2014); ando Published Tariff Guidelines, 2009.

• Regulatory / policy certainty; and• Creditworthy off-taker

o Electricity generator required as anchor gas customer;o Future IRPs may include additional Open Cycle Gas Turbines;o NERSA may facilitate Power Purchase Agreements; ando The Eskom Multi-Year Price Determination has a cost-recovery

mechanism that would facilitate use of gas generation.

39

ADDITIONAL INFORMATION REQUESTED (3)• Extent to which price and regulatory certainty has been created in the

energy sector (1):o Electricity:

• Multi-Year Price Determination approach to generation;

• Approved Eskom Retail Tariff Structural Adjustments; and

• Approved tariff benchmarks and municipal tariff increase guidelines.

o Piped-Gas:

• The current Gas Act and Electricity Regulation Act seeks to grow the gas market in SA; and

• NERSA has developed all necessary regulatory mechanisms required by the Gas Act to provide regulatory certainty for such as the Maximum Pricing Methodology, Tariff Guidelines and Rules.

40

ADDITIONAL INFORMATION REQUESTED (4)• Extent to which price and regulatory certainty has been created in the

energy sector (2):o Petroleum Pipelines:

• The following rules pursuant to the Act have been published:o Tariff Methodologies for Pipelines and Storage facilities;o Frequently Asked Questions;o Guidelines for Allocation Mechanisms (the determination of free

capacity);o Financial Indicators – needed in the formulae in the Methodologies; and o The Beta to be used in the Weighted Average Cost of Capital calculation.

41


• Extent of accelerating licence applications (1):o Electricity Industry Regulation:

• Approved Licensing Procedures that will accelerate licence applications;

• Currently in the process of conducting a Business Process Analysis; and

• NERSA approved the first phase of 28 Independent Power Producers’ (IPP) licences and the second phase of 19 IPPs in 90 days, instead of the statutory deadline of 120 days.

o Piped-Gas Industry Regulation (1):

• Approved Licensing Procedures that will accelerate licence applications;

42


• Extent of accelerating licence applications (2):o Piped-Gas Industry Regulation (2):


• Improved from 90% of applications processed within statutory deadlines to 95% - target is to reach 100% in 2014/15.

o Petroleum Pipelines Industry Regulation:


• Improved from 56% of applications processed within statutory deadlines in 2010/11 to 80% currently - target is 100% in 2013/14.

43


• Legal cases: types of cases and amounts spent on each (1):o Visigro Investments vs. NERSA and SFF (2011)

• Visigro is challenging a decision of NERSA to provide a licence to SFF

• Cost incurred to date is R 137 180.68 o Azola recruitment solutions cc vs. Deloitte Consulting and NERSA

(2009)

• Review application brought against NERSA by Azola to review NERSA’s decision of cancelling its contract on the basis that Azola bid documents were submitted late despite the fact that it was the successful bidder

• Litigation costs on this matter will be borne by Deloitte as it was the wrong party in handling the whole procurement matter on behalf of NERSA

44

ADDITIONAL INFORMATION REQUESTED (8)• Legal cases: types of cases and amounts spent on each (2):

o Eskom vs. Midvaal and NERSA (2010)• Eskom is asking for reviewing and setting aside of a decision by NERSA

to amend the licence granted to Midvaal Municipality, which amendment effectively added more areas of supply for electricity which are in favour of Midvaal

• Cost incurred to date is R 202 292.58o NCP Chlorchem (Pty) Ltd vs. NERSA, Ekurhuleni Metropolitan

Municipality, ESKOM Holdings SOC Limited And Minister of Energy (2012)

• Notice of motion application brought by NCP Chlorochem against arbitration award made by NERSA in a matter between NCP and Ekurhuleni Metro.

• The arbitration related to NCP disputing the electricity charges added by Ekurhuleni Metro on the electricity account of NCP whilst Ekurhuleni Metro does not supply electricity to NCP

• No cost incurred to date

45


• Code of ethics: the extent of compliance with the code; any breaches during period under review:o Declarations of interest:

o Bi-annual;o Verbally and in writing in every meeting; ando Recusal at conflicted meetings.

• Disclosure of interests by senior management:o Annually; ando Verbally and in writing in every meeting.

• Relations between CEO and Regulator Members:o Sound

• Relations between senior management and Regulator Members:o Sound

46


• Gas market value pricing (MVP) by Sasol – trends, patterns and impact (1):o MVP was mandated by the Government of SA trough its agreement with

Sasol Limited in order to provide an incentive to current energy users to switch to natural gas.

o It has been successful from that point of view, but there have been several unintended consequences e.g. the uneven gas price it results in, across customers, without any relationship to volumes or other factors;

o However, when applied correctly, it should provide benefits to the customers.

o NERSA has investigated several complaints and in some cases has found non-compliance to MVP and directed Sasol to renegotiate (see slide 21).

47


• Gas market value pricing (MVP) by Sasol – trends, patterns and impact (2):o Due to the nature of MVP, which can link a customer’s gas price to oil,

electricity, coal etc, MVP prices have been increasing with the increases in the prices of the alternative fuels.

o MVP will be discontinued in March 2014 and NERSA has already approved the subsequent methodology and is implementing this methodology for other licensees in the interim.

o The Methodology does not allow discriminatory pricing as is required by the Gas Act and is expected to lead to a convergence of gas prices among ‘similar’ customers.

48

ADDITIONAL INFORMATION REQUESTED (12)• Trends and patterns on energy pricing from a regulatory perspective –

electricity:

Trends and Patterns: Eskom Price History

MYPD1 Decision Revision 1: 2008 price

in Dec 2007

Revision 2: 2008 price

in Mar 2008

Interim MYPD2 Decision Revision: 2012 price Mar 2012

2006 2007 2008 2008 2008 2009 2010 2011 2012 2012

Average Price Increase (%)

5.1% 5.9% 6.2% 14.2% 27.5% 31.3% 24.8% 25.8% 25.9% 16.0%

Average Price (c/kWh)

17.91 18.09 18.27 22.61 25.24 33.14 41.57 52.30 65.85 60.00

Prices in bold actually applied

49


piped-gas:o Due to linking to fuel alternative prices, piped-gas prices have increased in

the last few years

• Trends and patterns on energy pricing from a regulatory perspective – petroleum (1):

Source: NERSAData: DoE

50


petroleum (2):

Source: NERSAData: DoE

51

ADDITIONAL INFORMATION REQUESTED (15)• Role of NERSA in transformation - Internally: Employment equity,

affirmative action, etc:o NERSA has an approved Employment Equity Plan; ando NERSA is an equal opportunity employer.

• Role of NERSA in transformation - Externally: Promotion of BBBEE and Procurement policy and practices:o NERSA has an approved procurement policy which is aligned to the PFMA;o NERSA’s procurement practices are governed by this policy as well as

practice notes issued by National Treasury from time to time;o Our assessment shows that in 2010/11 NERSA spent 60% of its

procurement budget on BEE companies. o 2011/12 assessment is underway; ando A framework in terms of which future monitoring and reporting of NERSA’s

contribution towards BBBEE will be done is currently under development.

52

H. CONCLUSION

CONCLUSION (1)

• NERSA would like to thank the Parliamentary Portfolio Committee for the opportunity to present its Annual Report 2011/12;

• NERSA continues to grow from strength to strength since its inception in 2005.

• The results of its work continue to have a profound impact on the lives of ordinary people as well as on the economy of the country;

• The regulation of the three energy industries characteristically continues to pose challenges in that the Energy Regulator is required to balance the conflicting interests of licensees, investors, consumers/end-users and the policy maker;

• NERSA has achieved its regulatory mandate through projects set for the 2011/2012 financial year – it completed 66% of its planned Business Plan activities for 2011/12;

53

CONCLUSION (2)

• The staff turnover has stabilised over the years; • NERSA is a viable entity and is still operating as a going concern;

and• To deal with regulatory challenges, NERSA has undertaken various

initiatives to refine regulatory practices and methodologies in its quest to become a world-class leader in energy regulation and will continue to do so;

54

55

Thank Youwww.nersa.org.za

http://www.nersa.org.za/

Documents

1 NERSA ANNUAL REPORT 2011/12 Portfolio Committee on Energy Chairperson and Chief Executive Officer 16 October 2012