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Sasol Gas Transmission Tariff Application & Maximum Prices Application for Piped Gas

PPC Energy Meeting 27 March 2013, Parliament, Cape TownMs Ethèl Teljeur Regulator Member Piped Gas

Ms Nomfundo Maseti, Executive Manager Piped Gas Division

Introduction

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• NERSA regulates the piped-gas industry•Natural/synthetic/compressed gas transported via pipeline•Not LPG in cylinders (Minister of Energy)

•A special regulatory agreement was entered into between the Government of the Republic of South Africa and Sasol ltd in September 2001

•Rights and obligations, first gas on 26 March 2004 •Special regulatory dispensation period up to 10 years•Expires on 25 March 2014

Agreement Mozambican Gas Pipeline

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• NERSA has regulated prices in terms of the Agreement since 2005

•Maximum prices for various customer categories•Revenue cap on average gas prices

•But...•... Constrained by the Agreement which allows Sasol to price according to ‘Market Value Pricing’

Agreement Mozambican Gas Pipeline

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• NERSA has regulated prices in terms of the Agreement since 2005

•Maximum prices for various customer categories•Revenue cap on average gas prices

•But...•... Constrained by the Agreement which allows Sasol to price according to ‘Market Value Pricing’

Agreement Mozambican Gas Pipeline

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• ‘Market Value Pricing’•Pricing according to the customer’s alternative fuel at the time of conversion•Plus switching costs and opex differentials•Unique system, not used elsewhere

•Allowed for perfect price discrimination•Numerous complaints received•Like customers given widely divergent prices, even within same industry

Gas Act

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• The Gas Act and the Regulations require a fundamental price restructuring

• required by shift from Agreement to Gas Act wrt pricing provisions in particular• current MVP, which allowed price discrimination, is not allowed ito the Gas Act•Gas Act requires non-discrimination ito prices, tariffs and other conditions•Gas Act mandates NERSA to ‘approve maximum prices for distributors, reticulators and all classes of customers, where there is inadequate competition...’

Gas Act

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• The Gas Act and the Regulations require a fundamental price restructuring

•Removal of price discrimination means that prices for some customers will go down or remain the same, and go up for others•In particular those (smaller) customers whose prices were based on LPG face price reductions, •... whereas some large customers whose prices were related to coal, may face price increases

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• Sasol Gas Ltd has applied to NERSA for approval of:-– Maximum Gas Prices for the prescribed customer

categories for a multi-year period from 26 March 2014 to 30 June 2017

– Transmission tariffs for 26 March 2014 to 30 June 2015

NB Price = charge for gas molecule, “Gas Energy price”

Tariff = charge for (network) serviceNote: 25 March 2014 is the end of Sasol Gas’ Special Regulatory Dispensation

The Applications

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• NERSA regulates the Piped-Gas industry in terms of Gas Act, 2001 (Act No. 48 of 2001).

• Regulations issued by the Minister in terms of Gas Act

• The Gas Act and the Regulations contain more “light handed regulation” – fundamentally different from e.g. Electricity regulation

• Not every element of the value chain is regulated by NERSA as shown in the following slide:-

Legal Basis

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Total charges build-up

Max Gas Energy Price

Transmission

Price (R)

Tariff (R)

Distribution Tariff (U)

Trading margin Margin (R)

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• The role of the Energy Regulator in regulation of transmission tariffs – Section 4(h) of the Gas Act provides that the Energy

Regulator must ‘monitor and approve and, if necessary, regulate’ transmission and storage tariffs

• The role of the Energy Regulator in regulation of maximum prices of gas– Section 21(1)(p) of the Gas Act, prescribes that

the Energy Regulator, may impose licence conditions…

Legal mandate

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“…within the following framework of requirements and limitations: ...

(p) maximum prices for distributors, reticulators and all classes of consumers must be approved by the Gas Regulator where there is inadequate competition as contemplated in Chapters 2 and 3 of the Competition Act, 1998”

Legal mandate

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• Based on the legislative provisions NERSA developed two sets of methodologies after extensive consultation:• Tariff Guidelines, 2009, appl. to infrastructure

• Applicable to transmission and storage tariffs and comprising of a flexible menu of 6 tariff methodologies

• Maximum Prices Methodology, 2011 for product• Applicable to the price for gas energy (molecule)

• And, on 8 February 2012, the Energy Regulator determined ‘inadequate competition’ in gas

Legal mandate

Transition from Agreement to Gas Act• Price restructuring means price can go up/down• However, the current application is for maximum prices,

not actual prices– Regulations prescribe very wide category bands– Non-discrimination does not mean one price, but where costs of

supply are equal, the prices must be equal (so large customers pay less than small customers in a particular category)

– S22 allows for price differentiation on objective factors– It is therefore misleading to compare today’s actual prices with

future maximum prices

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Salient features• Application complies with the appr. Methodology

– NERSA urged Sasol to apply early to assist industry– Sasol applied on 23 December 2012– The Gas Act requires immediate compliance, i.e. from 26

March 2014– Hence a 12 month implementation period to provide certainty

and allow customers to negotiate, assess implications/complain to NERSA when their actual price is clear

• Maximum prices are not actual prices – so some statements of increases are premature

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• Salient features

Element Application

Methodology chosen GE Price Indicators

Pricing period 26 March 2014 – 30 June 2017

NERSA calculation of maximum price of GE (2013-2014) / GJ

R 117.69

NERSA forecast of maximum price of GE (2014-2015) / GJ

R 120.55

Sasol Gas application GE maximum price (2014-15) / GJ

R 118

Sasol Gas Ltd Maximum Price of Gas Application

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• Discounts by Customer classes– NERSA accepted the discounts as provided by

Sasol

– Sasol discounts per customer class based on its international study of comparable customer classes

Sasol Gas Ltd Maximum Price of Gas Application

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• Distinguishing features– Additional discount to traders (incl distributors and

reticulators) of 50% of the trading margin (R 4.11 and R 5.20)

– S22 transitional mechanism: phasing-in of increases >15%

– Immediate implementation of price decreases as is required by the legislation

Sasol Gas Ltd Maximum Price of Gas Application

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What Sasol Applied for and NERSA approved

  Class 1 Class 2 Class 3 Class 4 Class 5 Class 6

 

< 400 GJ p.a.

401 - 4 000 GJ p.a.

4 001 - 40 000 GJ p.a.

40 001 - 400 000 GJ p.a.

400 001 - 4 000 000 GJ p.a.

> 4 000 000 GJ p.a.

Gas Energy Price (GE) - R/GJ forecast 2014 128 128 128 128 128 128

Reductions % 7.5% 7.5% 15.0% 22.5% 30.0% 37.5%

Reduction (R/GJ) 9.6 9.6 19.2 28.8 38.4 48.0

Sasol GE (R/GJ) (26/3/2014)

NERSA approved (26/3/2013)

R118

R 108.86

R118

R 108.86

R109

R 100.04

R99

R91.21

R90

R 82.38

R80

R 73.56

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26 March ‘14 - 30 June '14 1 July '14 - 30 June '15

Trading Margin (R/GJ) 8.21 10.40

Sasol Gas Trading Margin Calculation Summary (26 March 2014- 30 June 2015)

Sasol Gas Trading Margin Application

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• Small volumes customers (class 1 to class 3) – account for 5% (3.1 million GJ) of sales to external

customers

• Of Sasol Gas’s 524 total customers– 345 (66%) are small volumes customers

Impact on small customers

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Impact on small customersSmall Customers (classes 1 to 3) prices after restructuring (assumptions NERSA)

  Total Total in % % Vol

Customers that will/ may face decreases 268 78.4% 60.4%

Customers that may face increases 74 21.6% 39.6%

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Impact on small customers

R 0

R 50

R 100

R 150

R 200

R 250

1 10 19 28 37 46 55 64 73 82 91 100

109

118

127

136

145

154

163

172

181

190

199

208

217

226

235

244

253

262

271

280

289

298

307

316

325

334

343

Number of customers

Small Customers: Sasol Price Restructuring Impact

Gas Price R/GJ for the period April 2011 - March 2012 Maximum Price in R/GJ for the Class

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• 78% of the small customers may/will face decreases as shown above.

• 22% may face increases, extent of which is currently not known as the application is merely for maximum prices

• Thereafter it will be a process of individual customer price approvals

• It is expected that many actual prices will be far below the maximum prices per category

Impact on small customers

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Sasol Gas Maximum Price of Gas ApplicationLarge Customers (classes 4 to 6) prices after full restructuring (if done at once 26 March 2014)

• Note assumption : the prices are all contained at below the maximum and <R100/GJ in all customer classes

  Total Total in % % Vol

Customers that may/will face decreases 66 53.7% 37.9%

Customers that may face increases 57 46.3% 62.1%

NERSA also approved• S22 (allowable discrimination) for a phased approach

to increases > 15%– 15% on 26 March 2014– Additional 15% in quarterly increments during 2014-15– Additional 15% in quarterly increments during 2015-2017– For increases > 45% Sasol Gas is to provide NERSA with

additional information and suggest an appropriate phase in period subject to NERSA approval

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The transmission tariff application

• Sasol’s transmission tariff applications were made in terms of the approved Tariff Guidelines– Approved in 2009 after an extensive public hearing

process– Have been applied in the past:

• Transnet gas transmission pipeline• Rompco tariff (>120 m GJ) and • Transnet’s current multi year application for gas transmission

tariffs

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The Tariff Guidelines• Guidelines for monitoring and approving piped gas

transmission and storage tariffs• Key provisions in the Guidelines:-

– Licensees choose a preferred methodology from the menu of six provided in the Guidelines

– Licensee can also use its own, (not in the menu), methodology so long as it is ‘proven and tested’

– Data sources are specified by NERSA– NERSA tests the application using same methodology as

licensee in its application

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Sasol Gas Ltd Transmission Tariff Application

Element Application

Methodology chosen Cost of service (Rate of return)

Tariff period 26 March 2014 – 30 June 2015

Tariff structure approach 3 zones

3 Tariff zones

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Phoenix

Richardsbay

Pretoria

Benoni

Ressano Garcia

MPUMALANGAMPUMALANGA

GAUTENGGAUTENG

SWAZILANDSWAZILAND

KWAZULU-NATALKWAZULU-NATAL

MAPUTOMAPUTO

MAGUDEMAGUDE

GAZAGAZA

INHAMBANEINHAMBANE

MOAMBAMOAMBA

Avoca

Sabie

Nigel

Guija

Maputo

Temane

Durban

Motaze

Mahele

ErmeloBethalAlberton

Chokwe

Muabsa

Talofo

Jofane

Rosslyn

Chigubo

Verulam

Mandini

Panjane

Secunda

Witbank

BreytenLenasia

Springs

Meginge

Babelegi

HendrinaBadplaas

Malelane

Carolina

Meyerton

Componde

Empangeni

Barberton

Nelspruit

Volksrust

Amsterdam

Sasolburg

Lyttelton

Magandene

Camo-Camo

Rumbacaca

New Castle

Middelburg

Standerton

Vilanculos

Kemptonpark

Komatipoort

Vereeniging

Randfontein

Mabuiapanse

AAEE

BB

CC

DD

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3* 1

2

3

Zone1

Zone 2

Zone 3

* Zone 3: Excludes the Transnet Lily Pipeline

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Sasol Gas Ltd Transmission Tariff ApplicationTariff  calculation summary per Zone - 01 July 2014 to 30 June 2014 

Zone NERSA Tariff

R/GJ SASOL Tariff

R/GJ Variance

% 1

Secunda-Gauteng

4.74

5.09 + 7 % 2

Witbank-Middelburg

13.22

14.20 + 7% 3

KZN

5.22

5.61 +7%

Tariff calculation summary per Zone - 01 July 2014 to 30 June 2015 

Zone NERSA Tariff

R/GJ SASOL Tariff

R/GJ Variance

% 1

Secunda-Gauteng

4.77

5.13 + 7 % 2

Witbank-Middelburg

12.41

13.36 + 7 %

3 KZN

5.52

5.94

+ 7 %

The variance of - 7% is within NERSA tolerance of +/-10%

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END

Thank You

Q & A