Gas Bill: Follow Up Briefing; Eskom & National Electricity Regulator

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE;
9 May 2001
GAS BILL: FOLLOW UP BRIEFING; ESKOM'S FUTURE PLANS; NATIONAL ELECTRICITY REGULATOR: OVERVIEW AND FUTURE PLANS

Chairperson: Mr D Nkosi

Relevant documents:
Gas Bill [B18-2001]
Overview of National Electricity Regulator and it Future Business Direction
Eskom's 2001 Objectives

SUMMARY
The Committee were briefed on how the Gas Bill would operate, especially the role of the state as a regulator. The Committee was told that it was important for the country to have different sources of energy. This Bill will help the country develop gas as an alternative important source of energy. In introducing the Bill the government wants to create a low-cost platform for economic development and to establish an appropriate gas infrastructure to support industrial development. The National Electricity Regulator and ESKOM also made their presentations.

MINUTES
Gas Bill
The Chairperson noted that they would make use of the previous document presented by Dr Crompton at the first briefing on the Gas Bill on 28 February (see Appendix).

Mr S Mokoena, the Deputy Director-General of Energy in the Department, noted that the Bill was formally tabled in Parliament on 19 April as a section 75 Bill. The government's objective is to provide a conducive environment for investment in the gas industry in South Africa. The government's policy objective is to have the security of energy supply through diversity as stated in the Energy Policy White Paper of December 1998 and would also try to reduce dependency on coal.

In terms of world standards, gas is not exploited as a primary energy source in South Africa when compared to coal. If SA were to exploit all the gas reserves, the situation would have been better. He added that the fact that coal is more used than gas is an indication that coal is here to stay as a primary energy resource. Thus the government will have to concentrate on clean coal technologies and develop other resources such as gas.

For more details on the Bill please refer to the attached document

Discussion
Mr Nash (ANC) wanted to know if the Board would be independent of the government. To whom is it going to account?

Mr Mokoena replied that the Minister appoints the Board and thus the Board is accountable to the Minister.

Mr Nash noted that the section on the regulatory council is not clear. For instance it says SASOL will have a free run for ten years. Does this mean that there will be no control of SASOL for ten years?

Mr Mokoena replied that to say SASOL will have a free run for ten years does not mean that SASOL is exempted from being regulated. He said what this implies is that the agreement entered into by the government and SASOL prior to the establishment of the Gas Regulator should be regarded as a licence. This does not mean that SASOL will be excluded from the activities of the regulator, all it means is that the conditions that were agreed to before the establishment of the Gas Regulator apply.

Mr Nash noted that if licences are going to be given for exclusive areas for certain classes of gas, how are they going to control the pricing of gas? He believed that by so doing the department is giving those licencees a monopoly over those areas, and the licencees again can charge their own prices.

A department official explained that the reason why a distributor should have an exclusive geographical area is to improve their original investment. He said as mentioned in the presentation one of the problems is that they must get gas as cheap as possible otherwise their customers will pay extremely high prices. Another problem is that all residential customers have the same low income profile. He said once one has an exclusive area, the distributor is also taking on an obligation to supply that community. Regarding pricing control, the Minister by regulation will lay down pricing principles and these will be administered by the regulators through licence agreements. The prices would not be set by monopolists as Mr Nash was arguing.

Mr Ramodike (UDM) said Clause 20 of the Bill stated that state controlled entities will not be required to apply for licences because that could be granted upon a directive by the Minister after consultation with the Gas Regulator. How does the department differentiate between a directive by the Minister and undue influence as contemplated in Clause 9 of the Bill?

Mr Mokoena replied that what they have tried to do is that the Minister should develop regulations after consulting the Board. He added that the areas in which the Minister can make those regulations are clearly outlined. The Minister could not make any regulations outside these parameters. The influence of the Minister would be in line with the responsibilities as outlined in the Bill. Those responsibilities are: the appointment of the Board, issuing of directives and the making of regulations.

Mr G Oliphant (ANC) noted that the Bill had been discussed since 1994 and asked if there were any documents available so that the Committee can make reference to them. Further had the department looked at international best practices?

Mr Mokoena said they would make a compendium of all the documents from 1994 and these documents would be available in the office of the Committee secretary for reference. Regarding international best practices, they have learnt from quite a number of countries. He mentioned Latin America, North America, Europe and Asia. In all the countries they have studied, they found that there is a lot of state involvement in the industry.

Mr Lucas (IFP) was concerned about the life span of the Mozambique gas well. He said some are talking of ten to fifteen years.

Mr Mokoena replied that for any company to have bankable project, a sizeable lifespan has to exist which is normally 20 to 25 years. The Department is looking at a situation where this particular project in Mozambique will have a life of 25 years which will meet the requirements of SASOL and other industries. He said the current agreement is for a period of ten years.

Prof. Mohamed (ANC) said he wanted to be clear on how ESKOM has exclusive use of the pipeline for ten years.

Mr Mokoena said the exclusivity period is part of the agreement. The way they saw it is that it introduced what he called a phased-in competition within that period.

The Chairperson appealed to the Committee that they do not have to accept the provisions at this briefing stage, they merely have to understand what is being proposed.

Mr Ramodike (UDM) asked about the definition of a person that includes any organ of state. He said the Bill states in Clause 16 that any person who wants to apply for a licence must do so in the prescribed form and that includes a state organ. Again in Clause 20 it states that the Minister may, after consultation with the Gas Regulator, direct that a licence be issued to a State-controlled entity. According to his analysis, this implies that the state entity is now excluded from making an application as contemplated under Clause 16.

A department official explained that the Minister can only make this directive if it is in the national interest for regional development and other social objectives. All that the Minister is able to do is to say that that state entity will get a licence subject to the stated regulations.

National Electricity Regulator
Dr X Mkhwanazi told the Committee that the history of regulation in South Africa dates back to the 1890s. He said the legislation was updated by the 1987 Electricity Act which was amended in 1995. The role of the NER is to approve tariffs, set and monitor quality of supply and service standards as well as arbitrate and mediate in disputes, including expropriation matters.

For the rest of the presentation please refer to the attached document.

ESKOM
For Mr T Gcabashe's presentation, please refer to the attached document.

Discussion
Mr Nkosi (ANC) said the Committee would have to debate with ESKOM the issue of restructuring because he believed ESKOM was insensitive to some issues. He argued that the issue of restructuring had been avoided in many ways.

Mr Gcabashe replied that their presentation looked at the objectives of ESKOM in terms of restructuring. They were not avoiding the debate but it is the Department that spearheads the process of restructuring.

Mr Mokoena (Department) added that it is not easy for ESKOM to enter into the debate on restructuring. He said proposals have been made by all the stakeholders and that is why the issue of restructuring was never a problem to ESKOM. He said there is a balancing of the social objectives of ESKOM on the one hand and its commercial objectives on the other.

The meeting was adjourned.

Appendix:
Gas Bill briefing from on 28 February
Background: Government's Objectives
· Lower intermediate input costs (energy) to create a low-cost platform for economic development
· Reduce monopoly rents in the natural monopolies
· Establish appropriate gas infrastructure to support industrial development

Background: Government's Approach
· Competition between and within energy carriers (Third party access)
· Appropriate "rules of the game" for investors
· Facilitate investment projects
· Development entities ie iGas
· Regulation where necessary

Background: Policy objectives
· Security of supply through diversity of supply.(Energy Policy White Paper Dec 1998)
· Reduce coal dependency
- mined only in the north
- environmental issues

Primary Energy
Gas Bill: Status
Consultations:
· Gas Policy Working Group formed May 1994
· SADC Study released June 1995
· World Bank Study released July 1995
· Mbeki/Gore Binational Commission; DoE Advisor
· Gas Workshop (5 day) October 1996
· White Paper on Energy Policy December 1998
· International Energy Agency survey released April 1996.
· Three Workshops during March and April 2000
· Ad Hoc Consultations with stakeholders and international
· Cabinet Approved June 2000
· Final Public Comment (late 2000)
· No Fundamental Changes Submit to Parliament
· Currently with State Law Advisor
· Scheduled Introduction to Parliament March 2001

Gas Bill: Purpose
· To promote the orderly development of the piped gas industry
· To establish a national regulatory framework
· To establish a National Gas Regulator as custodian and enforcer of the national regulatory framework

Gas Bill: Scope
· Piped Gas
· Transmission, Storage, Distribution
· Construction, Operation and Trading
· Excludes production and gas reticulation (<2 bar - Schedule 4B Constitution)
· Gas means all hydrocarbon gasses transported by pipeline (NG, syngas, CBM, LNG, LPG etc)

Gas Bill: Objectives
· Promote the efficient, sustainable, and orderly development and operation of the downstream gas industry
· Facilitate investment
· Ensure a safe, efficient and environmentally responsible downstream gas industry
· Promote competitiveness
· Ensure that gas services are equitable and that present and future needs are met
· Promote competitive markets
· Facilitate gas trade between the RSA and other countries
· Promote access to gas in affordable and safe manner

Gas Bill: National Gas Regulator
· Established as a legal person.
· Functions of the Regulator:- Issue licenses for:
- Transmission, Storage, Distribution
- Construction, Operation, Trading
· Approve tariffs to those without choice of supplier
Promote competition

Gas Bill: National Gas Regulator
· Composition:
- 5 part-time members;
- appointed for 4 years renewable;
- limitations
· RSA citizen
not employed by gas organizations, or by Government.
(Possible Co-ordination with NER/Petroleum Pipeline Regulator)

Gas Bill: Qualifications of Regulator Board
· Relevant experience.
· Representative.
· Committed and available.
· Impartial and objective.

Gas Bill: Regulator Meetings
· Procedures prescribed by regulation.
· Open to public unless confidential, propriety or commercially sensitive
information discussed.
· Record of proceedings.

Gas Bill: Duties of Regulator
· Act in a justifiable and transparent manner
· Not act in own interests
· Act independently of undue influence or instruction
· Act in a manner required and expected from the holder of a public office

Gas Bill: Decisions of the Regulator
· Legally consistent
· In public interest
· Procedurally fair
· Based on facts and evidence
· Reasonable
· Written
· Explained
· Appeals to High Court

Gas Bill: Regulator Funding
· By appropriations from National Revenue or
· Levies by separate legislation
· Fees earned, e.g. dispute resolution
· Accounts audited by Auditor General

Gas Bill: Issuing of Licenses
· Application published
· Objections considered
· Decision period set by regulation.
· Separate licenses for each gas activity
· Existing gas activities must get licenses
· Minister may stipulate that state controlled entity gets a specific transmission license

Gas Bill: License Conditions
Regulator may impose conditions
· Separate management and accounts for vertically integrated companies-no cross subsidization
· Third Party Access on commercially reasonable terms to uncommitted capacity in transmission and storage for prescribed eligible customers
· Negotiated changes in routing, diameters capacity, compression at own cost.
· Distribution exclusive areas for class of gas
· Distribution areas based on ability to supply
· Distribution obligation to supply
· Tariff approval for captive customers (inadequate competition)

Gas Bill: Licenses - Sundry
· Non-discrimination, term, amendment, revocation of license
· Graded responses to contravention of license. Appeal to High Court
· Registration of non-licensed gas activities for information
· Regulator arbitration on request

Gas Bill: General Provisions
· Entry, inspection and information gathering by Regulator
· Voluntary resolution of disputes
· Investigations by Regulator
· Expropriation - rights of way.
· Rights of Licensee (entry, street crossings, ownership of gas appliances)

Gas Bill - Regulations
· Made by Minister after consulting Regulator and inviting public comment:
- Procedures
- Record keeping
- Forms
- Publishing information
- Classes of gas
- Land rehabilitation

Mozambique Pipeline Agreement
· Gas Regulator bound by provisions of agreement for 10 years from first gas
- Certain exclusive areas
- TPA provisions
- Prices
- Obligations to supply
- Regulator administers agreement

Anticipated Impact of Gas Act
· Facilitate Investment:
- investor certainty "rules of the game";
- transparency leading to level playing field.
· Consumer Protection:
- phased introduction of competition;
- regulation where competition inadequate.
· Coordinated Development.

Discussion from 28 February 2001
Mr Nkosi asked Dr Crompton to indicate why the Bill had remained with the State Law Advisor for a long period of time. He also asked what issues were being raised in terms of the Gas Bill. Dr Crompton stated that the delay related to various procedural issues. When Cabinet approved the publication of the Bill, it was on condition that the public be given a chance to comment on the Bill. After the public's input there certain changes but the substantive content of the Bill remained the same. The Bill was then placed in the hands of the State Law Advisor, as he is required to certify the Bill. The problem here was that within the State Law Advisor's office, there was a lack of familiarity with pipeline issues.

The Department and the State Law Advisor debated what to do when a licensee is in breach of the license conditions as contained in the Bill. Should the Regulator be empowered to act on this breach? The State Law Advisor said this should be allowed. The issue of fines was discussed. The Bill provides for the imposition of fines if the licensee is in breach of the license conditions.

Dr Crompton mentioned that there are certain logistical constraints within the office of the State Law Advisor. He attributed part of the delay to the festive season.

Mr IO Davidson (DP) asked how the large amounts of energy that are produced would integrate with other existing energy industries. There needs to be an Integrated Energy Plan (IEP). Dr Crompton replied that the Department was in the process of developing an IEP for the country. The Bill creates a platform for the Energy Plan to be put in place. He also mentioned that passing the Bill would not immediately create a gas infrastructure. The Bill would create a "level playing field" for the energy carriers.

An ANC member was concerned with the lack of mention in the Bill of Black Economic Empowerment. Dr Crompton admitted that this was an omission and would be brought to the Department's attention.

Mr EJ Lucas (IFP) asked whether gas would be cheaper than electricity. Dr Crompton replied that electricity in South Africa is the cheapest in the world. Gas would really have to compete to be cheaper than electricity.

Mr Blanche (Federal Alliance) asked whether any consideration had been given to the road reserves. Is there enough of space for the laying of pipes in our roads? Dr Crompton replied that this referred to reticulation and that it was outside the scope of the Bill. Road reserves are a local government issue.

Mr Lucas stated that in terms of the Bill, the Board members would have to be people with experience; however, in South Africa there are few people who have the relevant experience for such a position. This is something new being ventured in South Africa. Would this mean that "outside people" would have to be hired? Dr Crompton referred to the Bill and said that one of the requirements for such a position is that the person must be a South African citizen. However, experts from other economies could be asked to provide advice.

Mr Davidson stated that it would be beneficial if the Committee could look at the public on the Bill. Dr Crompton stated that there were voluminous files that could be made available. Finally, the Committee decided that a list of all the submissions made by the public would be simpler to look at.

The meeting was adjourned.