Outline• Background to economic regulation• Introduction to NERSA• Regulating market entry• The construction boom & challenges• Prices and tariffs• Funding big energy infrastructure• Storage tariffs• Security of Supply & Strategic stocks 3• Biofuels compulsory blending?
• Commenced November 2005• Modelled on modern transparent economic regulator• Public hearings• Written decisions and reasons for decision
Regulated sectors Electricity Petroleum Gas Gen. Trm Distr Pipelines Storage Trm DistrDominant Eskom Eskom Munics Transnet Six oil SASOL SASOLmarket /Eskom cosshareRegulation Full Full Full/co Full/set Full/app Light Light ntested rove monitor monitor & & approve approve
3 Industries• 3 different Acts• Electricity and petroleum treated as established industries• Gas treated as an infant industry – less onerous regulation
What do economic regulators do?• Make impartial, difficult, economic trade-off decisions in “the public interest” (not defined) – licence “the players” (market entry) – set conditions of licence and police them – set and approve tariffs 11
Regulating Market EntryHow should we admit new pipeline capacity? 12
Market access1. Petroleum Pipelines Act: Must have a licence2. Objective of Act: Promote (introduce) competition (without privatisation – unique?)3. Act silent on competing applications4. Process in order received 1. First mover advantage 2. Unsubstantial rejected5. Weigh the merits 13
Storage Construction approved (2) Petroleum Storage Construction Year Approved Area Rm Licenses GrantedEngen (additional 5 tanks) 2010 Langlaagte (JHB) 40 - 80VOPAK SA Developments (new 38 Jamesson Parktanks) 2010 (Gauteng) <1 500Shell (additional 4 tanks) 2010 Alrode <500 Cape TownFFS Refinery (additional tank) 2010 Harbour 2–5BPSA, Shell Engen & Total (new four Island Viewarms) 2010 Berths 6 80 - 120Sunrise Energy (new 6 tanks LPG) 2011 Cape Town <1 000 17
Loading Construction approved Petroleum Loading Facilities Area Rm Licences Granted YEAR ApprovedBPSA, Shell Engen & Total (new Island View four arms) 2010 Berths 6 50-150Sunrise Energy (new 6 tanks LPG) 2011 Cape Town 350-750TOTAL (Rm) 5,228 to 5,964 18
Construction applications under consideration Applicant AreaOil Tanking Grinrod Calulo (new 18 tanks & loading facilities) Coega IDZTotal SA (additional tank) WaltlooTotal SA (additional tank) PolokwaneTotal SA (additional tank) OhrigstadBPSA (additional tank) WaltlooBPSA (new 4 tanks) Rand Airport 19
Licensed construction• Petroline: 12” Maputo to Kendal – scheduled completion Q3 2009. – licence deadline March 2010 – not built within allotted 3 years – EIA delays – 2010 – extended to 3 yrs after EIA ROD – Not started, market opportunity missed• Transnet: 24” Durban to Gauteng + other – scheduled completion Q3 2010 – latest Q4 2012 – cost escalations: • 2007: R 11 bn • 2009: R 12.6 bn • 2010: R 15.4 bn • 2010 R 23.4 bn 22 • next ????
Statutory options for late delivery Option Consequence1. Extend construction 1. Capacity constraints. period Upsets orderly development of capacity?2. Don’t extend 2. Construction halts? construction period Liquidation? Shortages?3. Impose fine for breach 3. Construction halts? of licence condition Liquidation? Shortages? 23
Statutory remedies for cost over runs Option Consequence1. “Prudent” - allow 1. Higher tariffs over run into tariffs2. “Imprudent” - 2. Lower tariffs. disallow over run Liquidation? from tariffs Shortages?
Options for risk allocationfor late delivery & cost over runs Options Risk bearer • Licensing (current legal 1. Consumers requirement) • Deregulate market 2. Investors & consumers access & let the market decide? • Competitive bidding 3. Fairer to all? rounds for additional capacity. (locked in tariff. Locked in premium. Construction Co. collusion?)
Issues1. SA needs new pipelines2. How to finance?3. Transnet Pipelines: >quadruple asset base without equity injection4. Only remaining financing option is tariffs5. Debt service cover ratio6. Security of supply levy: 7.5c/l for 3 years = R4.5 bn 30
Government Policy & strategic issues• Government required a bigger than commercial pipeline for security of supply reasons• Security of supply insurance policies have to be paid for (in the tariffs)• but if only some tariffs (SOEs) are burdened with this obligation how have fair competition?• Government security of supply injection: R4.5 bn via a 7.5c/l national levy on fuel for 3 years• Compare costs with cost of interruption in supply 37
Nersa Estimates Road and rail requirement is indicated by the area between the demand lines and the bars 20 000 NMPP pipeline capacity 18 000 16 000 DJP pipeline capacity million liter / annum 14 000 Inland Jet Fuel supply 12 000 10 000 Inland IP supply 8 000 6 000 Inland Diesel supply 4 000 Inland Petrol supply 2 000 0 Inland Fuel demand 2011 2006 2007 2008 2009 2010 2012 2013 2014 2015 Inland Fuel demand incl. exportsNMPP commences operation 1 January 2012. The whole project will be completed by 1 April 2014 i.e. NMPP reaches fullNote: Data availability an issuecapacity at 1 April 2014. This is as per Transnets presentation to NERSA on 7 December 2010. 38
Estimated impact of pipeline constraints on roads No. of road 2009 2010 2011 tankers from Durban to GautengPer annum 16 931 24 497 42 351Per day 47 68 117Per hour 2 3 5Minutes 31 21 12between trucks 39
Strategic Stocks• Currently held as crude at Saldanha Bay• Draft regulations 23 September 2010 – switch to refined products – almost equivalent to doubling refined products storage capacity (capex?) – key vulnerability (supply of inland market) will require additional measures• Regulations still coming? 40