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National Energy Regulator of South Africa (NERSA)Annual Report 2010/2011

18 October 2011

Presentation to Parliamentary Portfolio Committeeon Energy

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PRESENTATION OUTLINE

• Profile of NERSA• Structure of the Energy Regulator• Structure of NERSA Personnel• Strategic Objectives • Performance Against Pre-Determined Objectives• Highlights• Lowlights • Staff Analysis• Financial Performance• Significant events after year end• Conclusion

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OVERVIEW

Mrs Cecilia Khuzwayo – Chairperson

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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 written government policies as well as regulations issued by the Minister of Energy.

• NERSA was established on 1 October 2005 and began regulating 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 appointed by the Minster of Energy– 5 Part-time Members– 4 Full-time Members

• Chairperson & Deputy Chairperson: Part-time• Full-time Regulator Members:

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

petroleum pipelines industry regulation respectively• 7 Subcommittees of the Energy Regulator:

– Cross-cutting Subcommittee:• Regulator Executive Committee

– Industry specific regulatory Subcommittees for: • Electricity, Piped-Gas, and Petroleum Pipelines industries

– Governance Subcommittees:• Audit and Risk, Finance and Human Resources

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STRUCTURE OF NERSA PERSONNEL• 6 Divisions each with a number of departments - headed by Executive

Managers:– Electricity Regulation– Piped-Gas Regulation– Petroleum Pipelines Regulation– Human Resources– Finance and Administration– Corporate Services

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

• Total approved staff complement = 168

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STRATEGIC OBJECTIVES

1. 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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OPERATIONAL PERFORMANCE

Ms Phindile Nzimande – Chief Executive Officer

PERFORMANCE AGAINST PRE-DETERMINED OBJECTIVES

• At the end of the 2010/2011 financial year, NERSA had a total of 395 activities in its business plan.

• 68% of activities were carried out as planned

• 32% of activities were not carried out as planned. – 14% of activities were delayed due to external dependencies that are

outside of NERSA’s control

• Main reasons for delays within NERSA’s control:– Human resource constraints; and– Licensing of existing facilities in the piped-gas and petroleum pipelines

industries taking longer than anticipated.

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HIGHLIGHTS – ELECTRICITY INDUSTRY REGULATION• The Energy Regulator approved 179 municipal tariff applications for

2010/2011;• The Energy Regulator approved the Inclining Block Tariffs (IBTs)

rates for implementation by Eskom on 01 April 2011;• NERSA conducted 22 workshops with municipalities on the

implementation of the IBTs;• The Energy Regulator approved the principles to be used in

determining the electricity tariff guideline increase for electricity distributors;

• The Energy Regulator approved the guidelines for municipal Tariff Applications for 2010/2011 Electricity Rate for 2011/2012;

• The rules for the selection of Renewable Energy Feed-In Tariffs (REFITs) projects were completed;

• The Energy Regulator approved the Cogeneration Feed-in Tariffs (COFITs);

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HIGHLIGHTS – ELECTRICITY INDUSTRY REGULATION (Cont.)

• NERSA developed and published the consultation paper on the revised REFITs and qualifying criteria;

• The Energy Regulator approved the service incentive scheme for Eskom Transmission;

• The Energy Regulator approved the service incentive scheme for Eskom Distribution;

• The Energy Regulator approved 6 licensing of generation facilities in 2010/2011;

• The Energy Regulator approved 2 amendments to the licensing of generation facilities in 2010/2011;

• The Energy Regulator approved 4 amendments to the licensing of distribution facilities in 2010/2011;

• The Energy Regulator approved the publication of a consultation paper on the revised rules for Energy Efficiency and Demand Side Management for public consultation;

HIGHLIGHTS – ELECTRICITY INDUSTRY REGULATION (Cont.)

• The Energy Regulator approved the closure on Eskom’s Transmission corrective action plan;

• The Energy Regulator eradicated the backlog with regard to the approval of exemptions and amendments to the Transmission Grid Code;

• The Energy Regulator approved the connection requirements for Wind Energy Facilities;

• The Energy Regulator approved the first Governance Code for the Distribution Code;

• The Energy Regulator approved the report on the 2007/2008 and 2008/2009 distribution compliance audits with corrective action plans and analyses; and

• The Energy Regulator approved the close out report on Electricity Distribution Maintenance Summit 2008 indicating that all outstanding activities are ongoing activities by the different role players. 12

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HIGHLIGHTS – PIPED-GAS INDUSTRY REGULATION• The Energy Regulator approved the preliminary reference prices,

minimum prices and the maximum prices for the year 2008/2009 which were published for comment;

• The Energy Regulator approved the minimum and maximum prices for the year 2008/2009 in terms of clauses 8 and 9 of Schedule One of the agreement concerning the Mozambique Gas Pipeline between government of the Republic of South Africa and Sasol Ltd (Agreement);

• The Energy Regulator approved the Transnet Pipelines transmission tariff for the gas pipeline from Secunda to Durban South (Lilly Pipeline);

• The Energy Regulator approved the ROMPCO tariff for the period August 2010 to October 2010;

• The Energy Regulator approved consultation document on a methodology to approve maximum prices for gas in order to prepare in order to prepare for the end of the agreement in 2014;

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HIGHLIGHTS – PIPED-GAS INDUSTRY REGULATION (Cont.)

• Two pricing investigations were finalised;• The Energy Regulator issued a licence to operate a gas storage

facility, which was brought about by the current development of new technologies in the gas industries;

• The Energy Regulator granted nine (9) and amended one (1) construction licences for the construction of gas transmission facilities in 2010/2011;

• The Energy Regulator granted one (1) construction and amended two (2) licences for the construction of gas distribution facilities in 2010/2011;

• The Energy Regulator granted 13 operation licences in 2010/2011;• The Energy Regulator approved the Special Regulatory

Dispensation period to determine when the Agreement is coming to an end;

• Inspections of nine (9) construction sites were conducted in 2010/2011;

HIGHLIGHTS – PIPED-GAS INDUSTRY REGULATION (Cont.)

• The Energy Regulator considered a report on the status of development of gas sources and importation of gas; and

• The Energy Regulator considered a report on the review of new gas technologies penetrating or having the potential to penetrate the gas market in South Africa.

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HIGHLIGHTS – PETROLEUM PIPELINES INDUSTRY REGULATION

• Frequently Asked Questions (FAQs) on the tariff methodology for the setting of petroleum pipeline tariffs were developed and placed on NERSA’s website;

• The Energy Regulator approved the revised tariff methodologies for the petroleum pipelines and petroleum storage facilities;

• The Energy Regulator approved an increase in the allowable revenue for Transnet Pipeline System for 2011/2012;

• The Energy Regulator approved the Guidelines for Annual Assessment of Storage and Loading Facilities Tariffs Application

• The Energy Regulator granted nine (9) and amended four (4) operation licences in 2010/2011;

• The Energy Regulator approved five (5) construction licences in 2010/2011; and

• The Energy Regulator approved the fourth quarterly report on Security of Supply of Petroleum Products.

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HIGHLIGHTS – CROSS-CUTTING REGULATORY

• The Energy Regulator has approved three (3) implementation plans and three (3) cost allocation manuals as part of the implementation of the Regulatory Reporting Manuals; and

• The Energy Regulator approved the Minimum Information Requirements for Tariff Application (MIRTA) guidelines for the electricity and the petroleum pipelines tariff applications to ensure that all applications contain the minimum required information.

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HIGHLIGHTS – ORGANISATIONAL• NERSA received an unqualified Audit Report for

2009/2010; and• NERSA successfully hosted the seventh Annual

Conference And Annual General Meeting of Regional Electricity Regulatory Association (RERA).

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LOWLIGHTS• Delays in finalisation of the revision of the Energy

Efficiency and Demand Side Management policy; • Receipt of requested information from licencees,

including comments on audit reports - resulting in some projects being delayed;

• Delay in filling some positions within the organisation has had an impact on the completion of some of the planned activities; and

• Employment Equity is still a challenge (minority groups and people with disabilities)

STAFF ANALYSISOccupational Levels MALE FEMALE TOTAL

A C I W A C I WTop Management 2 0 0 0 4 0 0 0 6Senior Management 10 1 0 0 5 0 0 2 18Professionally qualified, experienced specialists and mid management

34 0 0 3 17 0 1 5 60

Skilled technical and academically qualified workers, junior management and supervisors

16 1 0 3 27 0 0 0 47

Semi-skilled and general worker

4 0 0 0 19 0 0 0 23

TOTAL PERMANENT 66 2 0 6 72 0 1 7 154Percentage (%) 43% 1% 0% 4 % 47% 0 1% 5%Temporary Employees 5 0 0 1 7 0 0 0 13TOTAL 71 2 0 7 79 0 1 7 167

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STAFF ANALYSIS (Cont)

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Total staff complement = 168

Total strength = 154 (91.7%)

Vacancies = 14 (8.3%)

Resignations = 7 (4.5% out of staff strength)

New employees = 21

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FINANCIAL PERFORMANCE

Ms Busisiwe Chaunzwa – Chief Financial Officer

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

– Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA);

– Treasury Regulations;– South African Standards of Generally Recognised Accounting

Practice (GRAP) issued by the Accounting Standards Board• The following legislation sets out the funding for NERSA:

– Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987);– Gas Regulator Levies Act, 2002 (Act No. 75 of 2002); and – Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004).

FINANCIAL PERFORMANCE (Cont)• Actual levies collected amounted to R155 million, received from the

following sources: o Electricity industry – R87 milliono Piped-Gas industry – R28 milliono Petroleum Pipelines industry – R40 million

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

• The actual expenditure for the period 1 April 2010 to 31 March 2011 amounted to R 163.7 million. This represents an underspending of 6% compared to the budgeted amount of R177.2 million.

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FINANCIAL PERFORMANCE (Cont.) • 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:– All direct costs are allocated directly to the three regulated

industries– All common costs allocated on the following principle:

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

FINANCIAL PERFORMANCE (Cont.)Actual Budget Variance

REVENUE 161 358 021 163 727 278 (2 391 343)

Levy Income 155 197 364 159 727 278 4 529 914

Other Income 6 160 657 4 000 000 (2 138 571)

EXPENDITURE 163 717 951 177 159 592 10 740 106

Remuneration 88 302 326 88 428 316 125 990

Other operating costs 59 782 600 69 992 056 7 507 921

Consultants 15 633 025 18 739 220 3 106 195

Net Deficit for the period (2 359 930) (13 432 314) 8 348 764 26

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FINANCIAL PERFORMANCE (Cont)• Expenditure categories in relation to the other

expenditure– Operating Expenses = 31%– Employment Costs = 53%– Consultant fees = 10%– Regulator Members remuneration = 6%

• Total irregular expenditure at year end was R85 242.00 and fruitless and wasteful was R5 797.00;

• NERSA received an unqualified audit opinion (with no emphasis of matter) from the Auditor-General for the 2010/2011 financial year

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SIGNIFICANT EVENTS AFTER YEAR END AND CONCLUSION

Mrs Cecilia Khuzwayo – Chairperson

SIGNIFICANT EVENTS AFTER YEAR END

• Appointment of Full Time Regulator Members;• Implementation of the IBTs by Eskom and

municipalities;• Implementation of the Framework for the

Development of Strategic Plans and Annual Performance Plans as per the National Treasury directive issued in September 2010;

• The publication of the revised New Generation Regulations by the Minister of Energy;

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SIGNIFICANT EVENTS AFTER YEAR END (Cont)

• 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

• The Department of Energy’s process of amending the Gas Act, the Electricity Regulation Act and the National Energy Regulator Act and NERSA’s participation in the process.

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CONCLUSION• 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 often poses challenges in that the Energy Regulator is required to balance the conflicting interests of licensees, investors, consumers/end-users and the policy maker.

• To deal with regulatory challenges, NERSA has undertaken various initiatives to refine regulatory practices and methodologies in its quest to become a world-class energy regulator and will continue to do so;

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CONCLUSION (cont.)• NERSA has achieved its regulatory mandate through

projects set for the 2010/2011 financial year – it completed 68% of its Business Plan activities for 2009/10 as planned.

• The staff turnover has stabilised over the years.

• NERSA is a viable entity and is still operating as a going concern.

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Thank You