Ethel Teljeur, Fulltime Regulator Member Primarily Responsible for Piped-gas; and. Robert Opini, Advisor, Regulatory Reporting. NERSA South Africa

Transcription

1 Ethel Teljeur, Fulltime Regulator Member Primarily Responsible for Piped-gas; and Robert Opini, Advisor, Regulatory Reporting NERSA South Africa

2 Boosting Investor Confidence: The Role of Regulators The experience of the National Energy Regulator of South Africa (NERSA) in the development of regulatory methodologies for the Piped-gas industry

3 About the National Energy Regulator of South Africa (NERSA) NERSA is a regulatory authority established in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) NERSA regulates the:- Electricity industry in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) Piped-Gas industry in terms of Gas Act, 2001 (Act No. 48 of 2001), and Petroleum Pipeline industry in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)

4 About NERSA Functions of NERSA include:- Issuing licenses and other registrations Monitoring/approving/setting prices and tariffs Compliance monitoring and dispute resolution Enforcement Aimed at, inter alia: Promoting efficient, effective, sustainable and orderly development and operation of the industries Facilitating investment Promoting competitive markets and equitable access

5 E1 Policy and legislative framework to enable effective regulation The South African energy policies aim to create a conducive regulatory environment to attract investment into energy infrastructure Hence the National Energy Regulator of South Africa was established as an autonomous entity, that implements a legislated mandate The Regulator does NOT formulate policy Legislation compels the Regulator to:- Adhere to the constitution and the laws Act transparently, with administrative justice

6 Slide 5 E1 I deleted slide 2 but kept the comment about policy formulation EthèlT, 27/08/12

7 Investors expectations of regulation: Regulatory certainty Primary concern for investors a credible regulatory regime (commitment) to assure returns on and of capital Rule of law provides a credible regulatory commitment to mitigate risk of expropriation E2

8 Slide 6 E2 hi, please check, I think in piped gas it is in the regulations and in electricity it is in the act. I am trying to tie the topic to the overall focus of the conference on electricity. EthèlT, 27/08/12

9 Investors expectations of regulation: Regulatory certainty Legislation provides assurance Gas Act (2001 and its Regulations), and the Electricity Regulation Act (2004, its Regulations, and the Electricity Pricing Policy) assure that:... an efficient licensee will be able to:- fully recover efficient investment costs; and make a profit commensurate with risk

10 Enablers of regulatory certainty Regulator building trust and reputation, by Acting fairly to both customers, the licensee and investors, as well as in the public interest Providing written reasons for all decisions Regulatory independence is vital, by means of Autonomy of budget Authority to execute its mandate Accountability to the legislature

11 NERSA Experience in Piped-Gas Regulation Greatest challenge: growing the gas market Requires additional supplies of gas and infrastructure development Despite assurances of gas act, project developers and financiers require a creditworthy anchor customer for gas International experience shows that this is most likely an electricity generation project

12 NERSA Experience in Piped-Gas Regulation Growing the gas market (cont.) Electricity generation fuel mix contained in the SA Integrated Resource Plan (IRP 2010) IRP 2010 provided limited CCGT - 711MW between , and MW between Current review of IRP 2010 could increase or bring forward Gas to Power This would provide a creditworthy anchor customer (Eskom / IPP)

13 NERSA Experience in Piped-Gas Regulation Next challenge (identified by stakeholders) (Gas) price uncertainty To mitigate price uncertainty NERSA developed two sets of methodologies: Tariff Guidelines, 2009, appl. to infrastructure Applicable to transmission and storage tariffs, Flexible menu of 7 tariff calculation methods Maximum Prices Methodology, 2011 for product Applicable to the price for gas energy (molecule)

14 NERSA Experience Tariff Guidelines (for infrastructure services) A menu with 7 methodologies provided : Rate of Return Regulation (ROR) Discounted Cash Flows (DCF) Incentive Based Regulation Price Cap, and Revenue Cap Profit-sharing and sliding scale Hybrid of any of the above methodologies Reflects intent to apply light-handed regulation

15 NERSA Experience Tariff Guidelines (for infrastructure services) Applicants can also suggest own methodology if such method is proven, tested and verifiable Data sources are specified by NERSA NERSA reviews each tariff application using the same methodology chosen and used by applicant Allowed revenue covers :- Pass-through of all efficiently incurred opex and taxes Return of Capital (Initial investment) Return on Capital (WACC x Investment)

16 NERSA Experience Tariff Guidelines (for infrastructure services) Return on capital components (WACC) Cost of debt either actual interest costs or lender s estimate of interest rates for applicant 2 options available cost of debt Patient capital approach - real cost of debt Pass-through of cost of debt - nominal cost of debt 1 st option (real cost of debt) enables backloading by new entrants in order to be able compete with incumbents

17 NERSA Experience Tariff Guidelines Return on capital components (WACC) Cost of equity determined using CAPM Any other (internationally) accepted methodology - from credible financial industry/practitioners sources Allows minimum financial ratios to be achieved Interest cover ratio or debt service cover ratio IRR to meet investor s hurdle rate

18 NERSA Experience Tariff Guidelines Financial indicators must be achieved The selected IRR for a project will be selected at a value that meets a set target cost of capital (the hurdle rate of the investors). The hurdle rate being the investor s set minimum acceptable required rate of return for making an investment When tariffs are considered by NERSA the tariff level will be approved to ensure that appropriate levels of financial indicators will be met, based on prevailing financial market conditions and best practice

19 NERSA Experience Tariff Guidelines With CAPM (Note: CAPM is only one option) Johannesburg Stock Exchange (JSE) all share index (ALSI) is the reference point for calculating allowed equity returns (return on equity, RoE) Beta determined using proxy of companies 25-year moving average equity returns over the period relatively stable in the range of 20% to 25% p.a. (before adjustments)

20 NERSA Experience Tariff Guidelines JSE ALSI Nominal Equity Returns, Historical CPI and Real JSE ALSI Equity Returns 25% 20% 15% 10% 5% 0% Historical CPI Nominal equity returns (JSE ALSI 25 years average) Real equity returns (JSE ALSI 25 years average)

21 NERSA Experience Tariff Guidelines ALSI equity returns in last 25 years 25 year average historical CPI = 8.91% 25 yr average nominal equity returns=22.86% 25 yr average real equity returns = 12.98% Variation from the 22.86% nominal RoE for an applicant is a function of beta i.e. if beta = 1 applicant achieves the full 22.86% nominal (12.98% real) RoE Beta determined using proxies Final Beta is a function of applicant s debt ratio

22 NERSA Experience Tariff Guidelines Additional adjustments to this cost of equity are allowed, informed by financial industry practices e.g., PwC valuation survey for South Africa, 2009/10 Report, 5 th edition, indicated following adjustments by 27 surveyed financial analysts and corporate practitioners:- Small company premium Project specific risks hurdle rates and/or company specific risk - e.g. for greenfield project Country risk premium

23 NERSA Experience Tariff Guidelines Challenges: Aimed at attracting investment, but potential not yet realised Providing reasonable returns for infrastructure without a guaranteed market Only applicable to parts of the value chain and that causes confusion Delayed response time due to: Small share (<3%) of piped gas in the SA energy mix, restructuring of electricity industry and Sasol special dispensation period

24 NERSA Experience Maximum gas price methodology Maximum prices methodology Challenge: determining a value for gas No gas market exchange, as there is only one major source of imported gas into South Africa (from Mozambique) Alternatives considered for pricing gas International gas exchange prices Cost plus method Price levels/structures for existing imports

25 NERSA Experience Maximum gas price methodology Methodology developed has two options for pricing gas energy (the product) Reference value (Energy Indicators) approach Price linked to prices of other energy sources Applied to Gas on first entry into the gas transmission/distribution system (and LNG importers, domestic gas developers if they opt for this approach) Cost build up (pass-through) approach Price is based on purchase cost Choice, applicable to: LNG importers, developers of domestic gas sources, traders down the value chain buying at reference value price

26 NERSA Experience Maximum gas price methodology Reference Value Approach Price determined using a weighted average of prices of selected five energy indicators Coal Electricity Diesel HFO LPG Data sources are specified by NERSA

27 NERSA Experience Maximum gas price methodology Reference Value Approach A seven step calculation to obtain Gas Energy (GE) price GE is the price of gas at the time of its first entry into the transmission/distribution system and before gas price discounts GE excludes the transmission/distribution tariffs Example of GE determined in August 2012:

28 NERSA Experience Maximum gas price methodology Reference Value Approach Reference Gas Energy Energy price Weights Price Reference Energy Rands/GJ % R/GJ carrier/type a b c = a x b 1 Thermal Coal % Electricity % Diesel % HFO % LPG % 1.66 Maximum Gas Price 100% R Equivalent US$/MMBtu $13.68

29 NERSA Experience Maximum gas price methodology Total price for piped-gas Trading margin Margin (R) Distribution Tariff (U) Transmission Tariff (R) Max Gas Energy Price of $13.68 Price (R)

30 NERSA Experience NERSA Maximum gas price compared to world LNG landed prices South Africa GE = $13.68 NB in gaseous form, compared to LNG before regas costs,

31 NERSA Experience Maximum gas price methodology Cost build-up or pass through approach applicable to LNG importers (if preferred) domestic gas developers (if preferred) Traders along the value chain after gas first entry in to the transmission/distribution

32 NERSA Experience Maximum gas price methodology Example of an LNG importer cost build-up Maximum Gas Price = + LNG landed price + Shipping costs + re-gasification costs + transmission tariff + distribution tariff + storage tariff + operating costs + trading WACC in nominal terms + Levy

33 NERSA Experience Maximum gas price methodology Total price for piped-gas Regas cost Storage Levy Trading margin Margin (R) Distribution Tariff (U) Transmission Tariff (R) Landed LNG Price Price (R)

34 NERSA Experience Maximum gas price methodology Challenges: Balancing consumer / public interest with need to incentivise entry i.e. profitability with affordability Providing flexibility and certainty Considerations: SA is a developmental state, currently developing infrastructure in many sectors Public sector not able to fund all infrastructure, hence private sector involvement is needed

35 NERSA Experience Maximum gas price methodology Challenges: A one size fits all applicable to existing and greenfields projects? Must cater for different sources and specifications of gas e.g. natural gas piped from Mozambique vs shipped LNG sourced from world market Dedicated supply vs spot purchases Current special regulatory dispensation for Sasol Non-discrimination requirements of the Gas Act

36 NERSA Experience Maximum gas price methodology Outcome: NERSA adopted a sophisticated two-pronged approach Anticipating increases in gas to power in South Africa s electricity infrastructure plan Incumbent able to achieve revenue neutrality Mindful of policy objectives such as fuel diversification, environmental sustainability On balance: erring on the side of attracting and rewarding investment

37 NERSA Experience Maximum gas price methodology Experience thus far Implementation has started NERSA assisting licensees with price applications Consumer and licensee education ongoing Lessons Flexibility, certainty, transparency Restructuring of prices inevitable and likely to lead to customer complaints Stakeholder education and communication is key

38 Outlook Short-term: off shore gas field exploration (Ibhubesi et al) Long-term: domestic gas production is possible Cabinet decision on Shale Gas moratorium expected

39 Medium term: Outlook Review of IRP may increase role of gas in electricity and facilitate investment in gas infrastructure Re-assessment of nuclear vs gas-fired electricity generation (National Planning Commission, Eskom) Request for information, DoE, March 2012 REBID 2011: blueprint? East African gas finds important catalyst

40 Conclusion NERSA has developed regulatory methodologies aligned to international practices to assure investors that they will be allowed to provide services at prices that fully recover efficient investment costs and provides a profit commensurate with risk Government policy and implementation (e.g. IRP and energy legislation) provide anchors for regulatory certainty necessary for attracting investment funds for much-needed infrastructure development in the energy sector

41 Thank You