ENERGY REGULATOR OF SOUTH AFRICA In the matter regarding Transnet Pipelines gas transmission tariff assessment for the pipeline from Secunda to Durban south (Lilly pipeline) for the period 01 January 2012 to 31 March 2013. THE DECISION On 26 July 2012, the Energy Regulator approved the Piped-gas transmission tariff for Transnet Pipelines (Transnet) Lilly pipeline from Secunda to Durban South for the period 01 January 2012 to 31 March 2013 as follows: a tariff for the period 01 January 2012 to 31 March 2012 as follows; GTA Tariffs for period 01 January 2012 31 March 2012 2012 TARIFF VOLUME (Proposed) R 0-12 m GJ/a 8.39 12.1-18m GJ/a 4.81 >18m GJ/a 4.24 tariff of R9.24/GJ for the period 01 April 2012 to 31 March 2013 for the Lilly Pipeline as summarised in the table below; and RoR Tariff for period 01 April 2012 to 31 March 2013 TRANSNET (Rm) (RAB = v-d +net working capital) Total RAB 820.50 (AR = (RAB*WACC) + E +D +T±C) WACC 6.43% Return on assets 52.80 Operating Costs 58.90 Depreciation and Amortization 23.70 Allowable Revenue before tax 135.40 Tax 21.70 Clawback 0.00 Total Allowable Revenue (AR) 157.10 Forecasted Volume (m/gj) 16.999 Tariff (R/GJ) 9.24 RfD Transnet Tariff Assessment 2012/13 Page 1 of 15
discounts on the above tariffs are permissible and these tariffs will be applicable until new tariffs are approved. REASONS FOR DECISION 1. APPLICABLE LAW 1.1 The Energy Regulator is mandated in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004), to regulate the piped gas industry in terms of the Gas Act, 2001 (No. 48 of 2001), (Gas Act). 1.2 In addition, the Energy Regulator approved and published the Guidelines for Monitoring and Approving Piped-Gas Transmission and Storage tariffs in South Africa (Tariff Guidelines) on 01 May 2009. 1.3 Section 4(h) of the Gas Act provides that the Energy Regulator must monitor and approve and, if necessary, regulate transmission and storage tariffs. In practice, this is interpreted as follows: In monitoring and approval, NERSA will not set tariffs but will review tariffs prepared by licensees or applicants for transmission and storage facilities; NERSA can request licensees or applicants to amend the levels of tariffs or tariff structure or both; and NERSA can approve or decide not to approve a tariff. 1.4 If NERSA decide not to approve the proposed tariff, then section 4h of the Gas Act requires the Energy Regulator to regulate the tariff. The process to be followed in regulating the tariff is outlined in the Tariff Guidelines. In regulating, NERSA will regulate by determining the tariffs, if necessary, to ensure that NERSA is fulfilling its regulatory duties, inter alia by ensuring tariffs are cost effective and applied in a non-discriminatory manner. 1.5 For monitoring purposes, the application for a tariff must be provided on an annual basis, although applicants are also allowed to apply for approval of tariffs for a period of several years. 1.6 The approved tariff becomes the applicable tariff and discounts are permissible. It must be noted that the discounts should be consistent with the objectives of the Gas Act as well as section 22 of the Gas Act. 1.7 The approved tariff will by virtue of section 22 of the Act also apply to third parties. 2. THE APPLICANT 2.1 Transnet Limited (registration number 1990/000900/06) is a public company registered and incorporated as such in terms of the company RfD Transnet Tariff Assessment 2012/13 Page 2 of 15
laws of the Republic of South Africa pursuant to the legal succession of the South African Transport Services Act, 1989 (Act No. 13 of 1989). 2.2 Transnet Limited ( Transnet ) operates the country s rail network (Transnet Freight Rail (formerly Spoornet)), its ports (Transnet National Ports Authority (formerly National Ports Authority)), the petroleum pipelines and the gas pipeline (Transnet Pipelines (formerly Petronet)), and other operations such as Transnet Port Terminals (formerly the South African Ports Operations) and Transnet Rail Engineering (formerly Transwerk). 2.3 The Transnet Pipelines Division of Transnet operates approximately 3 000 kilometers of pipelines conveying gas, refined petroleum products and crude oil. Only 573 kilometers of this pipeline is used for conveying gas. Gas Pipeline 2.4 The current gas pipeline commonly referred to as the Lilly pipeline is a piped-gas transmission pipeline which came about as a result of a conversion of sections of a crude oil pipeline ( COP ) and the Durban Witwatersrand pipeline in 1994. 2.5 On 11 November 2009, NERSA granted Transnet a Piped-gas transmission license to operate the Lilly pipeline which comprises: a 16 inch diameter, 153km pipeline from the inlet flange at Secunda via Standerton and Volksrust to Ingogo; An 18 inch diameter, 420 km pipeline from Ingogo via Scheepersnek and Empangeni to Durban; terminating near the Island View area at Bayhead; and Seven supply points at Newcastle, Empangeni, Mandini, Verulam, Phoenix, Avoca and Durban, along the pipeline route. 2.6 Transnet currently has one customer for transmission services, Sasol Gas, which is using the pipeline. A Gas Transportation Agreement (GTA) governs the relationship between Transnet and Sasol Gas. 3. TRANSNET TARIFF APPLICATION 3.1 On 25 November 2011, the National Energy Regulator received a tariff application from Transnet Pipelines ( the applicant or Transnet ) for the Piped-gas transmission tariff, for its pipeline from Secunda to Durban South, commonly referred to as the Lilly Pipeline, for the period 01 January 2012 to 31 March 2013. This is Transnet s third application since the Tariff Guidelines were approved and since Transnet s transmission operation licence was granted. 3.2 Transnet has in the past applied for approval for tariffs based on the Gas Transportation Agreement (GTA) with Sasol Gas Limited but changed to RfD Transnet Tariff Assessment 2012/13 Page 3 of 15
the Rate of Return (RoR) methodology for the tariff period 01 April 2012 to 31March 2013. 3.3 Transnet also requested the Energy Regulator to change its tariff period from the calendar year (01 January 2012-31 December 2012), to its financial year (01 April 2012-31 March 2013) so as to align its tariff application to the Regulatory Financial Reporting period which is aligned to the applicant s financial year. 3.4 Transnet is applying for an allowable revenue of R157.2 million and tariffs which range from R6,83/GJ to R9.25/GJ for the period 01 April 2012 to 31 March 2013 using the RoR methodology. 3.5 Furthermore, Transnet is requesting that the Energy Regulator approve a tariff of R8.39 per gigajoule ( GJ ) for volumes up to 12million gigajoules ( MGJ ), R4.81/GJ for volumes greater than 12MGJ but less than 18MGJ and R4.24/GJ for volumes greater than 18MGJ, for the transitional period of 01 January 2012 to 31 March 2012. This is based on the GTA tariff formula. 3.6 In the previous tariff period, Transnet applied for and NERSA approved a volume based block tariff of R7.90/GJ for volumes from 0-12m gigajoules per annum (GJ/a), R4.53/GJ for volumes from 12.1m-18m GJ/a and R3.99/GJ for volumes above 18m GJ/a. 4. TESTING OF PROPOSAL 4.1 According to the Guidelines for Monitoring and Approving Transmission and Storage Tariffs for the Piped-Gas Industry in South Africa (Tariff Guidelines), applicants are required to submit a tariff application based on their respective preferred methodology that may be chosen from the approved menu of tariff methodologies. 4.2 Each tariff application is reviewed using the same methodology chosen and used by the tariff applicant and any other appropriate information or method for assessing the reasonableness of each application by the Energy Regulator. 4.3 Alternative tariff methodologies or variations on the methods listed on the menu may be used by the applicant, provided that such method is proven, tested and verifiable. 4.4 Therefore, to review Transnet s application for reasonableness, the Project Team used the Rate of Return ( RoR ) methodology since this was in line with the methodology followed by Transnet in its submission. 5. ELEMENTS OF ALLOWABLE REVENUE 5.1 As mentioned above, NERSA used the Rate of Return ( RoR ) methodology to assess the 2012/13 tariff application since this was in line RfD Transnet Tariff Assessment 2012/13 Page 4 of 15
with the way Transnet submitted its information. The formula of RoR used is as follows: AR = (RAB x WACC) + E + T + D ± C Where: RAB - Regulatory Asset Base WACC - Weighted Average Cost of Capital E- Expenses T - Taxes D - Depreciation C - Clawback 2012 Tariff Calculation Summary NERSA (Rm) TRANSNET (Rm) (RAB = v-d +net working capital) Total RAB 867.80 820.50 (AR = (RAB*WACC) + E +D +T±C) WACC 6.41% 6.43% Return on assets 55.64 52.80 Operating Costs 58.90 58.90 Depreciation and Amortization 28.41 23.70 Allowable Revenue before tax 142.95 135.40 Tax 23.17 21.70 Clawback 0.00 0.00 Total Allowable Revenue (AR) 166.12 157.10 Forecasted Volume (m/gj) 16.999 16.999 Tariff (R/GJ) 9.77 9.24 5.2 As indicated in the table above, Transnet applied for an annualised allowable revenue of R157.10m. This is 28% higher than the allowable revenue approved for the 2011 tariff period, of R122.78m and 6% lower than the 2012/13 NERSA assessment of an allowable revenue of R166.12m. 5.3 The paragraphs below provide an analysis of each component of the allowable revenue formula. Starting Asset Regulatory Base (SARB) 5.4 In terms of section 4.4.1 of the Tariff Guidelines, the value of the RAB is the inflation-adjusted historical cost or trended original cost ( TOC ) of plant, property and equipment less the accumulated depreciation for the period under consideration plus net working capital. The formula for this is as follows: Regulatory Asset Base = Trended Original Cost of Property, Plant & Equipment (v) - Accumulated Depreciation (d) + Net Working Capital (w) RfD Transnet Tariff Assessment 2012/13 Page 5 of 15
5.5 NERSA used a Starting Asset Regulatory Base of R566m as approved by the Energy Regulator on the 25 th of March 2010, which was based on a 2009 study by PricewaterhouseCoopers (PWC) Report on the trended original cost valuation of Transnet Pipelines gas assets. 5.6 This PWC report provides an average useful life for each asset class whilst Transnet used specific useful lives of each asset in the class based on its asset register. 5.7 The following table gives a summary of NERSA s Trended Original Cost (TOC) calculation: TOC Determination 2006 2007 2008 2009 2010 2011 2012 (m) (m) (m) (m) (m) (m) (m) Opening TOC - Gas Pipeline Assets 566.00 577.14 603.10 655.70 687.31 702.59 736.00 Fixed Assets Additions - Pro rated 0.00 0.00 0.00 0.00 1.30 13.3 19.9 Non Pipeline Assets 0.00 0.00 0.00 3.90 5.90 5.80 6.40 Total Assets 566.0 577.1 603.1 659.6 694.5 721.7 762.3 Openining TOC CPI write up 26.04 41.55 69.36 46.83 29.86 41.86 57.30 Subtotal 592.04 618.70 672.45 706.43 724.37 763.55 819.60 Depreciation (d) and Amortization 5.8 Section 4.4.3 of the Tariff Guidelines provides that accumulated depreciation (d) is the cumulative depreciation against plant property, vehicles and equipment in service should be calculated on a straight line basis over the economic life of the asset. 5.9 Since the asset base and the remaining economic life of assets were determined in the SRAB report, NERSA used the SRAB value to calculate the straight line depreciation amount. The inflation write up from the trending of the asset value was also amortized over the estimated remaining useful lives of these assets. Net working Capital (w) 5.10 According to the Tariff Guidelines, net working capital refers to the various regulatory asset-base funding requirements other than utility plant in service. This is determined using the following formula: Net working capital = inventory + receivables + operating cash + minimum cash balance trade payables. 5.11 NERSA used the working capital figure of R48.2m as provided by the applicant. Tax (T) 5.12 Section 4.4 of the Tariff Guidelines provides that the flow-through tax approach is the Energy Regulator s preferred tax methodology. Under RfD Transnet Tariff Assessment 2012/13 Page 6 of 15
this approach, only the current taxes payable are factored into the allowable revenue and recovered during the tariff period under review. 5.13 NERSA used the flow-through tax approach to determine the tax payable figure of R23.17m in the allowable revenue. Deferred tax was not taken into consideration since the flow-through tax method does not provide for future income taxes payable outside the tariff period. Expenses (E) 5.14 The Energy Regulator is required by section 4.3 of the Tariff Guidelines to assess the operating and maintenance expenses using principles such as whether the expenses were prudently incurred, its controllability and efficiency. 5.15 NERSA allowed all the costs of R58.9m provided by Transnet since the expenses were correctly classified, recorded and allocated between gas and petroleum activities as per the NERSA-approved Cost Allocation Manuals. 5.16 Transnet indicated that it escalated the actual operating expenses incurred in 2011 by the CPI to get the 2012 forecasts, except where other factors, such as electricity costs which increased by 16% and all indirect costs which were allocated using the approved cost drivers. 5.17 Transnet revised the electricity costs after NERSA s determination of the electricity price for 2012/13. 5.18 Included in the expenses is a decommissioning provision armotisation of R0.633m, provided in line with section 34 (1) (d) of the Gas Act and Regulation 11 (4) and (5) which require licensees to provide for financial security in respect of rehabilitation obligations. DECOMISSIONING PROVISION CALCULATION SUMMARY Transnet Pipelines - Provision for Land and rehabilitation reqired Present value of obligation (current values) Less: Cumulative Contributions for 2011/12 and prior tariff periods Less: Interest earned (net of tax of prior period collections) Balance of PV of obligations to collect in remaining tariff periods Contribution recovered in the 2012/13 tariff period Cumulative contribution including interest earned Balance of obligations to recover in future tariff periods Remaining period Lilly Pipeline 18,986,598 0 0 18,986,598 633,520 633,520 18,353,078 29.97 Total 18,986,598 0 0 633,520 633,520 18,353,078 5.19 Transnet used to recognise the decommissioning costs in accordance with International Financial Reporting Standards (IFRS) which required them to make a provision without having to collect the concomitant revenue as required by the regulations. RfD Transnet Tariff Assessment 2012/13 Page 7 of 15
5.20 In order to comply with section 34 (1) (d) of the Gas Act and Regulation 11 (4) and (5) which require licensees to provide for financial security in respect of rehabilitation obligations, Transnet is allowed and an amount was incorporated in the Allowable Revenues to be collected starting from the current tariff period which will be use in future towards land rehabilitation costs. Weighted Average Cost of Capital (WACC) 5.21 NERSA used the following formula in its determination of the WACC: WACC Where: E Dt E Dt Dt E ( real) * Ke( real) * Kd ( real) E = equity amount Dt = debt amount Ke (real) = real cost of equity derived from the Capital Asset Pricing Model (CAPM) Kd (real) = the post tax real cost of debt WACC calculation summary NERSA (Rm) TRANSNET (Rm) Cost of Equity (Ke=Rf+(MRP*beta) Real Market Risk Premium (MRP) 5.89% 6.38% Real Risk free rate (Rf) 3.88% 4.38% Beta 0.78 0.64 Real Cost of Equity (Ke) 8.47% 8.49% Cost of Debt Nominal pre-tax Cost of Debt (kd) 10.36% 10.36% Nominal Post tax cost of debt (kd) 7.46% 7.46% Post tax Real cost of debt (kd) 1.62% 1.62% Debt ratio 30% 30% Equity ratio 70% 70% Real WACC 6.41% 6.43% 5.22 Based on the Tariff Guidelines, a minimum debt portion in the capital structure of 30% was used to calculate the WACC. 5.23 The mark-to-market risk free rate of a selected 5 to 10 year government of South Africa bonds were used for the expected risk free return (Rf) in the estimation of cost of equity. This yielded a real risk free rate of 3.88%. 5.24 The market return (Rm) was calculated using the JSE ALL Share Index, converted from a nominal to real value for the previous 25 years (April 1986 to March 2011). The average month-to-month CPI over the same period (April 1986 to March 2011) was used. This yielded a real market risk premium (MRP) of 5.89%. RfD Transnet Tariff Assessment 2012/13 Page 8 of 15
5.25 Transnet s MRP calculation was based on the petroleum pipelines tariff methodology determination. 5.26 The beta (β) was determined by proxy. As a proxy, the average of six gas pipeline companies chosen by the Energy Regulator that are listed on stock exchanges must be used as per the Tariff Guidelines. The following US companies were used by the Project Team as proxies: AGL Resources Inc. UGI Corporation South Jersey Industries WGL Holdings Inc. The Laclede Group Piedmont Natural Gas Company Inc. 5.27 NERSA updated and refined its list of proxy companies during the 2012 tariff period so as to capture the gas companies with operational risks closely related to a gas transmission company in South Africa, in this case Transnet. Therefore the companies which NERSA used were purely piped-gas pipelines companies as opposed to combined proxy petroleum pipeline companies used by Transnet in its tariff application. 5.28 NERSA used the Hamada approach to determine the beta, in line with the Tariff Guidelines. This resulted in a leveraged beta of 0.78 for Transnet s gas pipeline business and yielded a real cost of equity (Ke) of 8.47%. 5.29 On the other hand, Transnet used the Harris and Pringle approach to estimate the beta of 0.64, which combined with the different choices of proxy companies, resulted in a real cost of equity of 8.49%. 5.30 The table below gives a summary of NERSA s beta calculation: AGL Resources Inc. UGI Corporation South Jersey Industries WGL Holdings Inc. The Laclede Group Piedmont Natural gas Company Inc $m $m $m $m $m $m $m Total Capital 4,119.00 4,731.20 1,213.97 1,974.93 933.49 2,062.92 15,035.51 Debt/Equity Ratio 53.39% 48.36% 49.74% 34.57% 39.03% 50.77% Effective Tax rate 0.359 0.320 0.300 0.346 0.390 0.174 Proxy Beta (B1) 0.824 0.762 0.829 0.768 0.805 0.807 Unlevered/Asset Beta (Ba) 0.61 0.57 0.61 0.63 0.65 0.57 Weighted Average Beta(WB) 0.168 0.180 0.050 0.082 0.040 0.078 0.60 Transnet Beta Estimation Tax Debt Equity 28% 30% 70% 0.78 Total 5.31 NERSA used a cost of debt (Kd) of 10.36%, as provided by the applicant, and a corporate tax rate of 28%. This resulted in a post tax cost of debt of 7.46%. RfD Transnet Tariff Assessment 2012/13 Page 9 of 15
5.32 The CPI used in calculating the real cost of debt is a forecasted CPI for the next 12 months (5.75%). The CPI information was sourced from the Bureau of Economic Research (BER). The resultant post tax real cost of debt was 1.62%, thus yielding a WACC of 6.41%. 5.33 It must be noted that the sources of information prescribed by NERSA were used as data source for calculating the WACC. Clawback 5.34 Clawback on last year s approved tariff was not determined as the tariff was approved based on the GTA between Transnet and Sasol Gas on which take or pay volumes were used. Therefore this is the first time Transnet seeks approval of the tariff whereby the allowable revenues are determined using the RoR methodology. 6. ANALYSIS OF PROPOSED TARIFFS 6.1 Transnet is requesting the Energy Regulator to change its tariff period from the calendar year (01 January 2012-31 December 2012), to its financial year (01 April 2012-31 March 2013) so as to realign the tariff application to the Regulatory Financial Reporting Period which is aligned to the applicant s financial year. 6.2 Given that both periods cover 12 months, Transnet submits that it does not consider any differences arising from the tariff period changes to be material. 6.3 However, this creates a gap where there is no approved tariff during the period 01 January 2012 to 31 March 2012 since the 2011 approved tariff expired on 31 December 2011. 6.4 Transnet requested for approval of a two phased tariff structure where it will charge a volume based block tariff derived from the GTA formula during the transitional period and then apply the RoR determined tariff with effect from 01 April 2012. Analysis of the transitional GTA tariff for 1 January 2012 to 31 March 2012 6.5 Transnet submits that it will charge a tariff of R8.39 per gigajoule ( GJ ) for volumes up to 12m gigajoules ( MGJ ), R4.81/GJ for volumes greater than 12MGJ but less than 18MGJ and R4.24/GJ for volumes greater than 18MGJ, during the transitional period of 01 January 2012 to 31 March 2012. 6.6 The above tariff structure yields an annualised allowable revenue of R130.39m. This is a 6% increase from the allowable revenue of R122.78 approved in 2011. RfD Transnet Tariff Assessment 2012/13 Page 10 of 15
6.7 The table below gives a comparison of the GTA tariffs for the transitional period against the 2011 GTA approved tariff. GTA Tariffs Proposed 2012 versus Approved 2011 VOLUME 2012 TARIFF Q1 1 (Proposed) R 2011 TARIFF (Approved) R % INCREASE 0-12 m GJ/a 8.39 7.90 6% 12.1-18m GJ/a 4.81 4.53 6% >18m GJ/a 4.24 3.99 6% 6.8 NERSA s previous tariff decisions have been to approve the GTA tariff whenever it was lower than the RoR determined tariff and within reasonable limits. 6.9 The NERSA 2012/13 RoR determined reference tariff is R9.77/GJ linked to a throughput of 17 million gigajoules per annum. Therefore, the approval of the above tariff will be consistent with the Energy Regulator s previous Transnet tariff decisions for the tariff periods ending 31 December 2010 and 31 December 2011. Analysis of the RoR determined tariff for April 2012 to March 2013 6.10 Transnet applied for approval of an allowable revenue of R157.10m based on a focasted throughput of 17 million gigajoules. This is 28% higher than the allowable revenue of R122.78m approved in the last tariff period. 6.11 In the previous tariff period, Transnet applied using the GTA formula. This yielded an allowable revenue of R122.78m. NERSA s assessment using the RoR methodology for the same period yielded an allowable revenue of R185.82m. 6.12 In the 2010 tariff period, the GTA determined allowable revenue was R117.36m while the NERSA RoR tariff assessment yielded an allowable revenue of R140m. 6.13 The table below summarises the above scenario. Comparison of RoR and GTA Allowable Revenues : 2010-11 TARIFF PERIOD NERSA RoR ASSESSMENT R'm TRANSNET GTA DETERMINATION R'm VARIANCE 2010 140.00 117.36 16% 2011 185.82 122.78 33% 2012 166.12 130.39 21% 1 Tariff proposed for the transitional period of 01 January 2012 to 31 March 2012 RfD Transnet Tariff Assessment 2012/13 Page 11 of 15
6.14 The above table shows that the GTA formula has to date yielded significantly lower tariffs than the RoR methodology. Year-on-Year Tariff Assessment Comparison 6.15 The table below shows a year on year comparison of the NERSA RoR tariff assessment. Comparison of Year-on-Year NERSA RoR Assessment 2010-12 NERSA RoR TARIFF PERIOD ASSESSMENT Year R'm 2010 140.00 Year-on-Year Increase 2011 185.82 32% 2012 166.12-11% 6.16 It is important to note that the 2012 NERSA RoR assessment allowable revenue of R166.12m is 11% lower than the 2011 RoR assessment of R185.82m. This is partly attributable to the Regulatory Reporting Manual (RRM) implementation which led to a fair and enhanced allocation of costs between different business activities namely Piped-gas, petroleum pipelines and petroleum storage facilities. 6.17 In addition, the 2012 tariff application is based on an actual through-put of 16.999mGJ/annum as opposed to the 2011 tariff application which was based on a take-or-pay through-put of 18.2mGJ/annum. 6.18 Therefore, although the R157.10m allowable revenue Transnet is applying for is 28% higher than last year s GTA determined and approved allowable revenue of R122.78m, it is 18% lower than the 2011 NERSA RoR assessment of R185.82m and 6% lower than NERSA s 2012 RoR assessment of R166.12m. In light of these assessments, NERSA is able to approve this tariff. 7. CHANGE OF TARIFF PERIOD 7.1 Transnet requested the Energy Regulator to change its tariff period from the calendar year (01 January 2012-31 December 2012), to its financial year (01 April 2012-31 March 2013) so as to realign the tariff application to the Regulatory Financial Reporting period which is aligned to the applicant s financial year. 7.2 Transnet submitted that it did not consider any differences arising from the tariff period changes to be material, since both periods cover 12 months. RfD Transnet Tariff Assessment 2012/13 Page 12 of 15
8. THE DECISION MAKING PROCESS 8.1 The preliminary transmission tariff assessment for the Lilly pipeline was received on 27 January 2012 and was approved by NERSA on 22 March 2012, for the period 01 January 2012 to 31 March 2013. 8.2 A consultation document and a notice on the preliminary tariff assessment were published on the NERSA website and in the media. The closing date for submitting comments to the Energy Regulator was 20 April 2012. A public hearing on the draft tariff assessment was held on 04 May 2012. 8.3 The tariff was considered and approved by the Energy Regulator on 26 July 2012. The paragraphs below provide an analysis of the consultation comments. 9. PUBLIC HEARING 9.1 A public hearing was held on 04 May 2012 so as to solicit stakeholder comments. The following paragraphs discuss the main issues raised during the public hearing. Electricity expense 9.2 In its tariff application, Transnet had budgeted for a net increase of electricity expense of 25.1% in 2012/13, based on Eskom s focasted tariff increase of 25.9%. 9.3 However, due to the lower increase in the NERSA approved Eskom tariff for 2012 (16%), the Energy Regulator requested Transnet to restate its forecasted operating expenses using the latest electricity tariff increase. 9.4 The restatement has resulted in the decrease in Transnet s operating expenses from R59m to R58.9m. This restated expenses figure of R58.9m was used in the final tariff assessment to yield a reference tariff of R9.24/GJ. 9.5 The downward revision of the percentage year-to-year increases in electricity tariff only reduces total operating expenses by R0.1m. This indicates that non-recurring costs and decommissioning costs, which were previously not provided for in the last period, are a significant cost driver in the current period as opposed to the electricity cost. Gearing 9.6 The Energy Regulator requested Transnet to provide a split and allocation of the corporate gearing into different business units namely petroleum pipelines, petroleum storage facilities and piped-gas. RfD Transnet Tariff Assessment 2012/13 Page 13 of 15
9.7 The average corporate gearing is 40.8%. However, due to ring fencing, this translates to 44.3% for petroleum pipelines, 24.9% for piped-gas and 26.0% for petroleum storage facilities. 9.8 Since the gas gearing is 24.9%, a minimum gearing of 30% was used by both Transnet and NERSA in the tariff calculation as per the Tariff Guidelines. 10. STAKEHOLDER COMMENTS 10.1 Stakeholders were invited to provide written comments, on the draft tariff assessment to the Energy Regulator, which were considered before taking a final decision on the matter. Comments were received from 23 March 2012 to 20 April 2012 and are discussed below. Change in Tariff Methodology from GTA to RoR 10.2 Transnet applied for the GTA tariff in both 2010 and 2011 and that the commercially agreed tariff was approved by NERSA in both periods. Therefore it is not clear how conditions could have changed over a period of a year to justify a departure from the previous GTA tariff. Response 10.3 Section 3.1 of the Tariff Guidelines states that The Energy Regulator will request licensees to submit a tariff application based on their preferred methodology that may be chosen from the approved menu of tariff methodologies. The RoR is one of the approved tariff methodologies. 10.4 In the year under review, Transnet applied using the RoR and as per the Tariff Guidelines, NERSA used the same tariff methodology to assess the tariff application. 10.5 In addition, although NERSA approved the 2010 and 2011 GTA tariffs, the assessments were done using the RoR so as to test for their reasonableness. During both of those assessment, NERSA determined that the GTA does not allow Transnet to recover its fully efficiently incurred costs and make a profit commensurate with risk as required by the Regulations. In addition, the GTA seems not to have allowed Transnet to recover, over time, through tariffs the land rehabilitation costs in order to provide the financial security required by the Regulations. Operating expenses 10.6 It was asserted that a 21% increase in Transnet s operating expenses without extraordinary expense items is unexpected from a prudent operator. RfD Transnet Tariff Assessment 2012/13 Page 14 of 15
Response 10.7 Transnet has revised some of its costs in line with the latest Eskom approved electricity tariff decrease from 25.9% to 16%. Decommissioning costs which were not recognised in the previous period have contributed to the increase in expenses. Other non-recurring costs such as professional fees and legal fees emanating from the GTA renegotiation increased the 2012 forecasts. However with the application of the RoR, it will be possible to apply clawback should the estimated expenses turn out to be lower than the actual expenses for the tariff period under review. 10.8 In addition, all the other cost estimates were 2011 actual operating expenses escalated using the CPI to get the 2012 forecasts, except where other factors were at play such as electricity costs which increased by 16% and indirect costs which were allocated using the cost drivers from the Cost Allocation Manual approved by NERSA. Proxy companies used in beta calculation 10.9 There was an enquiry into the reasons why the set of proxy companies used by NERSA in its assessment was different from Transnet in its tariff application. Response 10.10 NERSA updated and refined the list of proxy companies during the 2012 tariff period, in line with section 4.4.5 of the Tariff Guidelines, so as to capture the piped-gas pipelines companies with operational risks closely related to a gas transmission company in South Africa, in this case Transnet. Therefore the companies which NERSA used were purely piped-gas pipelines companies as opposed to combined petroleum pipeline companies used by Transnet. 11. CONCLUSION 11.1 In light of the reasons highlighted above, the Energy Regulator decided to approve the gas transmission tariff for Transnet Pipelines Lilly pipeline from Secunda to Durban South for the period 01 January 2012 to 31 March 20113 as follows: 11.1.1 a tariff of R8.39 per gigajoule ( GJ ) for volumes up to 12m gigajoules ( MGJ ), R4.81/GJ for volumes greater than 12MGJ but less than 18MGJ and R4.24/GJ for volumes greater than 18MGJ, for the period 01 January 2012 to 31 March 2012; 11.1.2 a tariff of R9.24/GJ for the period 01 April 2012 to 31 March 2013; and 11.1.3 discounts on the above tariffs are permissible and the tariffs will be applicable until new tariffs are approved. RfD Transnet Tariff Assessment 2012/13 Page 15 of 15