Keeping the lid on

The National Energy Regulator of South Africa (NERSA) has raised Transnet’s pipeline tariffs by a whopping 60%, which could have potentially disastrous effects on the economy and jobs. GAVIN MYERS looks at the reasons and objections.

NERSA (National Energy Regulator of South Africa) announced on 31 March that as of 1 April, updated tariffs for Transnet’s petroleum pipeline will allow for an increase of 59,99% in allowable revenue compared to the 2010/2011 tariff period. This represents an increase in revenue from R1 223,63 million to R1 957,72 million. However, opponents are saying the increase will bring more harm to the economy with a cost of up to R1 billion annually, in addition to a loss of 40 000 jobs and a potential petrol price hike of 6,4 cents/litre.

Transnet operates South Africa’s petroleum and gas pipelines, along with its rail network and ports. It is a public company (wholly owned by the state) registered and incorporated as such, in terms of the company laws of the Republic of South Africa, pursuant to the Legal Succession to the South African Transport Services Act No 13 of 1989. Transnet operates about 2 775 km of pipelines that convey refined petroleum products, crude oil and gas inland, as well as a 30-million litre storage facility for liquid petroleum products at Tarlton, near Krugersdorp.

NERSA does not simply hand out tariff increases. In line with the Petroleum Pipelines Act No 60 of 2003, a long, intricate decision-making process takes place beforehand, where various economic and business assessments are made. The Act requires NERSA to set tariffs that are “based on a systematic methodology applicable on a consistent and comparable basis”. Stakeholders (including the public) are also asked to make comment, before any increase is granted. Guidelines for what the monies may be used for are also set, and NERSA then publishes a full report detailing the figures and findings.

For the 2011/2012 year, Transnet’s original application was for a 69% increase, which it later revised to 128%. Written comments on the application were received from BPSA, Sasol, Engen, Shell, Total and Petroline. Taking these into account, the Draft Tariff Determination on Transnet’s application was published on 28 January 2011, and comment on this was received from Transnet, BPSA, Sasol Oil and Petroline. A public hearing on the tariff application was then held on 10 March 2011, where the same four companies presented their views.

Some matters raised and addressed at that stage dealt with the life expectancy of the various pipelines; calculations, data and methodologies used by NERSA; alternative strategies to smooth out the short-term peaking of tariffs; and barriers to entry for new entrants, among many others.

However, since NERSA has set the increase at 59,99%, BPSA has strongly opposed the increase raising numerous other issues, key of which is the increased cost to the economy and the loss of jobs.

“Our analysis shows that these tariffs exceed the global average by over 400%. At these high input cost levels, business viability is at stake and will inevitably lead to major job losses in Gauteng,” says BPSA CEO Sipho Maseko.

According to NERSA, “the size of this increase is attributed largely to the fact that a significant part of Transnet’s New Multi-Product Pipeline (NMPP) will commence operations during 2011/2012 and have therefore been included in the regulatory asset base. NERSA argues that the increase in the petrol price arising from higher tariffs is only a small fraction of the GDP of the inland provinces, which suggests that they view the magnitude of the increase to be insignificant. However, their own figures show 40 000 job losses, which is very significant,” continues Maseko.

The approved increase in allowable revenue would have been 92,38% had it not been reduced by clawback adjustments of -32,39% from previous years. This was largely made up by the differences in the value of Transnet’s starting Regulatory Asset Base for the 2008/2009 and 2009/2010 financial years, and secondly by Transnet’s delay from June 2010 to January 2011 in bringing certain new pipelines (which form part of the NMPP) into operation.

According to Maseko, the decision favours inland refiners, as the pipeline tariff increase will raise the cost of doing business in the inland market relative to the coastal markets.

NERSA says that, for the first time, it has been able to set tariffs on a rational and systematic basis for Transnet’s pipeline system. Consequently, it has not been possible to do so in a way that affects all customers equally.

BP has urged NERSA to review the implications of the tariffs, given its comparison with global benchmarks and the consequent implications for the competitiveness of the regional and South African economies. NERSA is of the view it has opted for an approach that economic modelling found to have the least adverse economic impact.