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2 Regulating LPG retail prices Portfolio Committee on Minerals and Energy 12 March 2008 Ethel Teljeur, Regulator Member for Piped Gas, NERSA

3 Outline Background NERSA and role of Gas Regulator LPG market in SA Objectives of LPG retail price regulation Observations regarding LPG retail price regulation How NERSA can assist NERSA, as a ‘clustered’ energy regulator – ideally positioned for implementation

4 Natural gas regulation Background NERSA –Regulator in electricity, petroleum pipelines and piped-gas industries established by NERSA Act 2004 –Implements 3 sector-specific Acts Functions of ‘Gas Regulator’ –LPG under Gas Act when transported by pipeline – AND in gaseous form. –LPG under Petroleum Pipelines Act when transported by pipeline AND in liquid form –LP Gas in gas cylinders not regulated by NERSA. Minister’s budget speech 30 May 2007: LPG retail price regulation (in addition to existing regulation of ex-factory prices)

5 All hydrocarbon gases transported by pipeline –Natural gas –syngas –CBM –LNG –LPG etc. Gas activities covered: –Transmission –storage –distribution and –trading of piped gas. Excludes production and gas reticulation Scope of piped-gas regulation

6 Upstream Transmission Storage Liq / Regas Distribution Reticulation PASA / DME MunicsNERSA Max Gas prices Scope piped-gas regulation

7 Promoting competition Stimulating investment Information asymmetries Paucity of natural gas finds Special dispensation for up to 10 years E&P regulated by other regulator NG perceived as unable to compete with electricity Regulated entity resources and information Gas regulation challenges – chicken or egg?

8 LPG vs Natural Gas LPG advantages –Clean burning and effective source of space and water heating and cooking source Important to note that all the advantages of LPG apply equally to Natural Gas –Exception is the portability of gas cylinders; –Although this is also an advantage to natural gas, especially when piped or stored / transported as compressed natural gas.

9 Preliminary observations on LPG retail price regulation LPG is expensive Domestically –LPG is in short supply (2006/7); and –Import and storage facilities (infrastructure) are in very short supply; High cost of cylinders And: lack of effective competition at retail level

10 LPG retail price regulation Elsewhere LPG is routinely used as a fuel by the poor, but –LPG is more expensive in SA than elsewhere; –Prices tend to be ‘sticky’ downwards; and –Drivers of LPG prices (oil/petroleum price and exchange rate) – likely to be outside of scope of price regulation Hence, World Bank (PPIAF) recommendation that industrial users should use natural gas and the LPG displaced by this could be used by the poor who are without alternative energy sources

11 LPG retail price regulation - ctd Economic regulation aimed at mimicking competitive outcomes – particularly in ‘natural monopolies’ important to match solutions to the actual problem(s) identified: –1998 WPEP: “many people cannot afford to use electricity optimally, even if they have access to it. Such households have to rely on less convenient and often unhealthy fuels, such as paraffin, candles, coal, liquefied petroleum gas, batteries and fuelwood.” –Budget speech 2007 “the poor have limited access to energy, even when electrified, using paraffin and low grade coal”

12 LPG retail price regulation - ctd If regulation aimed at growing domestic usage: If regulation aimed at curbing ‘excessive prices’: If aimed at ameliorating the electricity crisis: not a pro-poor energy source, especially if displaces electricity recognise enforcement challenges (no of outlets); and methodological problems (Import parity/export parity/cost plus?) preferred energy alternative: piped natural gas (cheaper, safer, more environmentally friendly, less onerous infrastructure investment), especially for industrial users.

13 If longer term objective (as in pilot projects Tshwane and Tembisile) is –to create a market for natural gas by supplying LPG temporarily…. Then it would provide the catalyst for the provision of more efficient and cleaner energy –And crowd in investment in gas exploration to supply this new market LPG retail price regulation - ctd

14 LPG retail price regulation LPG has a role to play in serving energy needs; –LPG can cover the main domestic energy uses of cooking, water and space heating and lighting; –LPG would lower the incidence fires caused by use of paraffin; LPG prices are currently regulated by the Minister at the factory gate, however, there is scope to reduce the markups further downstream, i.e. at retail level As piped LPG is regulated by NERSA, it would require a simple amendment to mandate NERSA to regulate the critical retail part of the value chain

15 LPG retail price regulation Important to separate policy and implementation –What vs how and by whom For implementation, NERSA has the advantages of –transparency, –impartiality, –accountability and –enforcement structure and ability to impose fines of up to R 2 mln per day.

16 Role for NERSA ? Parliament prerogative – no turf war Areas where NERSA can assist - –Input to legislative amendments, regulations, pricing methodologies –Harness the expertise gained in 3 industries, some over 10 years. NERSA, as a ‘clustered’ energy regulator – ideally positioned for implementation