AFRICAN UTILITY WEEK Cape Town – 8 May 2006

Contents The legislative context for energy regulation –Relevant Acts –Regulatory Functions –Regulations Vision for NERSA –Regulatory Principles –Regulatory Challenges Vision for the energy industries –Electricity industry; –Piped-gas industry; –Petroleum Pipelines Regional and continental co-operation Conclusion

Legislative Context National Energy Regulator Act, Act No 40 of 2004; –Independent Regulator: 4 full time and 5 part time members –Responsible for the regulation of three energy industries: electricity; piped gas; petroleum pipelines –Decisions based on reasons, facts and evidence –Public meetings –Significant enforcement powers Industry legislation –Electricity Act, 1987 (Act No. 41 of 1987) To be replaced by the Electricity Regulation Act; –Gas Act, 2001 (Act No. 48 of 2001); –Petroleum Pipelines Act, 2003 (Act No. 60 of 2003); Money Bills –Gas Regulator Levies Act, 2002 (Act No. 75 of 2002); and –Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004).

Functions Licensing: Construction, operations; trading; Setting of tariffs and price structures; Setting of conditions of supply and standards; Monitoring compliance with licence conditions –separate accounting provisions; –third party access and interconnection provisions; –Non-discrimination; –Safety, environment, health and security standards Handling of non-compliance –setting penalties and fines for non-compliance;

Functions (2) Investigate complaints; Mediate or arbitrate in disputes; Gather and store industry information; Promote BEE, competition and improved efficiency of the energy industry; Consult with government regarding industry development; and Expropriate land as necessary to meet the objectives of the relevant legislation.

Electricity Regulations Current Electricity Regulations is aged; The Electricity Regulation Bill provides for regulations on: –activities to be licensed or registered ; –the conditions for issuing a licence; –norms and standards relating to quality of supply; –new generation capacity; primary energy sources and energy mix; –private sector participation in new generation activities; –standards relating to health, safety and environment; – the prohibition of certain practices: cross-ownership or vertical and horizontal integration.

Energy Regulations (2) Gas Regulations and Petroleum Pipeline Regulations are in the development and consultation phase; Rules for licensing for gas and petroleum pipelines have been gazetted Administrative rules being developed

NERSA Vision NERSA strives to regulate the South African electricity, piped-gas and petroleum pipelines industries by ensuring that the most efficient and effective industries are in place to exceed the requirements of existing and future energy customers. This is encapsulated in its vision statement: “To be a world-class leader in energy regulation”

Regulatory Principles Regulatory principles, which guides the Regulator’s conduct and service delivery: Rule of Law: Law applies to everybody and provides a clear framework for everybody to operate. Review and appeal by high court Transparency: reason for decisions and consultative processes; Neutrality: neutral to all market players without favouring one or other group (non-discrimination) Consistency: Explained decisions enabling stakeholders to take informed decisions – no surprises; predictability Independence: Independence from stakeholders and politicians; within legal framework and published Government policy) Accountability: Internal accountability – PFMA. Regulator takes responsibility for actions and decisions. In addition, NERSA binds itself to carry out its business efficiently, economically and effectively, as required by legislation.

Regulatory Challenges Electricity industry Regulating the current electricity industry in a changing environment. Ensuring that NERSA is at the forefront of developments and ready to regulate the reformed electricity industry. Advising on the appropriate legislation to regulate the future electricity industry. Piped Gas and Petroleum Pipelines Industries Implementing legislation and advising on implementing the Regulations. Administration and monitoring of the Sasol Gas Regulatory Agreement. Licensing existing and new activities Ensuring access to the petroleum pipeline infrastructure. Developing and implementing appropriate pricing and tariff approaches.

Cross Cutting Regulatory Challenges Facilitating investment in the energy sector Promoting Broad Based Black Empowerment (BEE) Promoting competition in the energy sector Dealing with overlapping jurisdictions with other government departments and other Regulators (safety, environmental, health and security) Ensuring that NERSA’s activities are in support of government’s socio- economic development programmes. Developing regulatory rules and practices for efficient and effective regulation of the energy sector –resolution of disputes, public hearings, enquiries, tribunals, public participation, regulatory transparency; –submission of information by regulated entities, –regulatory accounts specifications and –consumer advocacy and protection.

Vision for electricity New generation capacity requirements to be met by Eskom (70%) and Private sector (30%) Eskom to be the purchaser of electricity produced by the private sector (IPPs) Regional trade in electricity – import and export licences, trading licences Consolidation of electricity distribution into REDs Promotion of Renewable Energy / Energy Efficiency and DSM based on targets Local trading and customer choice in the longer term

Electricity activities Eskom Multi-year price determination monitoring and review; Multi-year economic regulation for Metros and municipal distributors: development and implementation. Mechanisms to rectify the distribution maintenance backlog and prevent future backlogs: implementation. Distribution License renewal or extension based on compliance 3rd National Integrated Resource Plan development Regulatory Accounts: development and implementation. Regulatory framework for renewable energy generation. Industry risk assessment Industry codes and standards

Vision for Piped-gas Augment supplies of natural gas currently imported from Mozambique; Develop gas infrastructure based on LNG imports; Facilitate domestic supplies of gas e.g. natural gas, Sasol's methane rich gas, coal bed methane Expand gas infrastructure, Lilley Pipeline Facilitate regional trade in gas, including coal bed methane Facilitate investment and competition

Vision for Petroleum pipelines Right sizing planned petroleum pipelines infrastructure Optimum use of existing infrastructure e.g. conveying crude and products in the same line Facilitate access to petroleum pipelines infrastructure Facilitate investment and competition

Regional and Continental Regulation Regulatory Associations has been established in support of NEPAD –RERA: Regional Electricity Regulatory Association –AFUR: African Forum for Utility Regulation (All network industries) Independent regulators is required –overcome the reluctance to invest in infrastructure in the continent; –Harmonisation of regulatory principles and market structures for integration of infrastructure; –Sharing of expertise, experience and information; –Promote economic efficiency.

NEPAD position on competition NEPAD envisages effective power pooling on a regional or continental basis. There are many challenges –Harmonising the principles for participation between countries; –Ensuring that utilities are sufficiently well managed: that revenue streams are maximised and losses are minimised. –The complexity of large scale cross border transactions and –Competition for scarce financial resources. NEPAD foresees that additional efforts and resources must be made available to allow the utility companies to change their charging structures, operating policies and business ethos. –This does not necessarily imply privatisation, but it implies reform to suit the local market place. NEPAD also supports agreed key performance indicators, which are benchmarked across regional electricity companies. Reform measures must also include provision for the development of strong and independent regulators for the sector.

AFUR best practice principles to address investor concerns The scope of economic regulation must give room to self regulation through competition; This would require reform of the electricity industry to include –elements of unbundling; –a neutral entity to co-ordinate the matching of generation and demand; –a neutral body to institute the technical rules for access to transmission; –freedom for buyers and sellers to transact with each other within these rules; and –a balanced and independent regulatory regime. Countries in a regional market must organise their electricity industries such that: –The transmission function stands on its own; –Transmission is managed according to regionally accepted rules.

The AFUR framework for utility regulation focuses on a set of high level core regulatory principles Minimum regulation Transparent decision making Independent from government and industry Accountable to government, investors and end users Non-discrimination, recognising public interest and policy objectives Investor protection against expropriation Promotion of competition – reducing barriers to entry, limit anti competitive behaviour, public-private partnerships

Conclusion An excellent South African legal framework for energy regulation has been established; Finalisation of the South African electricity industry legislation is imminent; Government policies inform the vision for the Regulator and for the Regulated Industries; Regional and Continental co-operation supports regional trade and investment.