1 National Energy Regulator (NERSA) Annual Report 2006/2007

2 CONTENT Structure of the Energy Regulator and the secretariat Vision, Mission, Values and Regulatory Principles Strategic Objectives (2006/07) Performance Against Objectives Learning and Growth Internal Business Processes Customer Financial Conclusion

3 STRUCTURE OF THE ENERGY REGULATOR AND SECRETARIAT/STAFF 9 Regulator Members –5 part-time Members –4 full-time Members Appointed by Minister of Minerals and Energy Chairperson & Deputy Chairperson part-time Full-time Regulator Members: –Chief Executive Officer –3 Regulator Members primarily responsible for each of electricity, piped-gas and petroleum pipelines regulation 4 Divisions each with a number of departments –Headed by Executive Managers 5 Specialised Support Units –Headed by Senior Managers Executive Managers and Senior Managers report directly to CEO Total staff complement = 143

4 VISION “To be a world-class leader in energy regulation” MISSION “To regulate the energy industry in accordance with government laws and policies, standards and international best practices in support of sustainable development”

5 VALUES AND REGULATORY PRINCIPLES VALUESREGULATORY PRINCIPLES PassionRule of Law Spirit of PartnershipTransparency ExcellenceNeutrality InnovationPredictability and Consistency IntegrityIndependence Accountability Professionalism

6 STRATEGIC OBJECTIVES (2006/07) To effectively and efficiently regulate the current electricity industry To develop an appropriate regulatory framework for the reforming electricity industry To promote and advise on appropriate legislation to regulate the future electricity industry To establish appropriate processes, procedures and systems to implement the Gas Act To establish appropriate processes, procedures and systems to implement the Petroleum Pipelines Act To effectively and efficiently monitor and administer the Sasol Regulatory Agreement To licence existing and new activities in the piped-gas and petroleum pipeline industries

7 STRATEGIC OBJECTIVES (2006/07 ) (Cont) To facilitate access to the petroleum pipeline infrastructure To develop and implement appropriate pricing and tariff approaches for the piped-gas and petroleum pipeline industries To promote investment in the energy sector To promote BEE and competition in the energy sector and to develop memoranda of understanding with government departments and other regulatory authorities with overlapping/concurrent jurisdiction To effectively contribute to the socio-economic development programmes of government. To develop regulatory rules and practices for efficient and effective regulation of the energy sector

8 PERFORMANCE AGAINST OBJECTIVES Of the 404 planned activities, 76 (19%) were removed by the Energy Regulator before the end of the 2006/07 Financial Year (mainly during its mid-term review of the 2006/07 Business Plan and Budget held on 30 November 2006) Of the remaining 328 activities, 78% were executed as planned Key factors impacting on execution: –External factors such as the EDI/ESI restructuring process and the late publication of the Regulations –High staff turnover –Late approval of the budget for regulating the piped-gas and petroleum pipeline industries –Re-prioritisation of activities

9 LEARNING AND GROWTH Highlights –Approved revised NERSA structure –Regulator Members attended the World Forum on Energy Regulation III –Regulator Members visited FERC; New York State Public Utility Commission; and Canadian National Energy Board –Approved Learnership Policy Lowlights –Resignation of 50 employees Objectives –Attracting, developing and retaining the requisite skills and competencies

10 LEARNING AND GROWTH (Cont.) MeasureTargetInitiative Development of a NERSA training and development plan based on staff members’ Personal Development Plans Conducting skills audit and development of a competency framework Approval of the Learnership policy To develop and have highly skilled staff members and retain them Fulfillment of the regulatory mandate of NERSA with the required skills Provision of local and international training and development for staff members Commencement of the skills audit and development of a competency framework Development of courses in preparation for the implementation of the learnership policy

11 LEARNING AND GROWTH (Staff Analysis – Race) LevelAfricanColouredAsianWhiteTotal Top Management 2 (50%) 2 (50%) 4 Senior Management 4 (80%) 1 (20%) 5 Professional & Middle Management 24 (77%) 7 (23%) 31 Skilled and Technical 44 (88%) 1 (2%) 1 (2%) 4 (8%) 50 Semi-skilled / Unskilled 19 (90%) 2 (10%) 21 Total93 (84%) 1 (1%) 2 (2%) 15 (13%) 111

12 LEARNING AND GROWTH (Staff Analysis – Gender) LevelMaleFemaleTotal Top Management3 (75%) 1 (25%) 4 Senior Management4 (80%) 1 (20%) 5 Professional and Middle Management 16 (52%) 15 (48%) 31 Skilled and Technical28 (56%) 22 (44%) 50 Semi-skilled / Unskilled4 (19%) 17 (81%) 21 Total55 (50%) 56 (50%) 111

13 INTERNAL BUSINESS PROCESSES (Cont.) MeasureTargetInitiative To ensure licensees comply with regulatory requirements via effective and efficient setting, monitoring and enforcement of license requirements To quantify and put mechanisms in place to minimise the huge maintenance backlog Completed Independent Technical Audits on 11 of the largest electricity distributors in South Africa To develop and implement methodologies for determination of required revenues and tariff structures that take consideration of changes in the industry and customer needs Establish Regulatory Accounts with emphasis on the separation between regulated and unregulated businesses for the energy industry in line with international best practices Assessment of the effectiveness of the Energy Regulator and its Subcommittees To provide consistency, predictability and stability Enable an efficient collection of data sources so that the Energy Regulator makes informed decisions Ensure that information collection is common to all regulated businesses Avoid regulatory burden on all affected license holders First Consultation paper on the MYPD Development of a Regulatory Accounts Manual that addresses common administrative procedures and instructions Development of industry specific Regulatory Accounts Manuals for electricity, piped-gas and petroleum pipelines

14 INTERNAL BUSINESS PROCESSES (Cont.) MeasureTargetInitiative Number of rules regarding the regulation of the piped-gas and petroleum pipeline industries developed To develop rules relating to the regulation of the piped-gas and petroleum pipeline industries Development of two rules relating to licence applications and inspections for both hydrocarbon industries Number of piped-gas and petroleum pipeline licences issued To develop a licensing framework for piped-gas and petroleum pipelines 9 piped-gas licences were issued 44 petroleum pipeline licences were issued Compliance measure for all the licence conditions issued To develop a compliance mechanism for petroleum storage, loading and pipelines Completion of a draft compliance framework Analyse pricing data from 2004 up to 2006 To determine compliance with the pricing provisions of the Mozambique Pipeline Agreement Draft report on compliance with pricing provisions of the Mozambique Pipeline Agreement To effectively contribute to the socio- economic development programmes of government : ASGISA, Universal access, Development Nodes Identify areas of contribution Target regulation that is pro- developments through developmental tariff Target regulation that is pro-poor through lifeline tariffs and free basic electricity tariff Identify areas to direct regulatory interventions by supporting ASGISA; DME programmes and policies; Universal access initiatives; and adopt regulatory processes that complement government programmes

15 INTERNAL BUSINESS PROCESSES (Cont.) MeasureTargetInitiative Development of procedures and processes in support of the Energy Regulator Assessment of the effectiveness of the Energy Regulator and its Subcommittees Development of financial planning and management through policies, procedures, systems and processes Development of human resources policies, policies, procedures, systems and processes Development collection of data from regulated entities in line with NERSA policies, procedures, systems and processes Full compliance by internal staff members and the Energy Regulator Compliance with the National Energy Regulator Act, PFMA and Treasury Regulations requirements and Good Corporate Governance Practices Compliance with DME requirements Implementation of budget and monitoring procedures Implementation of procurement monitoring procedures Review and implementation of recruitment, leave and payroll policies, procedures, systems and processes Procurement for the development of ICT and Disaster Recovery and Business Continuity plans Review of Lincensing Information System for collection of data within the energy industry

16 CUSTOMER Highlights –NERSA started regulating electricity on 17 July 2006 –Submission to the PPC on the viability of establishing the National RED –Commented on draft Regulations of the Gas Act and Petroleum Pipelines Act –First NERSA Annual Report submitted to the Minister of Minerals and Energy –Chairperson and CEO attended the Minister’s SOE’s Lekgotla Objectives –To establish effective and efficient pricing mechanisms that balance the interests of customers, suppliers and the sustainability of the energy industry –To develop, improve and sustain the good image of NERSA

17 CUSTOMER (Cont.) MeasureTargetInitiative To develop and implement methodologies for determination of required revenues and tariff structures that take consideration of changes in the industry and customer needs Development of a draft tariff methodology for hydrocarbon industries Consistency in the setting of tariffs amongst municipalities (Electricity) Consultation paper developed and work shopped with stakeholders (Hydrocarbons) Through a consultative process, provided a guideline percentage increase of 5.9% (Electricity) Public awareness campaigns Communicate socio-economic benefits of regulatory initiatives Media relation’s programme Dialogue with key stakeholders Publish reports on the performance of NERSA and licensees Internal communication programme Sound relationship with all stakeholders in the regulatory environment Facilitate information sharing and networking Internal staff members and the Energy Regulator Stakeholders and Customers Compliance with the PFMA requirements Stakeholder engagement Customer relations, Customer Education and Customer Communication Forums Complaints resolution International Coordination and Partnerships Resale of electricity

18 INTERNAL BUSINESS PROCESSES Highlights –Finalised and submitted the Western Cape Power Outages Report –Approved the MethCap licence application for a co-generation plant –First Consultation paper on the MYPD –Developed rules regarding the processing of hydrocarbon licence applications –Awarded 9 piped-gas licences –Awarded 44 petroleum pipeline licences –Energy Regulator adopted the Operations Model –Completed and implemented the hydrocarbons Licence Application System Lowlights –Municipal tariff applications not finalised as envisaged –Delays in awarding licences for piped-gas distribution and trading

19 FINANCIAL Highlights –Published proposed levies for 2007/08 for piped-gas and petroleum pipelines –Piped-gas and petroleum pipeline levies for 2006/07 approved –Received unqualified Audit Report from AG –Approved revised ring-fencing methodology –Improved budget management and reporting processes Lowlights –Delayed approval of the budgets for piped-gas and petroleum pipelines industries regulation –Challenges relating to collection of petroleum pipelines levies –Under spending of the NERSA budget due to cash-flow concerns (Surplus of R81.2m) –Defrauding of NERSA through the payroll

20 FINANCIAL (Budget Variance Analysis (Combined)) BudgetActual Income LeviesR millionR million Other Income-R 0.3 million Finance Income-R 2.0 million Total IncomeR millionR million Expenditure Actual as a % of total operating expenditure Employee CostsR 56.0 millionR 41 million47,5% Other Operating CostsR 49 millionR 29.3 million33,9% Fees for ServicesR 27.4 millionR 10.0 million11,6% Regulator MembersR 5.6 millionR 6.1 million7,1% Total Operating ExpenditureR 138 millionR 86.4 million Actual as a % of total expenditure CapexR 6.5 millionR 4.4 million4,8% Total ExpenditureR millionR 90.8 million

21 FINANCIAL (Budget Variance Analysis per industry) ElectricityPiped-GasPetroleum Pipeline BudgetActualBudgetActualBudgetActual Income LeviesR 86.2 million R 85.8 millionR 39.3 million R 39.2 millionR 37.9 million R 40.3 million Other Income/Finance Income -R 2 million-R 0.2 million-R 0.1 million Recoupment from Piped-Gas and Petroleum Pipeline R21.1 million ---- Expenditure Recoupment to Electricity --R 10.5 million Operating Expenditure R 89.1 million R 54.8 millionR 25.1 million R 14.8 millionR23.8 million R16.8 million Surplus from Operations R 18.2 million R 54.1 million R 3.7 million R 14.1 million R 3.6 million R13.1 million

22 FINANCIAL (Cont.) Balance Sheet Items: –Land and building has a carrying value of R21.7m –Capital expenditure: Computer hardware & accessories (16%); Office equipment(40%); Computer software and licenses (19%); and Building (35%) –Total assets have increased from R49,2m to R134,3m –The main increase in assets is reflected in accounts receivable and cash and cash equivalents: Accounts receivable increased by R41,8m Cash and cash equivalents increased to R63,2m from R22,7m commitments for operating expenditure R20,5m –(Main reasons: Petroleum pipeline levies and curtailment of expenditure

23 CONCLUSION NERSA is now successfully regulating the three industries having taken over electricity regulation from NER during the year under review Staff levels have stabilised although there are still challenges of recruiting and retaining specialised skills and the disabled The Energy Regulator is consolidating the development of regulatory rules, methodologies and procedures in the regulation of the three industries NERSA received an unqualified audit opinion from the Auditor- General and weaknesses are being addressed NERSA is establishing itself as an independent and credible Regulator among stakeholders through decisions that contribute to the orderly development of the regulated industries Collection of levies in the new industries being levied is improving and spending is stabilising

24 THANK YOU