Transcript Sasol Foundation

South African Economic Regulators Conference
Maurice Radebe
Overview
Economic Regulation in the Energy Sector
Areas to be highlighted
Regulatory certainty
Regulatory consistency and congruence
Unintended consequences
Regulatory independence
Impacts of non-economic regulation
National Environmental Management Air Quality Act
Clean Fuels 2
Climate Change Policy
Case Study – Alberta’s Regulatory Enhancement Project
Recommendations and conclusions
Economic Regulation
NDP identified three major challenges in South Africa – poverty,
unemployment and inequality
Policy and legislation are tools to address these challenges
Government responsibility to balance needs of business, civil
society and mechanisms to address the challenges
Correct and appropriate use of economic regulation can assist
progressing society with developmental objectives
Strategic nature of energy industry means that regulation is
essential
However, must support sustainable development
McKinsey Global Survey – increasing role of
regulators
Executives are becoming more aware that governments and regulators
will play an increasing role in how companies are able to create value.
The energy industry is currently one of the most aware of this impact
and is doing the most to influence outcomes.
It will continue to engage Government and Civil Society as economic
growth generates demand.
This will translate into investment
opportunities leading to job
creation, shareholder reward and
increased revenue flows to the
fiscus.
Failure to create an attractive
economic environment will have
an almost instantaneous
inversion of the above outcome.
2012
2011
The energy sector
Current direct economic regulation in the energy sector required to
ensure security of affordable energy for all;
transform the industry
increase competition.
The electricity and liquid fuels industry is well established
substantial investments, made by a few large players
both have run out of capacity as a result of deferred investment
decisions.
The liquid fuels refining industry is impacted by a confluence of
factors:
global over-capacity
poor future margin outlook.
new refining capacity will struggle to secure long-term crude oil supply as
crude-exporting nations aim to increase domestic refinery capacity
The energy sector
The gas industry
largely limited by the availability of feedstock
produced by refineries (LPG, MRG),
natural gas utilized by PetroSA at its GTL facility, or
imported from Mozambique.
The biofuels industry is fledgling and impacted by viability and
regulatory constraints.
Economic regulation generally takes the form of:
absolute or maximum prices of products (petroleum, gas and
electricity), or;
service tariffs
pipeline, storage and transmission Licensing
construction, operating.
The energy sector regulation
License conditions regulate the relationships
incorporated in regulation
or made license-specific
Reasonably robust economic regulatory framework in place
Regulation is a learning curve for both regulator and regulated
Good regulation should produce
Regulatory certainty
Regulatory consistency and congruency
This may extend to the implications for compliance.
Two separate pieces of regulation from two different Government
departments may demand capital investment for compliance in the
same timeframe, as an example.
Practicality and the prevention of unintended consequences
Regulatory independence - the integrity of the regulatory process is
essential.
The Investigating Team has concluded that the fuel shortage resulted
from a convergence of a number of events. Of greater importance
and concern, however is the fact that these events exposed underlying
structural and regulatory weaknesses in the sector.
Report of the Moerane Investigating Team to the Minister of Minerals and Energy on
the December 2005 Fuel Shortages, www.energy.gov.za
Regulatory certainty
Occurs when policy formation, legislation and regulation are in
sequence and progress quickly.
Example of lack of certainty – Strategic fuel Stock
The Petroleum Products Amendment Act and the Energy Act
empower the Minister to determine strategic stock levels
Draft regulations governing the management of the stock were
published for comment without
policy clarity around ownership,
reward for investment in stock and infrastructure and
conditions for release.
A result of lack of certainty is that security of supply, diversification
of supply sources and related infrastructure are not addressed.
Due to lack of certainty, investors, public or private, are potentially
unable to secure funding
Regulatory consistency and congruency
Economic evaluation of new investments (retail service stations)
protect existing operations or
promote transformation imperatives.
sets competition for the market
adjudicates on spare capacity and third party access to storage
facilities.
The same activity may be regulated by different Regulators with
substantially different financial outcomes.
Secondary Storage tariff used in the build-up of the regulated retail
petrol price.
Regulatory consistency and congruency
Regulation necessitates the collection of substantial amounts of
data (regulatory accounts), some of which may be duplicated.
may not be available in the required format
requires substantial changes or addition to enterprise computer
systems.
The cost and complexity of regulatory compliance
petroleum storage and loading facilities, licensed by NERSA for 25
years, may lose their security of tenure in terms of National Ports
Authority legislation and regulation.
Unintended Consequences
Problems very often arise from equally important conflicting
imperatives.
May be as a result of misaligned priorities between or within
government departments.
The promotion of LPG as a fuel for low income households is an
example. The regulated price does not support the operation of the
domestic LPG supply chain
Unintended consequences can be prevented ,through clear
overarching policy guidelines
Implemented through balanced robust legislation and regulation
National Planning Commission is an important first step in policy
alignment.
Specific impacts of additional regulation
Existing and pending legislation, regulation and policy formation
could significantly impact the ability of industry to sustain and grow
operations in South Africa:
National Environmental Management: Air Quality Act (NEMAQA)
Clean Fuels 2 (CF2)
Carbon tax and climate change
The National Environmental Management: Air Quality
Act (NEMAQA) (and associated regulations)
Key concerns regarding the Act are:
Clarity is required regarding future amendments
the Act makes provision for 5-year revisions of standards and local
government can at any time introduce even stricter standards.
South African legislation is more stringent than other benchmark
regulations in developed countries such as the USA and European
countries.
Further clarity is required for exemption mechanisms for
grandfathering of old plants on new plant standards.
Alignment is needed with other legislative requirements such as CF2,
and the Waste Act
The need for a legal framework which recognises sustainable
investments where significant measureable ambient air quality benefits
are achieved, including offset mechanism.
The National Environmental Management: Air Quality
Act (NEMAQA) (and associated regulations)
The following concerns in respect of the Act and its impact on Oil
companies in general have been highlighted:
Refineries cannot afford the investment requirements for NEMAQA on
current and projected refinery margins.
Clean Fuels 2 is essentially an “air quality improvement” initiative for
which NEMAQA gives no recognition.
NEMAQA requires compliance investment in the same time window as
Clean Fuels 2, making it a matter of practical impossibility due to shut
down requirements, locally produced liquid fuel security of supply will
be threatened.
Clean Fuels 2
The recent publication of the Amendment of Regulations regarding
Petroleum Products Specifications and Standards under the
Petroleum Product Act, 1977, has provided a degree of clarity and
certainty in respect of requirements and timelines for the transition
to Clean Fuels 2.
The key requirements are for smooth transition are:
The phasing of refinery investment plans.
The need for careful project sequencing.
Confirmation of the cost recovery mechanism.
With these there is no certainty or security for oil companies
required to make billions of rands worth of investments for no
return.
Climate change policy
Still under development but should consider:
South Africa’s critical developmental challenges and skills shortages.
thorough assessment of transition to a low carbon economy in respect
of the:
Impact on South Africa’s competitive position
Importance of coal-based resources as a source of competitive advantage
Constraints that climate change policies could (but should not) place on
existing business or investment
these should rather play a supporting role to enable reductions in carbon
footprints
Carbon tax and carbon budget policies need to be aligned to
create transparency.
Alberta case study
To create an attractive investment environment, a project reviewing
regulation recommended:
establishment of a new Policy Management Office
to ensure the integration of natural resource policies and
provide an interface between policy development and policy assurance;
establishment of a single regulatory body with unified responsibility for
policy assurance (regulatory delivery)
provide clear public engagement processes that enable parties to engage
effectively at the policy development and policy assurance stages;
ensure a systemic and common risk assessment and management
approach is used across the entire Policy Development and Policy
Assurance system;
adopt a Performance-Measurement Framework and a public reporting
function to measure and communicate the effectiveness of the system and
identify opportunities for continuous improvement;
ensure an effective mechanism to address landowner concerns
Recommendations
Clarity of purpose for regulation is paramount.
Stakeholders and Government need to co-operate to ensure
effective regulation is created.
Effective regulation should achieve the following objectives:
Create an environment that attracts investments, which implies
reasonable return for investors
Ensure value for the Nation
Eradicate the development of regulations to address internal process
inefficiencies
Create an environment of certainty
Develop a balance between intervention impacting investment
risk/reward and consumer benefit
Recommendations continued
Regulators must ensure efficient systems are established and
capacity is created to enable effective administration.
Conflicting government departmental and regulator agendas must
be resolved through:
Consistent legislative mandates, created at policy level within
government
Alignment of economic cluster imperatives
Holistic cross-departmental assessment of the appropriateness of
new/enhanced legislation and regulation
Coordinated implementation of new/enhanced regulation
Realistic targets and commitments aligned to the South African growth
agenda becoming focus areas
Consistent legislative mandates, created at policy level within
government
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