Decision. On 30 July 2015 the National Energy Regulator of South Africa ( NERSA or the Energy Regulator ) decided as follows:

Transcription

1 NATIONAL ENERGY REGULATOR OF SOUTH AFRICA Decision On 30 July 2015 the National Energy Regulator of South Africa ( NERSA or the Energy Regulator ) decided as follows: 1. that the piped-gas multi-year transmission tariffs for Sasol Gas (Pty) Ltd are as follows: Table 1: Sasol Gas multi-year transmission tariffs for the period 01 July 2015 to June 2017 Zone 1 July '15-30 June '16 1 July '16-30 June '17 1 Gauteng R6.00/GJ R6.01/GJ 2 Secunda - Middleburg R19.16/GJ R19.43/GJ 3 KwaZulu Natal R6.09/GJ R6.25/GJ 2. that the approved tariff is a maximum tariff exclusive of VAT; 3. that discounts are allowed and must be applied in accordance with the nondiscrimination provisions of section 22 of the Gas Act, 2001 (Act No 48 of 2001); and 4. that the tariffs are applicable for the period from 01 July 2015 to 30 June 2017, but will remain in force until the date the Energy Regulator approves another tariff. The applicant is directed to submit a tariff application four months prior to commencement of that tariff period. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 1

2 Reasons for Decision Contents Decision... 1 Reasons for Decision Applicable law Introduction Sasol Gas Transmission Tariff Application Nersa Assessment Elements Of Allowable Revenue... 8 a. Regulatory Asset Base (RAB)... 9 b. Depreciation (d) and Amortization c. Net working Capital (w) d. Tax (T) e. Expenses (E) f. Decommissioning Provision g. Weighted Average Cost of Capital (WACC) h. Claw-back Transmission Tariff Zones Analysis Of Comments Received...Error! Bookmark not defined. 8. Conclusion Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 2

3 Reasons for Decision 1. APPLICABLE LAW 1.1 The legal basis for the National Energy Regulator of South Africa ( NERSA or the Energy Regulator ) to regulate tariffs of piped-gas is derived from the National Energy Regulator Act, 2004 (Act No. 40 of 2004) ( the National Energy Regulator Act ), read with the Gas Act, 2001 (Act No. 48 of 2001) ( the Gas Act ). 2. INTRODUCTION 2.1 Section 4(h) of the Gas Act provides that the Energy Regulator must monitor and approve and, if necessary, regulate transmission and storage tariffs. In practice, this is interpreted as follows: In monitoring and approval, NERSA will not set tariffs but will review tariffs prepared by licensees or applicants for transmission and storage facilities; NERSA can request licensees or applicants to amend the levels of tariffs or tariff structure or both; and NERSA can approve or decide not to approve a tariff. 2.2 If NERSA decides not to approve the proposed tariff, then section 4(h) of the Gas Act requires the Energy Regulator to regulate the tariff. The process to be followed in regulating the tariff is outlined in the Tariff Guideline. In regulating, NERSA will regulate by determining the tariffs, if necessary, to ensure that NERSA is fulfilling its regulatory duties, inter alia by ensuring tariffs are cost effective and applied in a non-discriminatory manner. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 3

4 2.3 For monitoring purposes, the application for and implementation of a tariff must be provided on an annual basis, although applicants are allowed to apply for approval of tariffs for a period of several years. 2.4 The approved tariff becomes the applicable tariff and discounts are permissible. It must be noted that the discounts should be consistent with the objectives of the Gas Act as well as section 22 of the Gas Act. 2.5 The approved tariff will by virtue of section 22 of the Gas Act also apply to third parties. 3. SASOL GAS TRANSMISSION TARIFF APPLICATION 3.1 Sasol Gas (Pty) Ltd (registration number 1964/006005/06) is wholly owned by Sasol Gas Holdings (Pty) Ltd (registration number 2000/013669/07), a limited liability company incorporated in terms of South African company law. Sasol Gas Holdings (Pty) Ltd is in turn a wholly owned subsidiary of Sasol Limited. 3.2 Sasol Gas is vertically integrated in the gas industry supply chain in South Africa, i.e. it is active in gas transmission, gas distribution and gas trading. Sasol Limited has also secured rights to natural gas from the Republic of Mozambique through a series of agreements with the Mozambican Government. 3.3 Sasol Gas is involved in the transmission, distribution and trading of; piped natural gas from the Mozambican gas fields, as well as piped methane-rich gas produced at Secunda. 3.4 The Sasol Gas pipeline network covers most of the Gauteng Province, as well as parts of the Free State, Mpumalanga and KwaZulu-Natal provinces. The Application 3.5 On 03 March 2015, the Energy Regulator received a transmission tariff application from Sasol Gas. The application is for two years and will be effective for the period 01 July 2015 to 30 June Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 4

5 3.6 It is split into two tariff periods aligned with Sasol Gas financial year. The first tariff period is from 01 July 2015 to 30 June The second tariff period is from 01 July 2016 to 30 June Sasol Gas is applying for a postal pricing tariff approach whereby its transmission infrastructure is divided into three zones, with one tariff applicable to each zone. The Tariff Guidelines allows for this type of a tariff structure. According to section 6 of the Tariff Guidelines, the common approaches to tariff structuring are the Full distance pricing; Entry / exit pricing; and Postal pricing. 3.8 The full distance pricing, is the calculation of tariffs for individual pairs of entry and off-take points. The tariffs will reflect the distance between the off-take point and the point where gas was delivered into the gas pipeline system. A tariff will be calculated for each entry and exit point. The Tariff Guidelines further state that where the system is complex (there are many interconnections) and there is a large number of off take points, full distance pricing may be complicated to develop and impracticable to administer and maintain. 3.9 The simplified version of full distance pricing is the entry/exit pricing. In this pricing, off take points are grouped for each zone. In this method tariffs will be set for the transmission of gas from the point at which it enters the transmission system, the entry point, to the zonal exit points Postal pricing is a system in which each off take point in a particular region is charged a flat rate, irrespective of its capacity, the distance gas is transported or any other characteristic, similar to a postage stamp. This is the methodology that Sasol Gas has opted to use. The method may have the disadvantage of not being able to fully reflect costs associated with gas transportation over specific distances. However it presents a practical solution when compared to the cost reflective tariff pricing that is deemed to be complex and impractical to maintain if there are many (above 20) entry and exit points such as those prevalent in the Sasol Gas case. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 5

6 3.11 The application proposes three transmission zones namely: 1) Zone 1 : Secunda-Gauteng-Sasolburg network natural gas 2) Zone 2: Witbank-Middelburg network methane-rich gas; and 3) Zone 3: KwaZulu-Natal network methane-rich gas The figure below provides an illustration of the zones. Jofane Rumbacaca Temane INHAMBANE Talofo Muabsa Vilanculos Componde GAZA Chigubo Camo-Camo Mabuiapanse Magandene Meginge 1 Babelegi Rosslyn Pretoria Lyttelton Kemptonpark GAUTENG Benoni Randfontein A Springs Lenasia E Nigel Alberton Meyerton Vereeniging 2 MPUMALANGA Nelspruit Middelburg Witbank Carolina Hendrina Breyten Bethal Ermelo Secunda Badplaas Amsterdam B Malelane Barberton SWAZILAND MAGUDE Mahele Panjane MOAMBA Sabie Komatipoort Ressano Garcia Guija Chokwe Motaze MAPUTO C Maputo Sasolburg Standerton Volksrust New Castle 3* 1 Zone1 KWAZULU-NATAL Empangeni Mandini Richardsbay 2 Zone 2 Verulam Phoenix D Avoca Durban 3 Zone 3 * Zone 3: Excludes the Transnet Lily Pipeline 3.13 The tariff per zone is determined by calculating the allowable revenue per zone divided by the budgeted volume commitment for the zone The following table summarises the transmission tariffs Sasol Gas is applying for: Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 6

7 Table 1: Sasol Gas Tariff Application Summary Zone Component 1 July '15-30 June '16 1 July '16-30 June '17 Allowable Revenue (R ) Gauteng Volume (GJ) Tariff Allowable Revenue (R ) Secunda - Middleburg Volume (GJ) Tariff Allowable Revenue (R ) KwaZulu Natal Volume (GJ) Tariff NERSA ASSESSMENT 4.1 According to the Guidelines for Monitoring and Approving transmission and storage tariffs for the Piped-Gas Industry in South Africa (Tariff Guidelines), applicants are required to submit a tariff application based on their respective preferred methodology that may be chosen from the approved menu of tariff methodologies. 4.2 Each tariff application is reviewed using the same methodology chosen and used by the tariff applicant and any other appropriate information or method for assessing the reasonableness of each application by the Energy Regulator. 4.3 Alternative tariff methodologies or variations on the methods listed on the menu may be used by the applicant, provided that such method is proven, tested and verifiable. 4.4 Therefore, to review the application for reasonableness, the Energy Regulator used the Rate of Return ( RoR ) methodology as it was in line with Sasol Gas transmission tariff application. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 7

8 5. ELEMENTS OF ALLOWABLE REVENUE 5.1 The formula for calculating the allowable revenue for the tariff is as follows: AR = (RAB x WACC) + E + T + D ± C Where: AR - Allowable Revenue RAB - Regulatory Asset Base WACC - Weighted Average Cost of Capital E- Expenses T - Taxes D Depreciation & Amortization C Claw back 5.2 The above formula yielded the following results: Table 2: 2015/16 Allowable Revenue Calculation Summary (AR = (RAB*WACC) + E +D +T±C) NERSA Sasol Gas (R) (R) (RAB = v-d +net working capital) a Total Regulatory Asset Base RAB b WACC WACC 000% 000% c Rab x WACC= (a*b) RAB *WACC d Operating Expenses E e Depreciation and Amortization D f Tax T g Clawback C h Allowable Revenue (AR) = (c+d+e+f+g) AR 1,045,271,011 1,136,143,664 Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 8

9 Table 3: 2016/17 Allowable Revenue Calculation Summary (AR = (RAB*WACC) + E +D +T±C) NERSA Sasol Gas (R) (R) (RAB = v-d +net working capital) a Total RAB RAB b WACC WACC 00% 00% c RAB x WACC RAB * WACC d Operating expenses E e Depreciation and Amortization D g Tax T h Clawback C i Total Allowable Revenue (AR) = (c+d+e+f+g) AR 1,093,411,385 1,193,089, The paragraphs below provide an analysis of each component of the allowable revenue formula. a. Regulatory Asset Base (RAB) 5.4 In terms of section of the Tariff Guidelines, the value of the RAB is the inflation-adjusted historical cost or trended original cost ( TOC ) of plant, property and equipment less the accumulated depreciation for the period under consideration plus net working capital. The formula for this is as follows: Regulatory Asset Base = Trended Original Cost of Property, Plant & Equipment (v) - Accumulated Depreciation (d) + Net Working Capital (w) 5.5 Using the above formula, the resultant RAB for transmission as calculated by Sasol Gas is 0000 million for the period 01 July 2015 to 30 June 2016 ( FY16 ) and 0000 million for the period 1 July 2016 to 30 June 2017 ( FY17 ). The increase in the RAB from FY 16 to FY17 is attributable to projected additions during the tariff period. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 9

10 Secunda-Sasolburg pipeline 5.6 As part of the RAB, Sasol Gas included the Secunda to Sasolburg Pipeline ( GNP ). During licensing, the GNP was justified by Sasol Gas, indicating that it was required for new projects that had been initiated by Sasol Limited in the Sasolburg area. Sasol Gas stated that it saw a need to increase the capacity of the natural gas supply from Secunda to Sasolburg by constructing an additional transmission facility between Secunda and Sasolburg. 5.7 In the same licence application, Sasol Gas indicated that the additional natural gas will be used for xxx production by xxxxxxxxx and for power generation by xxxx ddd ddddd. The additional gas demand by bbbbbbbbbbbbbb for nnn production was projected to be 0 Million Gigajoules/annum plus 00 Million Gigajoules/annum to be used for power generation by vvvvvv vvvv vvv. Sasol Gas also indicated that it expects to supply additional 00 million Gigajoules to the Sasolburg customers. In total the additional gas that was expected by building the GNP pipeline was 00 million gigajoules over 10 years from Sasol Gas has further reported that there would have been capacity and pressure challenges if GNP was not commissioned. ArcelorMittal, Sasol Chemical Industries (high pressure customers) and the customers serviced by the distribution networks supplied by the Gauteng Network ( GTN ) would not be able to operate at their contractual capacity. The 140 MW power plant in Sasolburg will not have been built. If gas availability improves, more external customers could be added to GTN and GNP. Sasol Gas added that the GNP is used as back up for the GTN in the sense that every time pressure drops GNP PPS will open to stabilise GTN network to avoid supply interruptions of the customers supplied by the GTN. 5.9 During the public hearing Sasol Gas was requested to provide an explanation on what it is using the GNP for and whether it is connected to external customers. In its responses, Sasol Gas indicated that no external customer is connected directly to the GNP but that it is connected to the GTN by way of a pressure protection station in Sasolburg. Sasol Gas further reported that the capacity of the pipeline is not 00m GJ/ annum as reported in the public hearing but 000m GJ/annum that was submitted to NERSA when the pipeline was licensed. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 10

11 However, Sasol Gas indicated that its current capacity is 00 m GJ/annum and this can be enhanced to 000m GJ/annum at an additional cost of R000 million. Sasol Gas further stated that it is using 00m GJ/annum in the pipeline and that indeed there is uncommitted capacity in the pipeline NERSA noted the reduction in available capacity which is now 00m GJ/annum down from the 00m GJ/annum reported in the public hearing. The available capacity was calculated by simply subtracting the used capacity from the design capacity. The GNP is currently being used for internal customers and no external customers receive gas through this pipeline and yet it is included in the RAB. Sasol Gas argued that the GNP will technically benefit customers located around Sasolburg and Vanderbilpark but did not elaborate nor demonstrate how external customers benefit from the pipeline. No tangible evidence was provided to substantiate the claim. In this regard, the Gas division will conduct further inquiries on the operation of this pipeline to establish the actual volumes transported and to whom as well as the available capacity for third party access 5.11 NERSA conducted a desktop analysis, investigating the impact of excluding the GNP tariff from the total allowable revenue before it is split into zones. Thus NERSA used the total allowable revenue divided by volume to arrive at a figure and this was compared to the effect of excluding the GNP from the RAB. Operating expenses were not included in the calculation. The resultant difference was minimal and the GNP is included in the RAB However, NERSA will conduct an additional inquiry on who uses the GNP, the volumes it is transporting and whether it benefits the GTN network or not. Depending on the result of this inquiry, NERSA may not include the GNP in successive tariff assessments and may claw back the value of the GNP from the RAB. Other RAB 5.13 NERSA conducted a verification of the Sasol Gas asset base during the Regulatory Financial Reports ( RFR ) audit for the financial year ended 30 June As part of the Agreed Upon Audit Procedures, the Auditors were to: Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 11

12 Compare the starting RAB per the RFR to the historical asset base information provided to NERSA by Sasol Gas; Enquire from Sasol Gas whether a roll forward algorithm had been built into the ERP system, which is in accordance with NERSA s approved trending principles; Compare the calculation of the depreciation and amortisation inflation writeup per the RFR to the related NERSA principles in the RRM, and report on any deviations; Inspect that the starting RAB as per the RFR is determined on the historical cost basis or NERSA s approved revaluation values and further confirm that licensee utilises the starting RAB as approved by NERSA; Obtain representation from Sasol Gas confirming if plant held for future use (mothballed plant) existed and if so that they were itemized separately for exclusion from the RAB The audit report confirmed that there were no deviations or material findings Furthermore, NERSA performed a reasonableness check on the submitted RAB and performed a high level calculation based on the average useful life per asset class The resultant RAB for FY16 was R0000 million and 0000 million for FY17. This is 7% higher than the RAB values submitted by Sasol Gas where trending was done per individual asset item in the ERP system In light of the above, NERSA used the RAB values of 0000 million for FY16 and 0000 million for FY17 as applied for by Sasol Gas in its calculation of the allowable revenue. b. Depreciation (d) and Amortization 5.18 Section of the Tariff Guidelines provides that accumulated depreciation (d) is the cumulative depreciation against plant property, vehicles and equipment in service should be calculated on a straight line basis over the economic life of the Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 12

13 asset. This yielded a depreciation and amortisation expense of 0000 million for FY16 and 000 million for FY17. c. Net working Capital (w) 5.19 According to the Tariff Guidelines, net working capital refers to the various regulatory asset-base funding requirements other than utility plant in service. This is determined using the following formula: Net working capital = inventory + receivables + operating cash trade payables The Energy Regulator used the 45-day average working capital figure of 000 million for FY16 and 000 million for FY17, as provided by Sasol Gas and required by the Tariff Guidelines The principles and policies used to derive the elements of working capital was also verified though the FY14 full-year audit to confirm that they complied with the Tariff Guidelines and Regulatory Reporting Manuals (RRM). d. Tax (T) 5.22 Section 4.4 of the Tariff Guidelines provides that the flow-through tax approach is the Energy Regulator s preferred tax methodology. Under this approach, only the current taxes payable are factored into the allowable revenue and recovered during the tariff period under review The Energy Regulator allowed for the flow-through tax payable amount of R000 million for FY16 and 0000 million for FY17 in the allowable revenue calculation. Deferred tax was not taken into consideration since the flow-through tax method does not provide for future income taxes payable outside the tariff period. e. Expenses (E) Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 13

14 5.24 The Energy Regulator is required by section 4.3 of the Tariff Guidelines to assess the operating and maintenance expenses using principles such as whether the expenses were prudently incurred and efficient Sasol Gas applied for operating expenses of R 000 million for FY16 and million for FY17. NERSA used the principles as articulated in the approved Sasol Gas Cost Allocation Manual (CAM2) and Tariff Guidelines to assess each expense item as provided by Sasol Gas. After these prudency checks, NERSA allowed operating expenses of R0000 million for FY16 and 000 million for FY17. NERSA excluded expenses for other community development and penalties as these were viewed not to be efficient Sasol Gas, after the preliminary assessment, agreed with the NERSA assessment and excluded the expenses for community development and penalties from the final allowable revenue that would be used for approving the tariffs. Sasol Gas used the NERSA revised figures of 0000 million for FY16 and 0000 million for FY 17. f. Decommissioning Provision 5.27 NERSA allowed a decommissioning provision of 000 million, included in the expenses figure, in line with section 34 (1) (d) of the Gas Act and Regulation 11 (4) and (5) which require licensees to provide for security in respect of rehabilitation obligations The decommissioning provision is an amount that is collected during the operating period of an asset and it will be used to rehabilitate the land as prescribed in the Gas Act. The decommissioning provision is calculated in a similar manner as straight line depreciation whereby the present value of the decommissioning expense is divided by the remaining useful life of the assets. The remaining useful life used in the calculation is 15 years and this figure is the outcome of a study undertaken to determine the lifespan of the remaining gas reserves. Equal amounts, adjusted for asset additions and retirements is then collected in the tariff. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 14

15 g. Weighted Average Cost of Capital (WACC) 5.29 The Energy Regulator used the following formula in its determination of Sasol Gas WACC: WACC E Dt + E Ke Dt + Dt + E Kd ( real) = * ( real) * ( real) Where: E = equity Dt = debt Ke (real) = real cost of equity derived from the Capital Asset Pricing Model (CAPM) Kd (real) = the post tax real cost of debt Table 4: 2015/16 WACC calculation summary Symbol NERSA Sasol Gas Cost of Equity (Ke=Rf+(MRP*beta)+SSP) a Real Risk free rate (Rf) Rf 3.99% 4.05% b Real Market Risk Premium (MRP) MRP 5.80% 7.65% c Beta β d Small Stock Premium SSP 00% 00% e Real Cost of Equity (Ke) = ((a+(b*c)+d)) Ke 00% 00% Cost of Debt f Nominal Cost of Debt 000% 000% g Corporate tax rate Tax 28.00% 28.00% h Nominal Cost of Debt (Post-tax) 000% 000% i CPI forecast CPI f 000% 000% j Post tax Real cost of debt ((1+h)/(1+i))-1 Kd 000% 000% k Debt percentage 00% 00% l Equity percentage 00% 00% m Weighted Average Cost of Capital(Real) WACC 000% 000% Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 15

16 Table 5: 2016/17 WACC calculation summary Symbol NERSA Sasol Gas Cost of Equity (Ke=Rf+(MRP*beta)+SSP) a Real Risk free rate (Rf) Rf 3.99% 4.05% b Real Market Risk Premium (MRP) MRP 5.80% 7.65% c Beta β d Small Stock Premium SSP 00% 00% e Real Cost of Equity (Ke) = ((a+(b*c)+d)) Ke 00% 00% Cost of Debt f Nominal Cost of Debt 000% 000% g Corporate tax rate Tax 28.00% 28.00% h Nominal Cost of Debt (Post-tax) 000% 000% i CPI forecast CPI f 000% 000% j Post tax Real cost of debt ((1+h)/(1+i))-1 Kd 000% 000% k Debt percentage 00% 00% l Equity percentage 00% 00% m Weighted Average Cost of Capital(Real) WACC 000% 000% 5.30 Sasol Gas current gearing levels are below the xxxxx level required by Tariff Guidelines. Therefore the gearing based on xxxxx debt ratio of 00% was used to calculate the WACC The mark-to-market risk free rate of a selected 5 to 10 year government of South Africa bonds were used for the expected risk free return (Rf) in the estimation of cost of equity. This yielded a real risk free rate of 3.99% The market return (Rm) was calculated using the JSE ALL Share Index, converted from a nominal to real value for the previous 25 years (ended 30 June 2014) as prescribed by the Tariff Guidelines. The average month-to-month CPI over the same period (ended 30 June 2014) was used. This yielded a real market risk premium (MRP) of 5.80% Sasol Gas used 32 years (384 months) from March 1982 to February 2014 to calculate a risk free rate of 4.05% and an MRP 7.65%. As part of the reasons, it stated that ideally the period should not be shorter than the useful life of the pipeline assets. Sasol Gas contends that this would ensure that the return Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 16

17 expectations are commensurate with the investment horizon. A long MRP would also allow for all possible economic situations and scenarios to be captured in the calculation of the MRP estimate. Sasol Gas further stated that this principle is consistent with frequently cited International practice by Ibbotson Associates. Despite these assertions, Sasol Gas used 32 years to estimate the MRP which is a shorter period than the average useful life of its assets of 45 years and stated that data beyond the 32 years was not available The beta (β) was determined by proxy. As a proxy, the average of six gas pipeline companies chosen by the Energy Regulator and listed on stock exchanges must be used as per the Tariff Guidelines. The following US companies were used by the Sasol Gas as proxies: AGL Resources Inc; UGI Corporation; South Jersey Industries; WGL Holdings Inc.; The Laclede Group; and Piedmont Natural Gas Company Inc The beta was calculated using the Hamada methodology. NERSA used the same companies as those selected by Sasol Gas and updated its beta using the AGL Resources financial information However Sasol Gas used the above companies and the below mentioned data to derive a beta of 0.00: weekly returns observations; an estimation window using returns measured over the five-year period. In the previous tariff application, Sasol Gas used a two-year period; and raw equity betas which were not adjusted for proxy companies tax Although the Tariff Guidelines do not specify the data inputs to be used to estimate the beta, it has been NERSA s standard in piped-gas to use: weekly returns observations; Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 17

18 an estimation window using returns measured over the two-year period; and adjusted betas which were adjusted for proxy companies marginal tax in line with the Hamada formula The NERSA approach yielded a beta of In the determination of return on equity (Ke), NERSA allowed a Small Stock Premium (SSP) of 0.00% in line with international standards. The Tariff Guidelines, although they allow for adjustments to the WACC to reflect the real risk of the cost of equity, they do not specify the formula to be used. Therefore, this SSP adjustment is based on a research study conducted by PWC South Africa in 2009/10. The conclusions of the study are in line with valuation methodologies used by leading international valuation experts such as Professor Aswath Damodaran, who recommends that smaller companies should add a premium to their Ke Moreover finance literature clearly establishes that the Ke is the risk adjusted opportunity cost to the investors and not the cost of the specific capital sources employed by investors, meaning that the true cost of capital depends on the use to which the capital is put and not on its source. In a subsidiariy of a group such as Sasol Gas, it is not the parents WACC that determines the subsidiary s cost of equity because the parents WACC is itself a weighted average of equity costs of all subsidiaries. In this regard, Sasol Gas is treated as a small company because according to the RRMs, Sasol Gas is supposed to ring fence and report each regulated activity separately. Therefore, the transmission activity is separated from the trading and distribution activities and there should be no cross subsidisation among the regulated activities A cost of debt (Kd) of 00 % as provided by Sasol Gas was used to calculate the post-tax real cost of debt of 000% for FY16 and 000% for FY It must be noted that the sources of information prescribed by NERSA were used by Sasol Gas as data sources for calculating the WACC. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 18

19 h. Claw-back 5.43 NERSA calculated an under recovery claw back of R00.0 million that will be added to the current allowable revenue, whilst Sasol Gas calculated an under recovery of 000 million. However, after the preliminary assessment was published, Sasol Gas revised their clawback figure and used the NERSA figure of R00.0 million NERSA advocates for the use of the same cost of equity that was used at the application stage. It is NERSA s view that the shareholders view of their cost of investment cannot be clawed back. The cost of debt should be the actual debt used during the period and can be clawed back The other difference in the figures used by Sasol Gas in the 2014 allowable revenue was the decommissioning provision. Sasol Gas used R000 million in FY 2014 but has updated it with the actual figure of R00 million. The difference in the two figures mainly emanated from different useful life s used to calculate the provision. During the application stage for the 2014 decision Sasol Gas used 45 years, being the economic useful life of the assets, instead of 15 years up to 2029, when the gas reserves are expected to be depleted. In addition, a minor cause of the difference in the figures also arose from the fact that there were asset additions in 2014 and these increase the amount needed to decommission the assets Table 6 below provides a summary of NERSA s claw back calculation for the FY14. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 19

20 Table 6: Clawback summary calculation Clawback Calculation Total RAB Estimates used to calculate the FY14 Tariff Audited Actual figures being used for claw back purposes for FY14 Tariff ZONE 1 Clawback per zone ZONE 2 Clawback per zone ZONE 3 Clawback per zone R R R R R WACC Return on assets (RAB*WACC) Operating Costs (E) Depreciation & Amortisation -(D) Taxation Decommissioning Provision Allowable Revenue 936,342, ,150, ,707, ,347,069 98,096,817 Volume used to calculate tariff 169,911, ,509, ,110,797 6,267,246 17,131,599 Audited actuals of estimates - R/GJ Estimates at tariff approval - R/GJ Portion of tariff to be clawed back in R/GJ Actual Volumes sold in the tariff period (26 March June 2014) - GJ Clawback - AR under/ (over) recovered (Actual vol x under recovered tariff) 6. TRANSMISSION TARIFF ZONES 6.1 Sasol Gas transmission tariff is divided into three zones namely: a) Zone 1 : Secunda-Gauteng-Sasolburg network natural gas b) Zone 2: Witbank-Middelburg network methane-rich gas; and c) Zone 3: KwaZulu-Natal network methane-rich gas. 6.2 The tariff per zone is determined by calculating the allowable revenue per zone divided by the budgeted volume commitment for the zone. 6.3 The split of the allowable revenue elements into zones was done as per the approved CAM2 principles. The Tariff Guidelines allows for this type of a tariff structure. 6.4 The application of these principles yielded the following allocation drivers: Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 20

21 Table 7: Allocation Drivers for Allowable Revenue elements ZONE 1 ZONE 2 ZONE 3 COMPONENT RAB % 0% 0% 0% 0% 0% 0% OPEX % 0% 0% 0% 0% 0% 0% VOLUME (MGJ/a) NERSA application of the above approach yielded the following tariffs applicable to each zone: Table 8: Allowable Revenue Calculation per Zone - 01 July 2015 to 30 June 2016 Zone Allowable Revenue (R ) Volume (GJ) Tariff R/GJ 1 826,884, ,512, ,564,080 6,296, ,822,787 18,461, Table 9: Allowable Revenue Calculation per Zone - 01 July 2016 to 30 June 2017 Zone Allowable Revenue (R ) Volume (GJ) Tariff R/GJ 1 865,511, ,628, ,826,190 6,520, ,073,584 19,060, DECISION MAKING PROCESS 7.1 The non-confidential version of the application was published on the Energy Regulator website on 17 April Notices inviting members of the public to comment were published in The Star, Mail and Guardian and the Sunday Times on 24 April At the closing date of receiving written comments of 18 June 2015, only Illovo Sugar had submitted its comment. Below is an analysis of received comments: Comment There is an inconsistency between the asset base reported by Sasol Gas in its application and the total assets reported by Sasol Gas in its annual Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 21

22 financial statements, with the latter being substantially less than the former. Response The assets reported in the Sasol Gas annual financial records are recorded at historical cost whereas the assets used to calculate a return are recorded at inflation adjusted historical cost or trended original cost. The difference is that in the NERSA approach the Regulatory Asset Base is adjusted for inflation. The same inflation indices used to adjust for inflation will be used to adjust the nominal return/ WACC to real The key principle in setting a Regulatory Asset Base is to ensure that the investment in assets receives an appropriate level of return to recoup the investment and a return commensurate with risk. At the same time this requires the WACC to be set at an appropriate level for adequate return on capital. Therefore the adjustment to the assets is matched by the adjustment on WACC to ensure that there is no over recovery of the return on investment. In addition, setting the asset value correctly ensures that the appropriate level of funds is available as the return of capital towards the eventual replacement of the assets. Comment All relevant figures are redacted from the current published application for a transmission tariff for the period 01 July 2015 to 30 June Illovo submits that it s unable to comment on these figures and the onus is on NERSA to correctly evaluate the values provided in the application, particularly those assigned to infrastructure so as to ensure that there are no similar inconsistencies which could potentially result in an inflated tariff being granted. Response The legislation provides that NERSA should treat some information submitted by external parties as confidential provided that the external party has applied for the information to be treated as confidential under the relevant laws of the country. Section 36(1) of PAIA provides that: Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 22

23 Subject to subsection (2), the information officer of a public body must refuse a request for access to a record of a body if the record contains- a) trade secrets of a third party; b) financial, commercial, scientific or technical information, other than trade secrets of a third party, the disclosure of which would be likely to cause harm to the commercial or financial interest of that third party; or c) information supplied in confidence by a third party the disclosure of which could reasonably be expected- d) to put that third party at a disadvantage in contractual or other negotiations; or e) to prejudice that third party in commercial competition Furthermore, in terms of section 29(4) of the Gas Act, no information obtained by the Gas Regulator in terms of the Gas Act which is of a nongeneric, confidential, personal, commercially sensitive or of a proprietary nature may be made public or otherwise disclosed to any person without permission of the person to whom that information relates, except in terms of a high court order. Comment Illovo challenges the use of replacement value of assets when calculating the transmission base. Response NERSA does not use the replacement value of assets to calculate the regulatory asset base of the transmission assets but uses the inflation adjusted historic cost or (trended original cost) of assets. 7.2 Sasol Gas provided oral comments at the public hearing held on 02 July Sasol Gas agreed with the NERSA preliminary assessment of the claw back and the expenses. This had the effect of reducing the tariffs that Sasol Gas applied for. The tables below show the Sasol Gas tariffs before the public hearing and after the public hearing. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 23

24 Table 10: Sasol Gas multi-year transmission tariffs for the period 01 July 2015 to June 2016 Zone Before public hearing After public hearing 1 Gauteng R6.07/GJ R6.00/GJ 2 Secunda - Middleburg R19.40/GJ R19.16/GJ 3 KwaZulu Natal R6.16/GJ R6.09/GJ Table 11: Sasol Gas multi-year transmission tariffs for the period 01 July 2016 to June 2017 Zone Before public hearing After public hearing 1 Gauteng R6.01/GJ R6.01/GJ 2 Secunda - Middleburg R19.45/GJ R19.43/GJ 3 KwaZulu Natal R6.26/GJ R6.25/GJ 8. CONCLUSION 8.1 On the conspectus of the facts and evidence, it is appropriate and in compliance with the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to make the decision set out above. Reason for Decision For Sasol Gas Multiyear Transmission Tariff Application For 2015 to 2017 Page 24