Market Value Pricing is defined in clause 1.16 of the Agreement as the determination of gas price by comparison with:

Transcription

1 NATIONAL ENERGY REGULATOR OF SOUTH AFRICA In the matter regarding Market Value Pricing (MVP) The market value pricing (MVP) principle is prescribed in Schedule One to the Agreement Concerning the Mozambican Gas Pipeline between the Government of the Republic of South Africa and Sasol Limited ( Schedule One to the Agreement ). Clause 8.3 of Schedule One to the Agreement provides that the basis for pricing within the constraints of the Price Cap will be Market Value Pricing. Market Value Pricing is defined in clause 1.16 of the Agreement as the determination of gas price by comparison with: (a) The cost of the alternative fuel delivered to the customer s premises or anticipated place of use (in the case of Greenfields Customers); plus (b) The difference between all the operating costs of the customer s use of the alternative fuel and all the operating costs of using natural gas; plus (c) The difference between the Nett Present Value (NPV) of the capital costs of the customer s continued use of the alternative fuel and the NPV of the capital costs involved in switching to natural gas, as would be reflected in the customer s accounts. NERSA has given notice in the public media that it is inviting interested parties to comment on the explanatory notes for determining the Market Value Pricing (MVP) of gas. Comments regarding the explanatory notes for MVP must be submitted to the

2 following address: or to the offices of NERSA at Kulawula House, 526 Madiba Street, Arcadia, Pretoria by 20 September A public hearing regarding the Procedures for MVP is scheduled to take place on 21 September 2012 This consultation document provides background information and explains the Procedures for MVP. Interested parties have been requested in the public notice to provide written representation to the Energy Regulator, which it will then consider before making a final decision on this matter. The notice was made in terms of Section 10(2) of the National Energy Regulator Act, 2004 (Act No. 40 of 2004). The consultation document may be viewed on the NERSA website at

3 1. APPLICABLE LAW 1.1 The National Energy Regulator of South Africa (NERSA) 1 is a statutory body created in terms of the provisions of the National Energy Regulator Act, 2004 (Act No. 41 of 2004)(NERSA Act). NERSA has, amongst others, a function to regulate prices. In regulating prices it has to be guided by the provisions of the NERSA Act read together with the Gas Act, 2001 (Act No. 48 of 2001) ( the Act ). 1.2 Furthermore, section 36 of the Act provides that the Energy Regulator is responsible for the administration of Schedule One to the Agreement Concerning the Mozambican Gas Pipeline between the Government of the Republic of South Africa and Sasol Limited ( Schedule One to the Agreement ). 1.3 Clause 8.3 of Schedule One to the Agreement provides that the basis of Sasol Limited s pricing within the constraints of the price cap will be market value pricing (MVP). 1.4 According to clause 1.16 of Schedule One to the Agreement, MVP means determining the gas price by comparison with: (a) the cost of the alternative fuel delivered to the customer s premises or anticipated place of use (in the case of Greenfields Customers 2 ); plus (b) the difference between all the operating costs of the customer s use of the alternative fuel and all the operating costs of using (natural) gas; plus 1 Energy Regulator means the National Energy Regulator of South Africa established by section 2 of the National Energy Regulator Act, 2004 (Act No. 40 of 2004). 2 Greenfields Customer refers to an External Customer who, after 26 September 2001, constructs a facility on a new Site and which facility receives piped gas from Sasol for the first time at or after 26 March 2004.

4 (c) the difference between the Nett Present Value (NPV) of the capital costs of the customer s continued use of the alternative fuel and the NPV of the capital costs involved in switching to (natural) gas, as would be reflected in the customer s accounts. 1.5 Regulation 4.2 of the Piped-Gas Regulations 3 provides that gas traders whose maximum gas prices are calculated by MVP in terms of Schedule One to the Agreement must inform their customers of the elements used to calculate their maximum gas price. Each of these elements is defined in 1.4 (a) to (c) above. 1.6 Furthermore, regulation 4.6 of the Piped-Gas Regulations provides that when gas is sold, the accompanying sales invoice must itemise the constituent elements of the total price reflected on the invoice, including at least the cost of gas, any transport tariffs and any other charges. 1.7 It follows from above that Sasol Gas Limited has to determine prices for its piped-gas customers in terms of MVP. Failure to comply with the MVP principles will constitute a breach of certain conditions of licences granted by the Energy Regulator to Sasol Gas Limited. 1.8 As stated above, the Energy Regulator is empowered to regulate the pipedgas industry in South Africa and to administer Schedule One to the Agreement. As a result the Energy Regulator is continuously monitoring Sasol Gas Limited s compliance with the MVP pricing principle. 3 As promulgated by the Minister of Minerals and Energy on 20 April 2007.

5 2. ANALYSIS 2.1 Schedule One to the Agreement defines MVP as determining the gas price by comparison with: the cost of the alternative fuel delivered to the customer s premises or anticipated place of use (in the case of Greenfields Customers 4 ); plus the difference between all the operating costs of the customer s use of the alternative fuel and all the operating costs of using (natural) gas; plus the difference between the Nett Present Value (NPV) of the capital costs of the customer s continued use of the alternative fuel and the NPV of the capital costs involved in switching to (natural) gas, as would be reflected in the customer s accounts. 2.2 The above definition of MVP has led to confusion and customer complaints regarding: (a) Whether MVP is the applicable price or a maximum price per customer; (b) Which alternate fuel to use for the MVP calculation and how to establish the alternate fuel; (c) When is the MVP calculated, at time of conversion or continuously; and (d) When and how must Sasol Gas provide MVP information to customers 4 Greenfields Customer refers to an External Customer who, after 26 September 2001, constructs a facility on a new Site and which facility receives piped gas from Sasol for the first time at or after 26 March 2004.

6 2.3 Each of these questions is answered in the paragraphs below. More specifically, this discussion document was prompted by the number of complaints that NERSA received regarding Sasol Gas compliance with MVP. An analysis of the customer s complaints and queries that NERSA received over the previous three year suggests that there are discrepancies between the definition of Market Value Pricing as per Schedule One to the Agreement and Sasol Gas implementation thereof. MVP as a maximum price per customer 2.4 Clause 8.3 of Schedule One to the Agreement provides that the basis for pricing within the constraints of the price cap is MVP. 2.5 It follows from the above that, clause 8.3 of Schedule One to the Agreement cannot be taken to mean that MVP is merely a guideline to setting prices. It means that the maximum gas price of each customer is set by MVP. 2.6 Therefore Sasol Gas Ltd (Sasol Gas) cannot charge a customer a gas price which is above the maximum price determined by MVP, since MVP is equal to the approximate cost of alternative fuel and charging above it would not entice customers to switch. 2.7 Further to that, Sasol Gas is not prohibited from charging prices which are less than the maximum prices determined by MVP as clause 15.3 of Schedule One to the Agreement provides that the a foregoing is not intended to interfere with SASOL's normal way of doing business, i.e. to grow the market, to optimise profits and to conduct business under normal business practices. It will also not be used to overcome bad management practices or to stifle good management efforts.

7 2.8 Sasol Gas may offer discounts to customers in line with its normal way of doing business. Furthermore, Schedule One to the Agreement prescribes certain mandatory discounts to Small Customers The argument regarding MVP as a maximum price can also be derived from the piped-gas regulation (published on 07 April 2001, under GNR.321 in Government Gazette 29792) (piped-gas regulations), piped-gas regulation 4(2)(c). It should be noted that this regulation has a fundamental weakness in that it misquotes the Schedule One to the Agreement where it refers to operating costs instead of capital cost (see the definition of MVP in 2.1 above) Furthermore, clause 16.1 provides that Sasol Gas is permitted to conclude all gas sales agreements with its customers on the basis of a separate, independent contract for each geographically separated Site Site is described in Schedule One to the Agreement as a separate area of land with its buildings owned or rented by a gas consumer What is apparent from clause 16.1 of Schedule One to the Agreement is that there should be sales agreements concluded between Sasol Gas and its customers. These sales agreements should be concluded separately and independently for each geographical site. 5 Small Customer means customers consuming less than Gigajoules per annum of gas per Site.

8 2.13 From this clause one can see that the words concluded separately and independently for each geographical site give a basis upon which Sasol Gas should conclude sales agreements. Any basis other than the one provided for will be contravening clause 16.1 of Schedule One to the Agreement. Alternative fuel at time of connecting to natural gas 2.14 According to clause 1.16 of Schedule One to the Agreement MVP means determining the gas price by comparison with: the cost of the alternative fuel delivered to the customer s premises or anticipated place of use (in the case of Greenfields Customers 6 ); plus the difference between all the operating costs of the customer s use of the alternative fuel and all the operating costs of using (natural) gas; plus 2.15 The difference between the Nett Present Value (NPV) of the capital costs of the customer s continued use of the alternative fuel and the NPV of the capital costs involved in switching to (natural) gas, as would be reflected in the customer s accounts From the above definition of MVP, Sasol Gas must base its price gas on the market value price to each customer. This market value price must be determined according to the costs of the alternative fuel used by the customer or anticipated place of use (in the case of Greenfields Customers) at the time of converting to natural gas In other words, Sasol may charge different customer prices, depending on the alternative to gas that was available to the customer at the time of 6 Greenfields Customer refers to an External Customer who, after 26 September 2001, constructs a facility on a new Site and which facility receives piped gas from Sasol for the first time at or after 26 March 2004.

9 converting to natural gas or is available to the customer at the anticipated place of use (in the case of Greenfields Customers) These alternatives may, for example, be coal, electricity, Heavy Fuel Oil, etc. If the customer s alternative is for example coal the price at which gas is sold to the customer would be significantly lower than the price would be if the alternative fuel was Heavy Fuel Oil The MVP approach ensures that all potential users of gas can switch to gas at the price which is lower than they would currently be paying for an energy source. It effectively legalises price discrimination Therefore in order to implement clause 1.16 of Schedule One to the Agreement, it is important to establish which alternative fuel a customer converted from (at the time of the actual conversion to gas, not subsequent alternatives) in the case of a Brownfield customer Where a customer did not consume any energy prior to gas (as would be the case of a Greenfield customer), the alternative fuels considered at the anticipated place of use would be the alternative fuels Furthermore, when renegotiating a price, it is not required that a new MVP calculation is performed, as Schedule One to the Agreement only considers the price of the alternative fuel at the time of converting to gas. As a result, MVP of gas must not be based on any assumed or deemed logical alternative. Hence the emphasis of the difference between the Nett Present Value (NPV) of the capital costs of the customer s continued use of the alternative fuel and the NPV of the capital costs involved in switching to (natural) gas, as would be reflected in the customer s accounts, in the definition of MVP.

10 2.23 The preamble of the Schedule One to the Agreement states that: And Whereas, in the absence of existing specific gas legislation, SASOL has requested a regulatory dispensation that will be binding on the future Gas Regulator; And Whereas such gas projects involve significant investment and risks and the RSA, GOM and SASOL will be required to provide guarantees and undertakings in order to enable The Project Furthermore, the preamble states that And Whereas the RSA is committed to promoting the introduction of natural gas in the South African economy at the lowest cost and as fast as possible From the above, it is evident that the rationale for the Schedule One to the Agreement was that Sasol Gas needed to make investment decisions but there was no specific legislation for gas projects at the time so a regulatory regime had to be negotiated. As part of the regulatory regime Sasol Gas was given a Special Regulatory Dispensation Period regarding exclusive rights to ROMPCO s infrastructure until 10 years after First Gas, and the right to negotiate the price of gas based on MVP on separate contracts with individual customers In light of the definition of MVP, the determination of the MVP should be based on the cost of alternative fuel used by the customer at the time of converting to natural gas. The rationale for this definition was to encourage and incentivise the customer to switch to natural gas. Informing customers about MVP 2.27 Gas traders whose maximum prices are calculated by MVP in terms of Schedule One to the Agreement must inform their customers of the

11 constituent elements used to calculate their gas prices and of the MVP elements as provided for in regulation 4.2 of the Piped-Gas Regulations It is submitted that a customer must, before gas is sold to it, be informed of the elements used to calculate its gas price and that this should happen at the contracting stage and whenever the gas price is changed In addition, regulation 4(6) of the Piped-Gas Regulations indicates that when gas is sold, the accompanying sales invoice must itemise the constituents elements of the total price reflected on the invoice, including at least the cost of gas, any transport tariffs and any other charges The MVP price has to be established for each customer in order that: (a) a customer can use the MVP information to negotiate gas prices; (b) the maximum price for each customer is determined; (c) discounts to Small customers can be calculated; and (d) each customer has the opportunity to contest the alternative fuel ; and the price of that fuel as assigned to the customer by Sasol Gas In order for individual customers to assess their MVP (i.e. maximum) price they must therefore know what alternative fuel is being used to determine the price and the differences in the operating expenditure and capital expenditure between the use of (natural) gas and the use of the alternative fuel.

12 3. APPLICATION OF THE MVP PRINCIPLE 3.1 Clause 2 of Schedule One to the Agreement states that the purpose of this Agreement is to set out the regulatory dispensation, binding the Gas Regulator, which will, to the extent detailed herein and for the period referred to in clause 3, be applicable to SASOL s current piped gas business, the proposed supply of natural gas from Mozambique and the sale of that gas into markets within South Africa. 3.2 The above implies that the price of gas for all Sasol Gas s customers, including customers that were signed before the First Gas (26 March 2004) has to comply with clause 1.16 of Schedule One to the Agreement. Therefore MVP principle is applicable to all of Sasol Gas customers, i.e. socalled Brownfields Customers 7 and Greenfields Customers Furthermore, clause 16.1 of Schedule One to the Agreement provides that Sasol must conclude all gas sales agreements with its customers on the basis of a separate, independent contract for each geographically separated site Annexure A (Annexure A - Calculation of the MVP) of this document provides the different steps that must be followed in calculating the MVP of gas. Each of the steps provided in Annexure A is based on the provisions of Schedule One to the Agreement. 7 Brownfields Customer refers to an External Customer receiving piped gas from Sasol Limited before 26 March 2004, including a customer which expands its facilities and thereby increases its gas consumption, but excluding those persons which convert their facilities after 26 March 2004 from other energy carriers to accept piped gas. 8 See footnote 2 above. 9 Site means a separate area of land with its buildings owned or rented by a gas consumer.

13 4. PROCESS 4.1 The Energy Regulator has decided that interested parties must be invited to submit written comments regarding the MVP interpretation. 4.2 Any interested party, including piped-gas customers, wishing to make representation on the above-mentioned matters may submit comments to the following address: or to the offices of NERSA at Kulawula House, 526 Vermeulen Street, Arcadia, Pretoria by 20 September Customers may also participate in or attend the public hearing on the Procedure for MVP. The public hearing is scheduled for 21 September 2012 at the Energy Regulator premises from 09H30 to 13H00. Members of the public wishing to orally present their views at the hearing must submit their request to make representation at the said hearing to the Energy Regulator by 16H30 on 19 September 2012.

14 GLOSSARY OF TERMS Act Means the Gas Act, 2001 (Act No.48 of 2001). Brownfields Customer Means an External Customer receiving piped gas from Sasol Limited before 26 March 2004, including a customer which expands its facilities and thereby increases its gas consumption, but excluding those persons which convert their facilities after 26 March 2004 from other energy carriers to accept piped gas. Consumer Means a person who uses gas except for those persons who purchase gas from a reticulator. Gas Means all hydrocarbon gases transported by pipeline, including natural gas, artificial gas, hydrogen rich gas, methane rich gas, synthetic gas, coal bed methane gas, liquefied natural gas, compressed natural gas, re-gasified liquefied natural gas, liquefied petroleum gas or any combination thereof. Gas Regulator Means the Gas Regulator as contemplated in the Gas Act (Act No. 48 of 2004) and replaced by the Energy Regulator as contemplated in the National Energy Regulator Act (Act No. 48 of 2001). Gigajoules (GJ) A metric term used for measuring energy use. 1 (one) GJ is equivalent to the amount of energy available from 26.1 m3 of natural gas.

15 Greenfields Customer Means an External Customer who, after 26 September 2001, constructs a facility on a new Site and which facility receives piped-gas from Sasol for the first time at or after 26 March Greenfields Reference price Means the reference price for Greenfield s customers. Licensee Means any person holding a license granted by the Energy Regulator in terms of the Act. Natural Gas Means a gaseous fossil fuel consisting primarily of methane but including significant quantities of ethane, propane, butane, and pentane - heavier hydrocarbons removed prior to use as a consumer fuel - as well as carbon dioxide, nitrogen, helium and hydrogen sulphide. Price Means the charge for gas to a distributor, reticulator or final customer. Regulations Means the Piped-Gas Regulations made in terms of section 34 (1) of the Act. Residential Means household use of gas. Schedule One to the Agreement Means Schedule One to the Agreement Concerning the Mozambican Gas Pipeline between the Government of the Republic of South Africa and Sasol Limited, i.e. the Regulatory Agreement between the Minister of Minerals and Energy, the Minister of Trade and Industry and Sasol Limited.

16 Site Means a separate area of land with its buildings owned or rented by a gas consumer. Small Customer Means a customer consuming less than Gigajoules per annum of gas per site. Year Means any sequential period of 12 months with the first year measured from the first day of the month in which First Gas occurred.

17 ANNEXURE A Market Value Pricing (MVP) Calculation Model STEP Model Notes Volume of alternative fuel per annum delivered to the customer's premises or 1 Volume - anticipated place of use (in case of Greenfields Customers) 2 Conversion Factor - Conversion factor used to convert alternative fuel energy measurement to gigajoules. E.g kwh to gigajoules 3 Volume (GJ) - product of Steps (1;2) Cost of Alternative (e.g Electricity) 4 Actual Alternative Fuel Cost (R) - Actual total invoice amount billed for alternative fuel consumed in step (1) 5 Actual Aternative Fuel Cost (R/unit) - divide step (4) by step (1) to get actual cost per unit of alternative fuel 6 Conversion (kwh to GJ) - conversion factor used to convert alterantive fuel cost per unit in step (5) above to rand per gigajoule. The same conversion factor applied in step (2) must be used. 7 Efficiency (e.g 80%) - efficiency of the alternative fuel usage 8 Actual Alternative Fuel Cost (R/GJ) - the product of Steps (4;5;6;7) Operating Exepenses Difference ( e.g Electricity Vs Gas) the operating costs of the customer's use of the alternative fuel minus all the 9 Operating Costs differential (R) - operating costs of using natural gas 10 Operating Costs Diferrential (R/GJ) - operating costs differential in step (9) divided by volume in step(3) NPV of Capital Costs differential (e.g Electricity Vs Gas) 11 NPV of Capital Costs Differential (R) - 12 NPV of Capital Costs Differential (R/GJ) - the Net Present Value (NPV) of the capital costs of the customer's continued use of the alternative fuel minus the capital costs involved in swithcing to natural the Net Present Value (NPV) of the capital costs differential in step (11) divided by volume in step (3) 13 MVP Calculatation before discounts (R/GJ) - sum of Steps (8;9;10)