THE PRICE CAPPING MECHANISM FOR AVERAGE PIPED-GAS PRICES IN. Decision. On 6 August 2014, the Energy Regulator approved the following:

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1 ENERGY REGULATOR OF SOUTH AFRICA In the matter regarding THE PRICE CAPPING MECHANISM FOR AVERAGE PIPED-GAS PRICES IN THE PERIOD 01 APRIL 2013 TO 31 MARCH 2014 TO EXTERNAL CUSTOMERS OF SASOL LIMITED Decision On 6 August 2014, the Energy Regulator approved the following: (a) the calculation of the Sasol Volume Weighted Gas Average Price (SVWAGP) and the European Benchmark Price (EBP) for the period 01 April 2013 to 31 March 2014 in terms of the price capping mechanism prescribed by clause 8.2 of Schedule One to the Agreement as follows: Table 1: SVWGAP and EBP for the period 01 April 2013 to 31 March 2014 YEAR SVWAGP Rand per GigaJoule of gas EBP Rand per GigaJoule of gas 01 April 2013 to 31 March 2014 R R (b) the decision that Sasol Gas Limited (Sasol Gas) complied with the requirements of the price capping mechanism (clause 8.2 of Schedule One to the Agreement) in the period 01 April 2013 to 31 March 2014; and March 2014 Page 1 of 8

2 (c) that as the SVWAGP for the period 01 April 2013 to 31 March 2014 was below the EBP there will be no mandatory refund by Sasol Gas Limited to external customers. Reason for Decision 1. Applicable Law 1.1 The National Energy Regulator regulates piped-gas prices in terms the National Energy Regulator Act, 2004 (Act No. 41 of 2004) ( the Energy Regulator Act ) and the Gas Act, 2001 (Act No. 48 of 2001). 2. Background 2.1. In September 2001, the Government of the Republic of South Africa entered into an agreement with Sasol Limited regarding the regulatory regime of Sasol Limited s activities in piped-gas. The Agreement is known as the Schedule One to the Agreement Concerning the Mozambique Gas Pipelines between the Government of the Republic of South Africa and Sasol Limited ( Schedule One to the Agreement ) Schedule One to the Agreement bestowed Sasol Gas Limited ( Sasol Gas ) with a special regulatory dispensation up to 25 March The exact termination of this special regulatory dispensation period was dependent on Sasol Gas s reserves in Mozambique In terms of section 36 of the Gas Act, the Energy Regulator is required to administer and enforce the pricing provisions of Schedule One to the Agreement. March 2014 Page 2 of 8

3 2.4. Although Schedule One to the Agreement expired on 26 March 2014, the Energy Regulator is required to monitor prices of gas which Sasol Gas was required to charge in the period 01 April 2013 to 31 March 2014 when the Schedule One to the Agreement was still in force. This is due to the fact that monitoring pricing provisions of Schedule One to the Agreement is done retrospectively The paragraphs below provide information on monitoring of Sasol Gas compliance with clause 8.2 of Schedule One to the Agreement. Clause 8.2 of Schedule One to the Agreement prescribes that the average gas price to External Customers 1 will be subject to a price cap. 3. Analysis 3.1 As stated above, clause 8.2 of Schedule One to the Agreement, provides that the average gas price charged by Sasol Gas to all External Customers is subject to a price cap. The price cap is calculated on an annual basis and applies from one Year 2 after First Gas (i.e. the date upon which natural gas from Mozambique was first sold and delivered on a commercial scale and a continuous basis to pipeline customers in South Africa, which occurred on 26 March 2004). 3.2 The price cap mechanism requires calculation of the SVWAGP and the EBP according to prescribed formulae and data sources (see clauses and of Schedule One to the Agreement. Clause of Schedule One to the Agreement further provides that at the end of each year: 1 External Customer means a customer other than Sasol and its Subsidiaries but shall for the purposes of clauses 8.1 and of Schedule One of the Agreement include a maximum of up to 3 million Gigajoules per annum of gas sold to Natref. 2 Year means any sequential period of 12 months (also see footnote 3 below). March 2014 Page 3 of 8

4 (a). If the average SVWAGP for the Year is below the average EBP for the Year then there will be no mandatory refund in terms of the Price Cap mechanism; and (b). If the average SVWAGP for the Year is above the average EBP for the Year then Sasol will refund the over-recovery equitably to its External Customers in proportion to the amount paid for gas during the Year. 3.3 The price data sources to be used in the calculation of the EBP are stipulated in clause of Schedule One to the Agreement and include World Gas Intelligence (WGI) and Oil Price Assessment Limited (OPAL). 3.4 WGI and OPAL have been discontinued. Eurostat was prescribed for use in calculating price cap and to replace the above discontinued indices. 3.5 The following was also done to replace WGI and OPAL with Eurostat: (a) WGI issued its last data series for the first quarter of 2009 in March The WGI data for the first quarter of 2009 was made available in second quarter of the same year. In order to ensure continuous monitoring, and to avoid leaving out a year with no price cap calculation, Eurostat was used to calculate the price cap from April 2010; (b) the adjustment of the volume categories prescribed by Schedule One to the Agreement to include the new volume bands as published by Eurostat. Table 2 below provides the information regarding adjustment on the volume bands; March 2014 Page 4 of 8

5 Table 2: Eurostat Volume category (Annual consumption per GJ) Eurostat Industrial end-user Lowest Highest Bandl1 Volumes less than Bandl < Bandl < Bandl < Bandl < Band I6 Volumes above WGI cubic meters per year (3 770 Gigajoules per annum) 1 million cubic meters per year ( Gigajoules per annum) 35 million kilo Watt hours per year ( Gigajoules per annum) 10 million cubic meters per year ( Gigajoules per annum) 50 million cubic meters per year ( Gigajoules per annum) Additional volumes above (c) The Business Day was used as a data source of exchange rate. This implies that the EBP was converted from Euro into Rands at the average exchange rates for the year as obtained from the Business Day, the South African national morning newspaper, and quoted as being the closing South African Rand exchange rate against the US Dollar, that reflects the value of the last currency transaction that was completed on the previous trading day; and (d) In terms of clause of Schedule One to the Agreement, all prices will be smoothed by means of a 12-month rolling average i.e. the rolling average price for a particular month will be the monthly average of that month and the 11 preceding months. 3.6 Clause 14.3 of Schedule One to the Agreement provides that 75% of the transmission tariff payable to Petronet for transporting piped-gas from Secunda through the Secunda Empangeni Durban transmission pipeline must be deducted from the prices payable by customers within KwaZulu-Natal March 2014 Page 5 of 8

6 for the purpose of calculating the SVWAGP. Therefore, 75% of the transmission tariff payable to Petronet for transporting piped-gas from Secunda through the Secunda Empangeni Durban transmission pipeline was deducted from the prices payable by customers within KwaZulu-Natal for the purpose of calculating the SVWAGP. 3.1 Therefore, the gas prices in KwaZulu- Natal excludes 75% of the Lilly Pipeline tariff payable to Petronet. The table below provides information on the amount of gas volumes transported through the Secunda Empangeni Durban transmission pipeline per annum and the tariff payable to Petronet. Table 3: the amount of 75% of Lilly Pipeline tariff payable to Petronet Volume of gas, in GJ pa Lilly Pipeline tariff payable to Petronet payable for volumes between 12.1m - 18m GJ/a 75% of the Lilly Pipeline tariff payable to Petronet payable for volumes between 12.1m - 18m GJ/a 75% of the Lilly Pipeline tariff payable to Petronet per annum XXXXXXX R 9.77/GJ R 7.33/GJ XXXXXXXX Source: Sasol Gas, Furthermore, clause 14.5 of Schedule One to the Agreement provides that all prices referred to in this Agreement are exclusive of South African Value Added Tax. Therefore SVWAGP and the EBP are exclusive of South African Value Added Tax. 3.3 Based on the pricing data submitted by Sasol Gas and the Eurostat data sources, and after performing the required calculations, the SVWAGP and the EBP for the period 01 April 2013 to 31 March 2014 are as follows: March 2014 Page 6 of 8

7 Table 4: SVWGAP and EBP for the period 01 April 2013 to 31 March 2014 YEAR SVWAGP Rand per Gigajoule of gas EBP Rand per Gigajoule of gas 01 April 2013 to 31 March 2014 R R As the average SVWAGP is below the average EBP for the year period 01 April 2013 to 31 March 2014, Sasol Gas is not required to make a mandatory refund to its external customers in the period 01 April 2013 to 31 March A detailed calculation summary is attached hereto as Annexure A (Sasol Mozambique Pipeline NERSA Gas Price Monitoring Model). 3.5 The results show that the average weighted gas price as charged by Sasol Gas in the period 01 April 2013 to 31 March 2014 in South Africa is below the price charged in selected European countries. 3.6 It should be noted that the comparison of prices is made regardless of underlying cost structures, particularly the cost of supplying gas to customers. This does not provide any information regarding profit margins and also provides no information regarding the extent to which potential market power could be enabling monopoly pricing. 4. CONCLUSION 4.1 In light of the above reasons, the Energy Regulator approved the SVWAGP and EBP calculation for the period 01 April 2013 to 31 March 2014 and concluded that there are no mandatory refunds by Sasol Gas to its external customers. March 2014 Page 7 of 8

8 4.2 In addition, Sasol Gas complied with the requirements of the price capping mechanism (clause 8.2 of Schedule One to the Agreement) in the period 01 April 2013 to 31 March March 2014 Page 8 of 8