South African Economic Regulators Conference

1. South African Economic Regulators Conference Maurice Radebe

2. 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

3. 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

4. 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.

5. 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

6. 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.

7. 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

8. 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

9. 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 

10. 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.  

11. 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.

12. 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.

13. 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

14. 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.

15. 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.

16. 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.

17. 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.

18. 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

19. 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

20. 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

21. THANK YOU