NATIONAL ENERGY REGULATOR OF SOUTH AFRICA (NERSA)
In the matter regarding
THE APPLICATION FOR APPROVAL OF PIPED-GAS MAXIMUM PRICES
By
Virtual Gas Network (Pty) Ltd (‘VGN’)
DECISION
On 29 July 2013, the National Energy Regulator of South Africa (‘NERSA’ or
‘the Energy Regulator’) decided as follows:
(a)
approved the VGN maximum price of gas of R278/Gigajoule for the
period 02 April 2013 to 30 June 2014;
(b)
that discounts from the maximum prices are allowed and must be
applied in accordance with the non-discrimination provisions of
section 22 of the Gas Act;
(c)
that the approved maximum price is exclusive of VAT; and
(d)
that the date of the Energy Regulator decision becomes the
effective date of the implementation of the approved maximum
prices, for monitoring purposes.
.
VGN Maximum Price Approval
Page 1
Reasons for Decision
Contents
1
Applicable Law ................................................................................................................. 3
2
Background ...................................................................................................................... 3
a)
The Methodology to Approve Maximum Prices for Piped-Gas in South Africa (2011) ....... 3
b)
Relationship to the Tariff Guidelines .......................................................................................... 4
c)
The Piped-Gas Regulations......................................................................................................... 4
3
The Applicant ................................................................................................................... 6
4
VGN’s Application ............................................................................................................ 7
a)
Pass through Gas Energy Price .................................................................................................. 8
b)
Trading Margin ............................................................................................................................... 9
c)
Price Discriminating Factors ........................................................................................................ 9
5
NERSA’s Assessment of the VGN Application ........................................................... 10
a)
Assessment Of The Gas Energy Price .................................................................................... 10
b)
Assessment Of The Elements Of The Trading Margin .......................................................... 11
c)
Trading Regulatory Asset Base (RAB)..................................................................................... 12
d)
Depreciation ................................................................................................................................. 13
e)
Operating Costs ........................................................................................................................... 13
f)
Net working Capital (w) .............................................................................................................. 14
g)
Tax (T)........................................................................................................................................... 14
h)
Weighted Average Cost of Capital (WACC) ............................................................................ 15
i)
Claw-back ..................................................................................................................................... 16
j)
Distinguishing Features .............................................................................................................. 17
6
Total piped-gas prices inclusive OF tariffs ................................................................. 18
7
Impact Assessment ....................................................................................................... 19
8
Conclusion ..................................................................................................................... 20
VGN Maximum Price Approval
Page 2
Reasons for Decision
1
APPLICABLE LAW
1.1 The legal basis for the Energy Regulator to regulate prices of piped-gas
is derived from the National Energy Regulator Act, 2004 (Act No. 40 of
2004) (‘the NERSA Act’), read with the Gas Act, 2001 (Act No. 48 of
2001), (“the Gas Act”).
2
BACKGROUND
a)
The Methodology to Approve Maximum Prices for Piped-Gas
in South Africa (2011)
2.1 Section 21(1) of the Gas Act prescribes that the Energy Regulator, may
impose licence conditions within the following framework of requirements
and limitations: “(p) maximum prices for distributors, reticulators and all
classes of consumers must be approved by the Gas Regulator where
there is inadequate competition as contemplated in Chapters 2 and 3 of
the Competition Act, 1998 (Act No. 89 of 1998).”
2.2 In line with this particular requirement, NERSA has developed the
Methodology to Approve Maximum Prices of Piped-gas in South Africa,
2011 (“the Maximum Pricing Methodology” or “the Methodology”). The
Methodology is available on the NERSA website at www.nersa.org.za.
2.3 The Maximum Pricing Methodology also provides for the determination
of a trading margin, which is referenced to the Tariff Guidelines.
2.4 Approving maximum prices and the use of the Methodology are
contingent on NERSA determining that “there is inadequate competition
as contemplated in Chapters 2 and 3 of the Competition Act, 1998 (Act
No. 89 of 1998).”
VGN Maximum Price Approval
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2.5 Therefore, for NERSA to regulate maximum prices of piped-gas, it must
be of the view that there exist market conditions or market features
indicating inadequate competition in line with the provisions of Chapters
2 and 3 of the Competition Act.
2.6 The determination of inadequate competition contemplated in section
21(1)(p) of the Gas Act is made by the Energy Regulator outside of this
methodology from time to time. The first determination of inadequate
competition was approved by the Energy Regulator on 08 February
2012.
b)
Relationship to the Tariff Guidelines
2.7 According to section 4(h) of the Gas Act, the Energy Regulator has a
duty to “monitor and approve, and if necessary regulate, transmission
and storage tariffs and take appropriate actions when necessary to
ensure that they are applied in a non-discriminatory manner as
contemplated in section 22.”
2.8 In order to implement this mandate, NERSA developed The Guidelines
for Monitoring and Approving Piped-gas Transmission and Storage
Tariffs in South Africa, 2009 (the “Tariff Guidelines”). The Tariff
Guidelines are available on the website at www.nersa.org.za.
2.9 Hence, the Tariff Guidelines give guidance on tariff-related activities,
which are charges for gas services and which must be added to the
piped-gas energy price(s).
c)
The Piped-Gas Regulations
2.10 The maximum price determination principles outlined in the Maximum
Pricing Methodology, are further informed by the “Price Regulation
Procedures and Principles” prescribed in the Piped-Gas Regulations,
VGN Maximum Price Approval
Page 4
promulgated in terms of the Gas Act, Gazette No 29792, 20 April 2007,
(‘the Regulations”). The following are pertinent to this methodology.
2.11 Sub-regulation 4 (3) prescribes that the Energy Regulator must, when
approving the maximum price in accordance with Section 21 (1) (p) of
the Act,: –
a)
be objective i.e. based on a systematic methodology applicable on
a consistent and comparable basis;
b)
be fair;
c)
be non-discriminatory;
d)
be transparent;
e)
be predictable; and
f)
include efficiency incentives.
2.12 Sub-regulation 4 (4) prescribes that the maximum prices referred to in
sub-regulation 4 (3) must enable the licensee to:
a)
recover all efficient and prudently incurred investment and
operation costs; and
b)
make a profit commensurate with risk.
2.13 Sub-regulation (4) (13), provides that, when ownership of gas changes,
the price of gas in the new owner’s hands refers to the price of gas from
the seller plus any tariffs charged by that seller.
2.14 Sub-regulation 4 (6), then requires that, when gas is sold, the
accompanying invoice must itemise the constituent elements of the total
price reflected on the invoice, including at least the cost of gas, and
transport tariffs and any other charges.
2.15 Regulation 4(5) provides that, the Gas Regulator must approve
maximum prices for gas for each distribution area or group of distribution
areas as indicated in Annexure A for the following classes of customers:
(a) Residential; and (b) commercial and industrial. As there are no
residential customers who purchase gas from Sasol Gas, this
VGN Maximum Price Approval
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classification is redundant to the current application. NERSA is therefore
approving maximum prices for Sasol Gas’ licensed trading activity for
customers in the entire group of gas distribution areas as applied for.
2.16 Annexure A of the Regulations provides the definition of the classes of
customers as classified by their annual gas consumption in GigaJoules
as follows:
CLASS
ANNUAL GAS CONSUMPTION
Class 1
Less than 400 GJ pa
Class 2
401 GJ pa
to
4 000 GJ pa
Class 3
4 001 GJ pa
to
40 000 GJ pa
Class 4
40 001 GJ pa
to
400000 GJ pa
Class 5
400 001 GJ pa
to
4 000 000 GJ pa
Class 6
> 4 000 000 GJ pa
to
2.17 These legislative aspects, as prescribed by the Gas Act and the NERSA
Act are essential in defining the scope and nature of the Maximum
Pricing Methodology of Piped-gas developed by NERSA.
3
THE APPLICANT
3.1 Virtual Gas Network (Pty) Ltd (registration number 2008/024174/07) is a
wholly owned subsidiary of CNG Holdings (Pty) Ltd, a registered
company established by Absorption Technologies (Pty) Ltd and private
investors represented by Tricor Financial Services (Pty) Ltd.
3.2 The National Energy Regulator granted Virtual Gas Network (Pty) Ltd
(VGN) licences on 27 May 2010, subject to appropriate licence
conditions, for the operation of a gas storage facility in the Langlaagte
area of the City of Johannesburg Metropolitan Municipality; and for
trading in gas in 20 geographic areas of the Gauteng, Mpumalanga,
Free State and KwaZulu-Natal provinces. The trading areas are listed in
the VGN licence application Reasons for Decision (RfD’s) published on
the NERSA website.
VGN Maximum Price Approval
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3.3 VGN’s business model is to source gas from gas suppliers with pipeline
assets, compress the gas and store it in special box-like containers
called MAT modules. Heavy vehicles then collect the MAT modules and
transport them to daughter stations situated at customer sites, where
they will be exchanged with empty MAT modules, which in turn are
returned to the mother station for refuelling.
3.4 VGN customers are industrial and commercial customers. It plans to also
service smaller residential customers in future. VGN’s target market are
businesses that are /or were previously using LPG, paraffin, diesel and
petrol. In December 2012, VGN commissioned a mother station and is
supplying compressed natural gas to industrial users . 0000 0000 0000
000 0000 0000 0000 0000 0000 0000 0000 0000 0000 0000 0000
00000.
4
VGN’S APPLICATION
4.1 On 19 December 2012, VGN submitted an incomplete application for a
maximum price of piped-gas. On 26 April 2013, the Energy Regulator
received a revised application for a maximum price of piped-gas from
VGN for the period 02 April 2013 to 30 June 2014.
4.2 This is VGN’s first complete application since the implementation of the
Maximum Pricing Methodology in July 2012.
4.3 The financial data used by VGN in the maximum price application were
average figures pertaining to the calendar years 2013 and 2014 (that is
Jan – Dec 2013 data plus Jan - Dec 2014 data divided by 2). This
averaged data will apply in the period 02 April 2013 to 30 June 2014.
The applicant justified the use of the average data, indicating that this is
the first time it is operating and the estimates provided are sensitive to
the rate of expansion and the volume of gas distributed. If VGN had
used estimates pertaining to the price application period, the maximum
price would have been too high. It further highlighted that the approach
VGN Maximum Price Approval
Page 7
adopted in the application is beneficial to customers as they would pay a
levelised price whilst the licensee does not lose incurred costs.
4.4
VGN also highlighted in its application that it will be supplying its filling
station (mother station) and approximately 9 industrial customers 0000
000000
000000000000
000000000
00000000
with
their
gas
requirements that will substitute LP Gas, Paraffin, Diesel, and Petrol. No
customer will use 000000000000 and the average distribution kilometres
is estimated 00000000000 from Langlaate (Mother Station). It further
stated that NERSA must consider that this is the first cycle (of
application) and that the budgeted figures for maximum pricing that will
be used for gas distribution via road could move significantly depending
on the rate of expansion, volume of gas distributed, average distance to
customers from Mother Station and capital costs to customers.
4.5 VGN is applying for a maximum price of piped-gas of R278/GJ excluding
VAT. The price will be itemized as follows:
Table 2: Summary of itemised maximum price
Component
R/GJ
Cost of Gas Purchases for resale, (GE price) plus
00000
Trading Margin
00000
Total Price
R278.00/GJ
4.6 VGN also stated in its application that it is applying for one maximum
price to apply for all the volume categories as defined in the piped gas
regulations.
a)
Pass through Gas Energy Price
4.7 VGN submitted that it did not calculate a Gas Energy Price (GEP) but
rather opted to use the “Pass-Through Approach”, which is allowed in
the Methodology. VGN used its purchase price that will be charged by
Egoli Gas (Pty) Ltd (Egoli Gas) in the maximum price period as the GEP.
VGN Maximum Price Approval
Page 8
To this figure it will add the trading margin as prescribed in the
Methodology.
b)
Trading Margin
4.8 VGN applied for a trading margin as summarised below: (Please note
that the figures are taken as they were submitted on the application)
Table 3: VGN Trading Margin Calculation Summary
Component
Working capital
Cost of Sales
Total assets
Recoverable Capital
WACC
Margin on Investment
Expenses
Taxation
Depreciation
Clawback
Allowable Revenue
Volumes in Gigajoules (GJ)
Trading Margin (R/GJ)
Rands (R)
0000000000000
0000000000000
0000000000000
00000000000000
00000
0000000000000
0000000000000
0000000000000
0000000000000
00000
000000000000000
000000000000
00000
4.9 The trading margin will apply from 02 April 2013 to 30 June 2014. The
trading margin is more than the purchase price of gas. This is a result of
high capital costs that are required to set up and operate the
Compressed Natural Gas (CNG) model as a substitute to the petroleum
filling stations.
c)
Price Discriminating Factors
4.10 VGN stated in its application that each customer will be on a different
price determined by the following distinguishing factors:
a.
the number of MATS delivered per day - an indicator of volume
consumed per day;
b.
the distance from the mother station in Langlaate; and
c.
capital costs used to set up the supply requirements at the
customer site as well as the amount of MATS needed for rotation
purposes and customer maximum drawdown demand.
VGN Maximum Price Approval
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4.11 The application further states that, to provide transparency to VGN’s
customers, VGN gives the customer 2 contracts:a.
an equipment rental agreement. The contract period will be a
minimum of 5 years; and
b.
a gas supply agreement. The supply agreement is for a period of 5
years.
4.12 An equipment rental agreement will be based on the capital cost of
equipment and infrastructure provided at the customer’s site
4.13 Gas supply agreement will be a set price for gas supplied at the
pressure required (below 6 bar) at the customers site
4.14 The application includes an equipment rental escalation and gas
molecule price escalation:
a.
For equipment rental, the price review per annum will consider
service and maintenance costs for that specific customer.
b.
000
0000
00000
0000
00000
0000000000000000000000000000000000000000000000000000.
4.15 It was also indicated in the application that the costing provided to
NERSA is an overall summary indicating the maximum price that will be
charged to customers.
4.16 VGN will apply discounts to this maximum price of gas according to
provisions of section 22 of the Gas Act.
5
NERSA’S ASSESSMENT OF THE VGN APPLICATION
a)
Assessment Of The Gas Energy Price
5.1 According to the Methodology, applicants are required to submit a pipedgas price application for approval 3 to 4 months prior to implementation.
To calculate the GEP, the licensee should use either the price indicators
VGN Maximum Price Approval
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approach or the alternative pass through approach. The alternative pass
through approach may be used where the licensee deems the price
determined using the Price Indicators approach to be materially lower or
higher and impacts negatively on its business.
5.2 VGN opted to use the “Pass-Through Approach” justifying that such an
approach is more reflective of their operations as they buy gas from
Egoli Gas at a given cost and then build their costs from this purchase
price.
5.3 VGN used 0000 as the GEP. This is the company’s projected cost price
of gas purchased for resale from Egoli Gas in the maximum price period.
NERSA used the same projected gas purchase price of 0000 as a pass
through in assessing the application.
b) Assessment Of The Elements Of The Trading Margin
5.4 Section 3.6.3 of The Methodology states that:
“The trader’s margin (as a percentage) will be calculated in nominal
terms. The nominal Weighted Average Cost of Capital (WACC) of the
trader will be the trading margin (%), since all other expenses are
allowed to the licensee as a pass-through. In so doing, the Energy
Regulator will ensure the return on investment as derived in the cost of
capital calculation explained below is achieved.
Gas trading margins will be applied to the sum of ‘Cost of Sales’ plus
‘Trading RAB’ of that trader plus ‘Working Capital’.
Cost of Sales and operating expenses that are allowable in the pipedgas trading business are those determined in terms of the prescribed
Volume 1 and Volume 3 of the Regulatory Reporting Manuals for the
piped-gas industry.”
5.5 The formula for trading services provided to trading customers of a
trading licensee is:
Allowable Revenue (trading) =
VGN Maximum Price Approval
Page 11
{Expenses + ((Cost of Sales + RAB + Working Capital)* Margin + T + C}
Where:
RAB = approved historical cost trading services RAB less accumulated depreciation
Working Capital = approved 45-day-average trading working capital
Expenses
= approved efficient trading operating expenses including depreciation
Cost of Sales = Opening inventory of gas held for sale + Purchases of gas for sale Closing inventory of gas held for sale
Margin = Trading margin (%) determined in nominal WACC terms
T
= Corporate tax expense for the period
C
= Clawback (+/-) on volumes
5.6 The paragraphs below provide an analysis of each component of the
trading allowable revenue formula.
c) Trading Regulatory Asset Base (RAB)
5.7 According to section 3.6.1 of the maximum pricing methodology, trading
licensees would normally not have piped-gas network assets, and if they
do they would be insignificant. It also provides that such assets, referred
to as piped-gas trading plant in service plus limited amounts of nonnetwork assets referred to as the piped-gas general plant would form the
RAB. The investment in RAB would be recovered through a nominal
trading margin.
5.8 The RAB value is at historical cost and is not trended because the
investment is recovered through a nominal margin. The formula for this
is as follows:
Regulatory Asset Base = Original Cost of Property, Plant & Equipment (v) Accumulated Depreciation (d)
5.9 VGN applied for a RAB of 0000 million. VGN submitted the cost of
building the trading section of the mother station as well as the costs of
installing daughter stations at 9 customers. NERSA accepted these
assets as trading assets.
5.10 NERSA assessed the assets and used the original asset costs submitted
by VGN. NERSA used 0000 million as the RAB which corresponds to
VGN Maximum Price Approval
Page 12
the maximum price period ending 30 June 2014. The difference between
VGN and NERSA figures is attributable to that VGN erroneously used
the 2015 RAB. The 2015 figures have been excluded because the
application is for the maximum price period ending 30 June 2014.
d) Depreciation
5.11 In accordance with section 2.2 of the maximum pricing methodology,
reference was made to the Tariff Guidelines which provide that
accumulated depreciation (d) is the cumulative depreciation against
plant property, vehicles and equipment in service and it should be
calculated on a straight line basis over the economic life of the asset.
5.12 Since the original cost and the remaining economic life of assets could
be determined, NERSA used the original/historical value to calculate the
straight line depreciation cost.
5.13 NERSA used the straight line depreciation method and arrived at an
amount of 0000 million whilst the applicant used 0000 million. The
difference in amounts arose because NERSA used summarised asset
values for 2014 whilst the applicant depreciated per asset and used
values for 2015 instead of 2014.
e) Operating Costs
5.14 According to section 3.6.2 of the maximum pricing methodology, all
operating costs, including depreciation for the application year, that are
efficient and prudently incurred by the piped-gas trading licensee shall
be allowed as a pass-through in the trading margin.
5.15 In considering the VGN expenses, NERSA also referred to the tariff
guidelines section 4.3 that stipulate that each expense item should be
assessed using principles such as whether the expense was “prudently
incurred”, its controllability and efficiency.
5.16 VGN applied for operating expenses of 0000 million. NERSA used the
above principles and assessed each expense item as provided by VGN.
VGN Maximum Price Approval
Page 13
VGN is currently not yet required to comply with the Regulatory
Reporting Manuals (RRM’s) hence no Cost Allocation Manual (CAM) is
available from VGN for NERSA to use on how these costs are separated
between operating expenses and capital projects/non –operational site.
5.17 However NERSA applied the RRM principles to ensure the expenses
line items are in accordance with those provided for in regulatory
reporting requirements and used the figure as provided by the applicant
of 0000 million.
f)
Net working Capital (w)
5.18 According to the methodology, the net working capital refers to the
various regulatory asset-base funding requirements other than utility
plant in service. This is determined using the below formula and it should
be on a 45 day basis:
Net working capital = inventory + receivables + operating cash + minimum cash
balance – trade payables.
5.19 VGN applied based on the prescribed 45 day working capital cycle using
the above formula for an amount of 0000 million. NERSA used the same
figure as the applicant.
g) Tax (T)
5.20 In calculating tax, reference was made to section 4.4 of the Tariff
Guidelines that 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 period under review. However this application
being a forward looking, the actual taxes payable for the maximum price
period under review will only be known after the end of the maximum
price period.
5.21 NERSA therefore used the flow-through tax approach to determine the
estimated tax payable figure in the allowable revenue. The difference
between this estimated flow-through tax and the actual flow-through tax
VGN Maximum Price Approval
Page 14
will be subject to +/- claw-back in subsequent maximum price period as
per the methodology.
h) Weighted Average Cost of Capital (WACC)
5.22 VGN used the method articulated below in its WACC calculations:
 E 
  Dt 

WACC  
 * Ke  
 * Kd 
 Dt  E 
  Dt  E 

Where:
WACC = nominal weighted average cost of capital
E = equity
Dt = debt
Ke(nominal) = the nominal cost of equity
Kd(nominall) = the post tax nominal cost of debt
5.23 The same companies used by NERSA were used by the applicant to
estimate beta. 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 Methodology.
The following US companies were used by the NERSA and VGN as
proxies:

AGL Resources Inc.

UGI Corporation

South Jersey Industries

WGL Holdings Inc.

The Laclede Group

Piedmont Natural Gas Company Inc.
5.24 The mark-to-market risk free rate of 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 nominal risk free rate of
11.92% calculated over 25 years as required by the sources of
information approved and published by NERSA. VGN calculated and
came up with the same risk free rate.
5.25 The market risk premium (“MRP”) was calculated using the JSE ALL
Share Index for the previous 25 years up to June 2012. This yielded a
VGN Maximum Price Approval
Page 15
nominal MRP of 5.62% which is the same figure calculated by VGN. The
applicant used data for the period ending June 2012 to calculate its
WACC when it submitted its initial application in December 2012 and did
not change the period when it submitted additional information to
NERSA. Therefore NERSA also used data ending June 2012 in
assessing the application.
5.26 With respect to gearing, the Methodology prescribes a minimum debt
ratio of 30% in the capital structure. VGN used 000 debt which is above
the prescribed minimum thereby complying with the Methodology.
Table 4: Below is a comparison of NERSA and VGN’s WACC:
WACC Calculation
Summary
NERSA
VGN
Elements Used In WACC
%
%
a Ke (nominal)
000
000
b Kd (nominal)
000
000
c Weight of Ke
000
000
000
28
11.92
000
28
11.92
000
000
000
000
000
000
d Weight of Kd
e Tax rate
f Risk free rate (Nominal)
g Cost of Equity (a*c)
Post –tax Cost of Debt (b*(1h e)*d)
Nominal WACC (g+h)
5.27 NERSA and the licensee used a WACC of 000.
i)
Claw-back
5.28 Since this is VGN’s first maximum price application, there was no claw
back calculated on the trading margin.
5.29 The table below summarises the trading margin calculation. The VGN
figure of 000 is a rounded down figure from 000 and it is taken as it was
submitted in the application. The difference in the NERSA and VGN
trading margins are due to differences in total assets and depreciation
figures as explained in paragraphs 7.10 and 7.13 respectively.
Table 5: VGN Trading Margin Calculation Summary
VGN Maximum Price Approval
Page 16
Component
NERSA Rands (R) VGN
Rands (R)
Working capital
0000000000
0000000000
Cost of Sales
0000000000
0000000000
Total assets
Recoverable Capital
0000000000
000000000000
0000000000
000000000000
Margin on Investment
0000000000
0000000000
Expenses
0000000000
0000000000
Taxation
0000000000
0000000000
Depreciation
0000000000
0000000000
Clawback
0000000000
0000000000
000000000000
000000000000
000000000000
000000000000
000000
000000
Allowable Revenue
Volumes in Gigajoules
(GJ)
Trading Margin
(R/GJ)
j)
Distinguishing Features
5.30 Section 22(1) of the Gas Act states that “licensees may not discriminate
between customers or classes of customers regarding access, tariffs,
prices, conditions or service except for objectively justifiable and
identifiable differences regarding such matters as quantity, transmission,
distance, length of contract, load profile, interruptible supply of other
distinguishing feature approved by the Gas Regulator.”
5.31 VGN
indicated that it will charge each customer different prices
according to the following distinguishing factors:
a.
the number of MATS delivered to each customer per day - an
indicator of volume consumed per day;
b.
the distance from the mother station in Langlaate; and
c.
capital costs used to set up the supply requirements at the
customer site as well as the amount of MATS needed for rotation
purposes and customer maximum drawdown demand.
5.32 The above-mentioned differentiating factors are objectively justifiable
and identifiable as articulated in section 22 of the Gas Act.
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5.33 VGN applied for an escalation based on 50% HFO and 50% PPI.
NERSA notes that such an escalation based on 50% HFO and 50% PPI
alone will not be permissible as it may be discriminatory as it is solely
based on HFO and PPI which are not the gas energy price indicators.
5.34 Furthermore, VGN has indicated that the escalation will be annual. The
maximum price is for one year. Hence the escalation will not apply
because according to Section 3.4 of the maximum pricing methodology,
VGN will have to apply annually to NERSA for a maximum price. For a
longer period of price approval (e.g. for long term contracts), the initial
base price will be determined as per this methodology and the applicant
will specify the form and frequency of price adjustments for the duration
of the contract for approval by the Energy Regulator. Therefore the
method applied for by VGN is not compliant with the methodology
because it is an annual review that is not based on all the price
indicators.
6
TOTAL PIPED-GAS PRICES INCLUSIVE OF TARIFFS
6.1 After determination of the pass-through GEP and the trading margin as
explained above, the Methodology provides for the gas trader to recover
the storage tariff as a pass through.
6.2 The sum total of the above elements becomes the total charges invoiced
by the gas trader to its piped-gas customers.
6.3 The price of piped-gas charged by VGN to customers will be the
maximum price plus a storage tariff and may be expressed, generically,
as follows:-
Total Price (trader) = GE + TSM + S
Where:
Trader = for customers of a trader;
VGN Maximum Price Approval
Page 18
GE = Maximum price for gas energy;
TSM = Approved trading service margin
S = Pass through of monitored and approved and or regulated storage tariff
6.4 VGN will add an approved storage tariff to the maximum price of
R278/GJ to arrive at the maximum price it can charge its customers.
7
IMPACT ASSESSMENT
7.1 VGN highlighted that their strategy is to charge a price around 70% to
80% of the retail fuel price for all their customers. The VGN business
model is to offer a substitute to conventional petroleum fuels such as
LPG, Petrol and Diesel. 0000 0000 0000 00000 00000 000000 0000000
000000000000000000000000000000000000000000000000000000000
000000000000000000000000000000000000000000000000000000000.
7.2 Therefore a comparison of the actual prices charged by conventional
petroleum fuel products and the maximum gas price is a helpful
indication of the price incentive for consumers to move to piped-gas as a
substitute fuel. The comparative table is for indicative purposes only as
there are other factors such as security of supply and capital costs of
switching to another fuel among other issues that a consumer considers
before switching fuel.
Table 6: Comparative retail prices of petroleum fuels and gas
Petrol at
R12.97
per litre
Diesel at
R11.97
per litre
LPG at
R21.83
per kg
Petrol, Deisel and LPG Prices in
Rands per Gigajoule
341.90
314.77
411.49
Maximum Price of piped-gas in
Rands per Gigajoule
278
278
278
23%
13%
48 %
% Difference
7.3 The maximum price of R278/ J converts to R10.55/ litre of petrol.
Therefore the maximum price applied for by the applicant is below the
VGN Maximum Price Approval
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natural cap of VGN which is the current petrol and diesel prices of
R12.97/litre and 11.97/litre respectively.
7.4 The applicant further highlighted that their actual piped-gas prices are
not tracking the upward movement of petrol prices. The prices were set
when the petrol price was around R11.95/litre. Subsequently, the
licensee is achieving the objective of setting a price that attracts
customers to substitute petroleum fuels with natural gas.
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
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