NATIONAL ENERGY REGULATOR OF SOUTH AFRICA
September 2011
DISCUSSION DOCUMENT – DETERMINATION OF THE INADEQUATE
COMPETITION IN THE PIPED-GAS INDUSTRY AS CONTEMPLATED IN
CHAPTERS 2 AND 3 OF THE COMPETITION ACT, 1998 (ACT NO. 89 OF
1998)
1.
EXECUTIVE SUMMARY
1.1. The Energy Regulator is mandated in terms of the National Energy
Regulator Act, 2004 (Act No. 40 of 2004) to regulate the electricity,
piped-gas and petroleum pipeline industries in terms of the Electricity
Regulation Act, 2006 (Act No. 4 of 2006), Gas Act, 2001 (Act No. 48 of
2001) and Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).
a)
The functions of the Energy Regulator are to inter alia, as
appropriate, regulate prices in terms of section 21(1)(p) in the
prescribed manner;
1.2. Furthermore, the Energy Regulator has a duty in terms of section 21(1)
(p) of the Gas Act to approve the maximum prices for distributors,
reticulators and all classes of consumers where there is inadequate
competition as contemplated in Chapters 2 ad 3 of the Competition Act,
1998 (Act No.89 of 1998)
1.3. In order to fulfill the above mandate, NERSA has developed a discussion
document regarding the adequacy of competition in the piped-gas
industry and to determine whether or not competition is inadequate as
contemplated in Chapters 2 and 3 of the Competition Act.
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1.4. One of the objects of the Gas Act is to promote the development of
competitive markets for gas and gas services.
1.5. Section 4(g) of the Gas Act, states that the Gas Regulator must, as
appropriate, in accordance with this Act“regulate prices in terms of section 21(1) (p) in the prescribed manner.”
1.6. In terms of section 21(1) (n) of the Gas Act, “an exclusive geographic are must
be based on the distributor’s ability to supply present and future potential
consumers at competitive prices and conditions.”
1.7. Furthermore, section 31(1) (c), the Gas Regulator must conduct
investigations into complaints by any customer concerning unreasonable
differences regarding the supply of gas or gas services by licensees.
1.8.
It must be noted that the determination of inadequate competition
contemplated in section 21(1)(p) is made by the Energy Regulator as a
determination separate from the methodology for approving the
maximum prices of gas in the piped-gas industry.
1.9.
The consultation document on competition in the piped-gas industry
provides information on NERSA’s assessment and analysis of the state
of competition in the piped-gas industry in South Africa. This includes
market characteristics and features which signal uncompetitive and anti
competitive outcomes as indicators that there is insufficient competition
in the piped-gas industry.
1.10. NERSA has previously published its views on the adequacy of
competition in the gas together with the methodology for maximum
prices without calling for comments. NERSA would hereby like to solicit
views and comments of stakeholders specifically on the (in)adequacy
of competition in the gas industry as contemplated in contemplated in
Chapters 2 and 3 of the Competition Act.
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1.11. Interested parties are invited to provide written comments, by 31
October 2011, which the Energy Regulator will consider in the
determination of the adequacy of competition in the piped-gas market.
1.12. Further, a public hearing regarding the the state of competition in the
piped-gas industry will be held on 25 October 2011, from 10h00 at
NERSA offices.
1.13. The above consultation process is held in terms of section 10(1) of the
NERSA Act, which provides that every decision of the Energy
Regulator must, inter alia, be in writing and consistent with the
Constitution and all applicable laws; and taken within a procedurally fair
process in which affected persons have the opportunity to submit their
views and present relevant facts and evidence to the Energy Regulator.
2.
INTRODUCTION
2.1.
For NERSA to approve maximum prices of piped-gas, it must be of the
view that there exist market conditions or market features indicating
inadequacy of competition in the gas industry in line with the provisions
of Chapters 2 and 3 of the Competition Act.
2.2.
The following is an assessment by NERSA of the current piped-gas
market conditions that indicate inadequate market competition, and
hence the need to approve the piped-gas prices in the prescribed
manner. It should be noted that this assessment of the existence of
inadequate competition is not a permanent finding as market conditions
change overtime, but an assessment of current conditions. NERSA will
periodically assess if these conditions have materially changed to a
situation where there is adequate competition, thereby possibly
negating the need to approve maximum prices.
2.3.
Well-functioning competitive markets are characterised by several
important attributes, namely:
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2.4.
(a)
Ease of entry and exit;
(b)
Lack of significant market power;
(c)
Availability of information;
(d)
Access to network facilities
(e)
Large number of sellers and buyers
The state of competition in the gas market is determined based
primarily on market power and abuse of dominance provisions
stipulated in section 7, 8 and 9 of Chapter 2 of the Competition Act.
However this does not preclude consideration of crucial factors
normally considered in Chapter 3 of the Competition Act.
2.5.
The Energy Regulator has assessed the piped-gas industry to confirm
the existence of a firm that is dominant and that possesses market
power in the gas market. The Competition Act states that a firm is
dominant if:
(a)
it has at least 45% of that market;
(b)
it has at least 35%, but less than 45% of that market unless it can
show that it does not have market power; or
(c)
2.6.
it has less than 35% of that market but has market power”
Market power as defined in the Competition Act refers to the ability of a
firm to control prices, or exclude competition or behave to an
appreciable extent independently of its competitors, customers or
suppliers.
2.7.
For the purpose of this analysis, it is not necessary to determine that a
participant in the gas market industry is engaged in any of the anticompetitive conduct/practices stipulated in Section 8 and 9 of the
Competition Act. To assess whether competition in this industry is
sufficient, the Energy Regulator shall examine the degree of
competition in the South African gas market in terms of:
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a)
Market structure and existence of monopolistic conditions;
b)
Uncompetitive and discriminatory pricing; and
c)
Existence of entry barriers.
Market Structure and existence of monopolistic conditions in the pipedgas industry
2.8.
There is one licensee, namely Sasol Gas Ltd, who is effectively the
sole supplier of gas and importer of natural gas into the South African
market. The licensee is vertically integrated in that it owns and
operates the pipeline network both at transmission and distribution
level. It is also a dominant player in the trading of gas at wholesale and
retail levels. Currently there are four traders of natural gas in South
Africa in addition to Sasol Gas Ltd most of whom resell gas purchased
from Sasol Gas Ltd.
2.9.
The conditions in the South African gas market manifest those of a
monopolist who has an influence in the market in terms of gas supply
and prices. Notably, the price of natural gas is referenced to the cost of
an alternative energy source available to a customer. This is an
example of perfect price discrimination by a dominant supplier. It must
be noted that this price discrimination is allowed in terms of clause 1.16
of Schedule One to the Agreement.
Uncompetitive pricing and discriminatory pricing
2.10.
Not only does the licensee discriminate according to categories of
customers, but has the power to charge different prices to similar
individual customers. The pricing principle based on cost of alternative
energy source to an individual customer has no standard or specific
alternative fuels to be considered for determination of gas, leaving
individual customers vulnerable to markedly high prices.
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2.11.
The market value pricing methodology for natural gas in South Africa
will prevail for ten years, until 25 March 2014 when the Special
Regulatory Dispensation Period stipulated in the Schedule One to the
Agreement expires. The Schedule One to the Agreement1 takes
precedence over the Gas Act. This Agreement entails several anticompetitive clauses on supply and prices of gas and access to the
infrastructure network.
2.12.
Furthermore, NERSA has no legislated powers to (i) set or regulate the
distribution tariff, (ii) to set the price of gas, or (iii) to set the
transmission tariff. Its regulatory oversight to control prices in this
developing industry is therefore limited. The Gas Act further comprises
sections which allow a distributor to operate in an exclusive geographic
area, and does not prescribe mandatory third partyaccess to
distribution networks, thereby limiting the scope for competition.
2.13.
In view of the above, and given the market value pricing principle in the
gas market in South Africa, it is NERSA’s view that the gas prices are
higher than those charged in a situation of perfect competition or in a
competitive market. In competitive market conditions, a firm prices its
products at the level where the price equals the marginal cost. If the
price is above marginal cost, economists agree that such a firm has
market power to influence prices without
losing business to
competitors.
Existence of entry barriers
2.14.
Free entry and exit makes markets function efficiently. Barriers to entry
in the gas industry are significant due to (1) very large infrastructure
investment requirements and cost of operating infrastructure, (2)
technical safety requirements, and (3) geographical restrictions at the
1
Regulatory Agreement Between The Minister Of Minerals and Energy, The Minister of Trade and
Industry And Sasol Ltd.
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level of distribution network. This reduces the possibility for
participation in the gas market, thereby limiting the extent of
competition (and thereby market efficiency) that is possible.
2.15.
Potential competition refers to the possibility that a new firm may
provide the same or a similar product or service in the market. The
degree of potential competition depends on the barriers to entry, that is,
the difficulties new firms face when they start their operations.
2.16.
Even when prices are above marginal cost and considered sufficiently
high to attract entry, it will be difficult to attract entry in the gas market
due to the large capital investment required at the transmission and
distribution levels of the gas market. A potential entrant will further be
limited in its impact on competition due to the exclusive nature of
established distribution areas and the absence of mandatory third party
access thereto.
2.17.
The existence of the following market characteristics or combination of
features, namely:
3.
a)
significant entry barriers,
b)
lack of countervailing power,
c)
discriminatory pricing; and
d)
the extent of vertical integration in the gas market.
CURRENT
ASSESSMENT
CONFIRMING
INADEQUACY
OF
COMPETITION
3.1
NERSA’s mandate to regulate, through approval, maximum prices is
contingent upon it determining that “there is inadequate competition as
contemplated in Chapters 2 and 3 of the Competition Act, 1998 (Act
No. 89 of 1998)” [Gas Act 21(1)(p)].
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3.2
Chapter 2 of the Competition Act prohibits anti-competitive practices by
cooperating entities and also prohibits the abuse of a dominant position
of an entity acting unilaterally. Chapter 3 relates to merger control.
3.3
Restrictive practices are categorized as either horizontal or vertical.
Anti-competitive behaviour in the horizontal sense would involve
entities at the same level in the supply chain, such as collusion by
different trading licensees selling gas from a transmission pipeline
setting prices to trading licensees purchasing for sale on a distribution
network.
3.4
Anti-competitive behaviour in the vertical sense would encompass
collusion along the supply chain, such as a trading licensee and its onselling customers agreeing a minimum re-sale price of gas.
3.5
The abuse of dominance occurs where a powerful market player acts
in a unilateral manner, which distorts, impedes and prevents
competition within the market within which it operates.
3.6
3.7
Inadequate competition could therefore be established if:
a)
there are no competing entities; or
b)
if the monopolistic behaviours exist.
As the piped gas industry is currently structured in South Africa, Sasol
is active at all levels. A Sasol subsidiary or affiliate:
a)
holds the production licences for the Pande and Temane fields
in Mozambique which are currently the predominant source of
gas in the South Africa piped-gas market;
b)
produces methane rich gas at Secunda which is the gas
supplied to the KwaZulu-Natal network
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c)
is a shareholder in the Republic of Mozambique Pipeline
Company (ROMPCO) which owns the transmission pipeline
delivering gas from the Pande and Temane fields to Secunda;
d)
owns
the
transmission
pipeline
network
in
Gauteng,
Mpumalanga and Free State;
e)
owns the distribution network in Gauteng, Mpumalanga, Free
State and KwaZulu-Natal;
f)
is the exclusive distribution licensee in Gauteng, Mpumalanga,
Free State and KwaZulu-Natal; and
g)
is the sole trader over this infrastructure, except in KwaZuluNatal where a company in which Sasol owns a significant
shareholding has a trading licence.
3.8
While clearly in a dominant position in the current piped-gas industry, it
is noted that there are two trading licensees in KwaZulu-Natal. This
was not considered sufficient in itself to excuse the KwaZulu-Natal
trading licensees from regulation, as it was noted that:
a)
the two trading licensees in Kwazulu-Natal are related through
shareholding;
b)
a market sharing agreement existed between the two entities
prior to Sasol applying for leniency to the Competition
Commission;
c)
there is de facto one trader from which customers buy gas in
KwaZulu-Natal, namely Spring Lights Gas.
3.9
It was argued during the consultation process that although the limited
number of gas suppliers would suggest a lack of direct competition
within the gas industry, competitive discipline is never-the-less imposed
on the industry by suppliers of competing fuels. Whilst the potential for
switching suppliers (if not between gas suppliers then switching to or
away from gas in favour of some other fuel) is a necessary condition
for competition, it is not necessarily an indicator that effective
competition exists. Given the costs of fuel conversion the choice
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between fuels can typically only be exercised at highly infrequent
intervals. Once the decision to use gas has been made, the customer
is effectively captured by the gas supplier, and in the absence of
multiple gas suppliers the customer is no longer open to competitive
threat.
3.10
It should be noted in this regard that the adoption of energy price
indicators related to other fuels is a pragmatic approach to determine
what a competitive energy price should be.
It is not evident that
alternative fuel types provide adequate competition for gas. It is also
not
indicative of the “relevant market” for piped-gas in competition
analysis terms, as NERSA does not support the view that the market is
defined as a broad “energy market” but instead considers the relevant
market to be one for piped-gas including (mobile) storage.
4.
DUE DATES AND TIMELINES
The National Energy Regulator of South Africa (NERSA) invites stakeholders
and interested parties to comment on the above document. Written comments
are to be submitted to the Energy Regulator on following email address:
[email protected] or to the NERSA offices at Kulawula House, 526
Vermeulen Street, Arcadia, Pretoria by 31 October 2011.
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