GAS BILL: COMMENTS ON SUBMISSIONS: CHAPTER ONE

Version 20-6-01

Statement

DME Comments/Position

Recommendations

General Statement: Eskom

It is important that the Gas Bill be underpinned by the following issues:

  • Equity, so that all players in the industry are treated in a fair manner; and also to ensure that different energy forms are regulated in a coherent manner;

  • An integrated approach should be adopted towards energy management that does not see gas in isolation, but that allows it to be linked to other energy forms in terms of the manner in which it is regulated;

  • The need to take into account long term gas purchase contracts.

 

  • Separation of powers between the Minister and the Regulator, and clarification of these roles.

 

 

  • Agreed.

  • Agreed.

 

 

  • Agreed but the Regulator will have to take care that long term contracts are not be used as a pretext to delay competition. Long-term contracts were the main reason for the delay in implementing the European Union Gas Directive. It was argued that long-term contracts had been signed under monopoly conditions and the consumers who had signed long-term contracts would be at a disadvantage to consumers buying spot gas in a competitive market.

  • This balance is dealt with in the next two sections..

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For noting.

General Statement: Egoli

 

Egoli Gas is faced with the challenge of expanding the gas infrastructure into the domestic market and will need to make large-scale investments from which financial returns will only result in the long term. To do this with confidence, Egoli Gas must be assured that its geographical exclusivity is protected. (i.e. other players cannot come along at a later date and "cherry pick" key customers.) This concept of awarding exclusive geographic areas to single parties is essential to promoting utility infrastructure investment (especially in a market in its infancy) and is a key principle recognised in the Government’s Energy White Paper of 1998.

It is also essential that the activities of Egoli Gas, or indeed any other company wishing to invest in the Gas sector, are subject to consistent and unambiguous regulation by a single regulator in which transparent and equitable rules prevail.

Section 21 of the Bill provides for exclusive geographic areas for distributors. A distributor would target the higher volume, and economically viable customers who receive their gas at a higher gas pressure in that area; and there would be absolutely no incentive for a reticulator, supplying low volume customers in that same area, to invest. In other words, the same concern of "cherry picking" arises in respect of Section 21.

To prevent constitutional conflict, any exclusive geographic area granted to a distributor in terms of Section 21 must therefore exclude any area in which gas is already distributed/reticulated under local government licence and we submit that a new Section 21(1)(n) should be added as follows:

"an exclusive geographic area contemplated in paragraphs (j), (k), (l), or (m) shall exclude a municipal area in which gas is distributed, reticulated or traded subject to local government regulation, and may exclude any other municipal area".

 

 

 

 

This principle is recognised in the Government’s Energy Policy White Paper of 1998 for distribution only and not distribution and reticulation combined.

 

 

 

 

 

 

 

 

 

Gas reticulation resorts under local authorities in terms of the Constitution and, without amending the Constitution, any party that is involved in reticulation as well as another gas activity will be subject to regulation by the local authority and the Gas Regulator.

Egoli in fact invested in a system that operates at less than 1 bar with small industrial, commercial and residential customers. Egoli’s desire to move into the more lucrative distribution market with larger customers is understandable and it is suggested that the solution to Egoli’s problem would be to start a distribution network serving these customers before the commencement of the Gas Act to take advantage of the terms of Section 35 (2) (a).

This "solution" is worse than the problem as is illustrated by the following:

  • Would Sasol not lose its rights to its existing distribution areas in the Greater Johannesburg and how could this be justified?

  • As the whole of the RSA is now divided into municipal areas this would mean that distribution licences could only be issued in those municipalities that choose not to award reticulation licences. This would make it impossible for the Gas Regulator to "promote the efficient, effective, sustainable and orderly development" of the gas industry (Section 2 (a)).

  • Distribution licences issued by the Gas Regulator would become null and void if the local authority issued a reticulation licence for the same area.

Egoli’s problem is unique to Egoli and the solution is not to amend the Gas Bill for Egoli to start distribution activities now in order to take advantage of the terms of Section 35.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This is a Constitutional matter outside the ambit of the Gas Bill.

 

 

 

 

 

 

 

No action recommended.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No action is recommended.

SECTION 1 DEFINITIONS

 

 

Customer: Shell

‘‘customer’’ means a person purchasing gas, or purchasing re-gasification, transmission, storage or distribution services;

 

"Re-gasification" inserted. When the Bill was drafted it was assumed that liquefied natural gas would be too expensive for the RSA for decades to come. No objections to the proposal.

 

 

 

 

Accept the proposal

Distribution: Sasol

Distribution 15 bar cut-off is not practical.

  • Distribution should be distinguished by function (transportation to points of ultimate consumption).

  • Network design and optimisation will be affected

  • Might deter investment in distribution

 

 

The International Energy Agency review "Natural Gas Distribution" states that "in physical terms, gas distribution as undertaken by LDC (Local Distribution Companies) usually takes place at a pressure of less than 15 bar. National transmission takes place in high-pressure networks (60 to 80 bars). The pressure in regional transmission is typically between 40 and 15 bar". On average for 6 European countries there are 69 domestic customers and 3,3 non-domestic customers per kilometre of distribution pipeline.

Note: most distribution pipes are operated at less than I bar.

In view of the above why should Sasol be insisting that a pipeline operating at 30 bar, over 100 kilometres long with 3 takeoffs should be classified as a distribution pipeline? The answer is to escape the normal third party access obligations for transmission pipelines. If this is accepted there would be the following consequences:

  • Competition will be delayed for years in areas supplied by Sasol’s transmission pipelines;

  • In order to bring competition to these areas Sasol’s transmission pipelines will have to be duplicated, a huge, wasteful, fruitless cost that will inevitably be paid for by the consumer;

  • This loophole, whose sole purpose is to ensure that one transmission pipeline company will escape the same competition faced by other transmission pipeline companies, will cause the Gas Bill to lose creditability with overseas investors and financiers and especially the South African gas consumers.

Note: Sasol is the only company that has a problem with this definition and yet is the only company whose pipelines have been largely amortised.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The PPC should note that the Gas Bill definition of distribution is in line with international practice.

Distribution: Sasol

With regard to deciding on an appropriate definition for "distribution" regard must be had to the fact that the argument advanced by the DME to reject the proposals of Petronet in respect of the definition of "transmission", is in essence an argument that the nature of pipelines should be determined by having regard to their functionality. This then supports Sasol’s argument in respect of "distribution". The only possible purpose that could be served in defining "distribution" by reference to an upper pressure limit of 15 bar gauge, would be to discriminate unfairly against Sasol for having historically developed its distribution network to operate at a pressure of 30 bar gauge. Accordingly, should the nature of pipelines be defined according to their functionality, it should be irrelevant, for the purpose of determining their nature, at what pressure such pipelines are operated.

Our proposed amendments to the definition of "distribution" are as follows:

"distribution" means the distribution of bulk gas supplies and the transportation thereof by pipelines with a general operating pressure of more than 2 bar gauge and less than 15 bar gauge to points of ultimate consumption or to reticulation systems, or to both points of ultimate consumption and to reticulation systems, and any other activity incidental thereto, and "distribute" and "distributing" have corresponding meanings;

 

Sasol has never had the obligation to supply or develop designated areas. It therefore naturally choose to supply the most lucrative customers only i.e. mainly large customers and industrial parks. The result is that Sasol’s existing infrastructure consists of typical high-pressure (30 bar) transmission pipelines linked directly to large customers or small distribution areas (industrial parks) via typical low-pressure (6 bar) distribution pipelines. In terms of this Bill Sasol’s infrastructure can be expected to develop along conventional lines. The purpose of specifying the 15 bar is precisely to close the loophole that transmission companies could avoid their third party access obligations by claiming that they are distribution companies simply on the strength of any split or off-take in the transmission pipeline. As stated above 15 bar is accepted internationally as the upper limit for distribution.

Sasol can hardly claim discrimination simply because its transmission pipelines will be treated the same as all the other transmission pipelines. On the other hand, it will be gross discrimination if gas distributors, reticulators and eligible customers in the areas served by Sasol’s transmission pipelines are denied third party access on the strength of the proposed loophole.

It is vital to retain the 15 bar limit in order to ensure that all transmission companies will have the same obligations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reject the proposal.

Separation of Distribution &Trading: Sasol

  • Trader brings no investment or new markets.

  • Jeopardise ability to provide contractual commitments beyond period of dispensation.

  • Could jeopardise investment in new distribution pipelines.

 

 

Transmission and distribution licensees will also have trader’s licences. Initially traders who do not have distribution networks will be limited to selling to eligible customers who are connected to transmission pipelines. This is because there will be no third party access to distribution pipelines in order to facilitate investment for distribution infrastructure. Canada, some USA states, Chile, Australia, the European Union member states etc. have third party access to distribution networks subject only to the qualifying limits for eligible customers. It can be expected South Africa will follow this trend once the distribution infrastructure has been established and the investors have recovered their investments. The system of separate distribution and trading licences will facilitate this inevitable change.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The licences for distribution operation and trading should be kept separate.

Eligible customer: Egoli

The concept of certain large customer being able to bypass the local franchise company and secure gas directly from the supplier is recognised as a sensible development to introduce competition for the large users of gas. Egoli Gas supports this concept in principle, but would wish to see the uncertainty of this issue not being adequately defined, removed at this stage.

Egoli Gas would like to propose that the definition of Eligible Customer is expanded to define customers whose consumption at a single site exceeds one million gigajoules per annum. That figure has been used as a benchmark in the European Union.

A possible definition would be:

"eligible customer" means a customer who [in the prescribed manner may buy] buys gas, directly from suppliers without the intervention of a distribution company in a quantity in excess of one million gigajoules per annum, for a single point of ultimate consumption subject to any other requirements and on terms and conditions that may be prescribed; provided that such eligibility shall be limited to that single point of ultimate consumption.

 

 

As explained in the document "Cross Cutting Issues" the gradual reduction of the qualifying threshold of an eligible customer is the standard method of introducing competition as the gas industry develops. Until now the highest ever qualifying threshold has been for the European Union Directive i.e.:

0-5 years 942 500 GJ p.a.

5-10 years 565 500 GJ p.a.

After 10 years 188 500 GJ p.a.

These high limits were counterbalanced by automatic qualification as eligible customers by distributors and gas-fired power generators from the start. As can be seen the reference to the one million GJ p.a. for the European Union is misleading as it gives the impression that the threshold is permanently fixed at the same level. In South Africa the gas industry will be developing at different rates in different parts of the country and it is essential that the flexibility of setting the threshold according to developments should be retained (section 34 (1) (h)).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No change required.

Gas: Shell

‘‘gas’’ means all hydrocarbon gasses transported by pipeline, including natural gas, artificial gas, hydrogen rich gas, methane rich gas, synthetic gas, coal bed methane gas, , compressed natural gas, re-gasified liquified natural gas, liquified petroleum gas or any combination thereof;

 

 

"Re-gasified natural gas" inserted. This is probably unnecessary as re-gasified natural gas is identical to natural gas and the list is not meant to be exhaustive but the proposal is acceptable.

 

 

 

 

 

Accept the proposal.

Import: Shell

"import" means the purchase of gas from a source outside the Republic of South Africa, procured either by transmission or re-gasification, and "importation" has a corresponding meaning;

 

 

This definition causes a contradiction in that re-gasification would then have to be registered in terms of section 28 (1) (a) and licensed in terms of Shell’s proposed section 15 (1) (a)

 

 

 

 

 

Reject the proposal.

Liquefaction: Shell

"liquefaction" means the process whereby a specific class of gas, namely natural gas, is converted from a gaseous state to a liquid state known as liquefied natural gas, at a factory designed and constructed specifically for this purpose at a harbour or coastal export terminal, linked to, or at, the point of production;

 

 

It is suggested that the definition should read: "liquefaction" means converting natural gas from a gaseous state to a liquid state.

 

 

 

 

 

Accept the DME proposal.

Local government regulation: Egoli

"local government regulation" means any licence or similar authorisation issued pursuant to local government legislation by a municipality as defined in Section 155(6) of the Constitution.

"municipal area" means the area within the boundaries of a municipality determined pursuant to the Local Government: Municipal Demarcation Act, 1998 (Act 27 of 1998).

 

 

These definitions were suggested in conjunction with an amendment to Section 21 (1) giving reticulation precedence over distribution and should be rejected for the reasons given below.

 

 

 

 

 

 

 

No change recommended.

Portfolio Committee: Shell

"Portfolio Committee" means the Parliamentary Portfolio Committee on Minerals and Energy;

 

No objection provided it is decided to refer to the Portfolio Committee in the Bill

Re-gasification: Shell

"re-gasification" means the process whereby a specific class of gas, namely liquefied natural gas, becomes a source of supply after it is converted back from a liquid state to a gaseous state at a factory designed and constructed specifically for this purpose at a harbour or coastal import terminal;

 

 

It is suggested that the definition should read:

"re-gasification" means converting liquefied natural gas to a gaseous state at a re-gasification plant.;

 

 

 

 

Accept the DME proposal.

Reticulation: Egoli

The definition of "reticulation", if it is to remain, must be amended. The general pressure limit of 2 bar gauge will prevent the adoption of the latest technology for low-pressure distribution/reticulation within the industry and result in inefficient system design and increased cost of supply to end customers.

"reticulation" means the division of bulk gas supplies and the transportation of bulk gas by pipelines where the majority of those pipelines operate, generally, at a [with a general operating] pressure of no more than 2 bar gauge to points of ultimate consumption, and any other activity incidental thereto, and ….

In reality the functions of reticulation and distribution are identical. They both involve the division of a bulk supply of gas to a large number of smaller end users. One single company must be able to access, on an exclusive basis, the whole range of customers within a geographical region. Otherwise the orderly development of a gas infrastructure which can be economically accessible to all categories of customer will not materialise.

 

 

The definition of "reticulation" is vital to establish the boundary between the jurisdiction of national and local authorities in terms of Schedule 4 Part B of the Constitution. The functions of distribution and reticulation are different as the market is divided into 3 categories:

  • Ultra-large and large industrial customers being supplied from transmission pipelines at pressures of 15 to 45 bar e.g. the Sasol plants. These customers typically consume more that 400 000 GJ p.a.;

  • Medium industrial consumers being supplied from distribution pipelines at pressures of 2 to 15 bar (approximately 6 bar in the existing system) e.g. the typical industrial park;

  • Small industrial, commercial and residential customers being supplied by a reticulation network at a pressure of less than 2 bar e.g. the Egoli system that operates at less than 1 bar. Small industrial and commercial customers typically on average consume less than 1 000 GJ p.a. and residential customers consume on average less than 20 GJ p.a.

Egoli’s desire to move into the more lucrative distribution market is understandable and it is suggested that the solution to Egoli’s problem would be to start a distribution network before the commencement of the Gas Act to take advantage of the terms of Section 35 (2) (a).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No change recommended.

Service: Shell

‘‘service’’ means any service relating to the liquefaction, re-gasification, transmission, distribution or storage of or trading in gas;

 

 

"liquefaction, re-gasification" inserted. No objections.

 

 

Accept the proposal

Storage: Shell

‘‘storage company’’ means any person storing gas but not holding title to the gas;

 

 

This proposal would prevent storage companies from maximising their investment by selling gas during peak periods. This would remove a major incentive to invest in storage.

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Reject the proposal

Supplier: Shell

"supplier" means any person who produces gas or owns and operates a re-gasification factory;

 

 

"supplier", as used in the Bill, could also be a trader. This definition serves no purpose.

 

 

Reject the proposal.

Trading: Shell

‘‘trading’’ means the purchase and sale of gas as a commodity, with transfer of title and risk in the gas, by any person and any services associated therewith, excluding the construction and operation of liquefaction, re-gasification, transmission, storage and distribution systems, and ‘‘ trading services’’ and "trader" have corresponding meanings;

 

 

"with transfer of title and risk in the gas" inserted. This is self-evident.

"excluding the construction and operation of liquefaction, re-gasification, transmission, storage and distribution systems" inserted. This is self-evident.

 

 

 

 

 

 

 

Reject the proposal

Transmission: Petronet

For the purpose of further clarity the following expansion is suggested for the definition of "transmission" "…………gas by pipeline at a pressure greater than 15 bar gauge supplied………….".

This would mean that all pipelines with a pressure of less than 15 bar gauge would be classified as a distribution pipeline whether or not the division of bulk gas was taking place i.e. a pipeline with a pressure of less then 15 bar gauge used for transmission would be wrongly classified as a distribution pipeline. A loophole would be created for transmission pipeline owners to escape third party access obligations by lowering the pressure to less than 15 bar gauge.

 

 

 

 

 

 

 

 

It is strongly recommended that the proposal be rejected.

Transmission: Shell

‘‘ transmission’’ means the bulk transportation of gas by pipeline supplied between a supplier and delivered or re-delivered to a trader, distributor, reticulator, storage company or eligible customer, or any other activity incidental thereto, and ‘‘ transmit’’ and ‘‘ transmitting’’ have corresponding meanings;

 

 

"and delivered or re-delivered to a trader" inserted. The gas will not be delivered physically to the trader.

 

 

 

 

 

Reject the proposal

Transmission Company: Shell

‘‘ transmission company’’ means any person transmitting gas but not holding title to the gas;

 

 

It is unclear why Shell wishes to exclude the merchant pipeline option. This was one of the options suggested by the World Bank for the initial stages of a project.

 

 

 

 

 

Reject the proposal.

Uncommitted capacity: Petronet

Given the important role that "uncommitted capacity" could play in the future it is recommended that this definition be expanded. Contractual obligations should be defined in terms of signed contracts or existing contracts with definite performance criteria in terms of commencement, period, duration, etc.

 

 

Difficulty is always experienced with the definition of "uncommitted capacity" because of the variables in capacity such as:

  • The pipeline capacity varies from one segment to another;

  • Pipeline capacity is not fixed but can be increased by additional compression, looping (parallel lines) and peak storage facilities;

  • Temperature and pressure differences can affect capacities;

  • Linepacking (pipeline storage) reduces capacity;

  • Backhauling (when gas is sold to a customer upstream from the source) gas increases economic capacity as opposed to physical capacity.

  • Swing requirements (peaks and valleys).

Similarly there are bound to be different views on contractual capacity by the parties according to their agendas.

 

 

 

 

 

 

 

 

 

 

 

 

 

It is recommended that the original definition be retained i.e. a neutral Regulator should determine the uncommitted capacity on a case-by-case basis because of the large number of variables involved.

Uncommitted capacity: Shell

‘‘uncommitted capacity’’ means such capacity determined by the Gas Regulator in a liquefaction, re-gasification, transmission, storage or distribution facility as is not required to meet contractual obligations.

 

 

"liquefaction, re-gasification" inserted. Should read "liquefaction facilities, re-gasification facilities". No objection.

 

 

 

 

Accept the proposal.

SECTION 2: OBJECTS OF ACT

 

 

Objects of Act: Shell

2. The objects of this Act are to—

(a) promote the efficient, effective, sustainable and orderly development and operation of gas liquefaction, re-gasification, transmission, storage and distribution facilities and the provision of efficient, effective and sustainable gas liquefaction, re-gasification, transmission, storage, distribution and trading services;

(c) ensure the safe, efficient, economic and environmentally responsible liquefaction, re-gasification, transmission,

distribution and storage of gas;

(e) ensure that gas liquefaction, re-gasification, transmission, storage, distribution and trading services are provided on an equitable basis and that the interests and needs of all parties concerned are taken into consideration;

 

 

 

"liquefaction, re-gasification," inserted in sub-sections (a), (c) and (e). No objections.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accept the changes.

Objects of Act: Eskom

2 (d) The imperative of ensuring Black Economic Empowerment (BEE) is clearly an important one. However, the manner in which the clause is formulated is not clear and could be problematic from a legal perspective. If it is suggested that licence conditions should be less stringent for BEE companies, how is this to be reconciled if it results in practices that constitute a danger to the public? The current provision is therefore vague and could lead to problems.

Recommendation:

Section 2(d) should be redrafted to provide clarity as to how BEE could be encouraged by means of licence conditions.

 

 

Agreed but it is difficult at this stage to make specific recommendations for gas projects that do not exist. The lowest barriers to entry are in distribution/reticulation. Exploration and production is high risk and very capital intensive while transmission is very capital intensive but with low returns. Distribution/ reticulation usually has good returns and the network can be built up incrementally so the initial capital requirements are not as high. It is vital, however, that the price paid for the bulk gas by the distributor/reticulator is low enough to enable market penetration and to service the debt, maintain and expand the network and make a reasonable profit. This entails third party access for distributors/reticulators and reasonable transmission tariffs. At present transmission and storage tariffs are only subject to being non-discriminatory and to pricing principles regulation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The PPC may wish to amend section 21 (1) to allow for the Regulator to approve transmission and storage tariffs to ensure the viability of distributors/ reticulators