The licensing of activities should take into account the possibility of competition in future. This could mean that existing licensed activities may not require a licence in future, for example, trading in gas.

Recommendation:

15. (1) No person may without a licence issued by the Gas Regulator—

(a) construct gas liquefaction, re-gasification, transmission, storage or distribution facilities or convert

infrastructure into such facilities;

(b) operate gas liquefaction, re-gasification, transmission, storage or distribution facilities; or

(c) trade in gas.

Accept the change.

Clause 16.(2)(e) makes provision for the applicant to propose the tariff and gas price policies.

The principles envisaged by Petronet will be set by the Minister by regulation – Article 34.(1) (s)

It is recommended that the original wording be retained.

16. (2) Any application contemplated in subsection (1) must include—

(f) the plans and ability of the applicant to comply with all applicable labour, health, safety and environmental legislation, including, but not limited to –

- with regard to applicable labour legislation: the Occupational Health and Safety Act, 1993; the Compensation for Occupational Injuries and Diseases Act, 1993; the Labour Relations Act, 1995; and the Basic Conditions of Employment Act, 1997;

- with regard to health: the Atmospheric Pollution and Prevention Act, 1965; the Hazardous Substances Act, 1973; and the Health Act, 1977;

- with regard to safety: the Mine Health and Safety Act, 1996; and

- with regard to the environment: the Environmental Conservation Act, 1989; the National Water Act, 1998 and the National Environmental Management Act, 1998;

Note: this would require the following change to the Gas Bill:

16 – Application for license.

(3) The applicant may request confidential treatment of proprietary or commercially-sensitive information, and subject to concurrence by the Gas Regulator, such information may be redacted from publicly available copies of an application.

No objections.

19. (3) The Gas Regulator must issue separate licences for—

(a) the construction of gas liquefaction, re-gasification, transmission, storage or distribution facilities or the conversion of infrastructure into such facilities;

(b) the operation of gas liquefaction, re-gasification, transmission, storage or distribution facilities; and

(c) trading in gas.

Accept the proposal.

Clause 20 (1) (a), (b) and (c) describe the conditions under which "the Minister may direct … that a licence be issued to a State-controlled entity for the establishment and operation of a specified gas transmission pipeline". This could be problematic in that it allows disparate treatment of public versus private sector entities. Shell believes that the possibility exists for public-private partnerships in owning, building and operating transmission pipelines, including HDSA or BEE. Provisions should be made for this in accordance with clearly stated principles and conditions.

It is proposed that provision be made in the Bill for the consideration by the Gas Regulator of private sector participation in transmission pipelines as a condition of licence for the State-controlled entity before issuing a licence in terms of 20 (1). The outcome of this consideration, with reasons, should be passed on to stakeholders of such a transmission line for discussion before making a final decision regarding the desirability of including a private sector entity in the State-controlled transmission pipeline.

20. (1) The Minister may, after consultation with the Gas Regulator and consideration by the Portfolio Committee with publicly stated reasons, direct that a licence be issued to a State-controlled entity responsible for the establishment, ownership and operation of specified gas transmission pipelines—

(a) if it is in the national interest;

(b) in order to promote regional growth; or

(c) for other social objectives.

(b) the impact of the specified gas transmission pipeline on any existing or anticipated contractual agreements or negotiations for the trading of gas.

The Constitutional principle is that Parliament legislates the conditions and that the Minister administers them.

This section provides for a departure from the normal licensing provisions and the rationale for this is not fully understood. A State controlled entity should be in a position to apply for a licence on the basis of any other applicant.

21 (1) (b) and (g)It is not evident what the "prescribed manner" is. It is assumed that this will be formulated in detailed regulation. Greater clarity is required in the Act.

It is Shell’s belief that the provisions that are meant to regulate conditions concerning third party access to gas infrastructure are not clearly defined and in some instances contradictory. For example:

"prescribed" is defined as prescribed by regulation. Third party access conditions will vary from project to project and according to the stage of development of the projects. It would be most unwise to set rigid conditions based on guesses as to what conditions will be in decades to come in an industry that largely does not exist. Flexibility on third party access is vital.

The principles are:

• the infrastructure owner will not be obliged to incur any additional expenditure;
• the total cost of the infrastructure must be shared equitably between the infrastructure owner and the applicant.

There is no contradiction and flexibility is maintained to share the costs equitably according to conditions. A "rubber stamp" Regulator would not be able to achieve the objectives of the Act.

Retain the present wording.

(b) third parties must have access to uncommitted capacity in transmission pipelines on commercially negotiated terms between willing customers and the transmission company;

The proposal is to substitute "commercially negotiated terms" for "commercially reasonable terms". However, vertically integrated companies could easily deny access to markets by third parties by demanding high transmission tariffs and it is never easy to negotiate with a monopoly.

It is evident that Shell has a particular model in mind but this may not suit all circumstances. Why should existing customers be forced to face additional expenses – this is a matter between the infrastructure owner and the applicant? Once again this is an attempt to impose rigid "one size fits all" conditions on projects for decades to come.

Retain the existing wording.

(f) licensees must allow interconnections with the facilities of suppliers, transmitters, storage companies, distributors and eligible customers, as long as the interconnection is technically feasible and the person requesting the interconnection bears the increased costs occasioned thereby, which must be taken into account when setting their tariffs and prices;

"suppliers" has been substituted for "producers", presumably to make provision for natural gas and liquefied natural gas importers. No objections. It is noted that reticulators have been left off the list. Giving reticulators this right in no way impinges on the jurisdiction of local authorities and increases the possibility of establishing reticulation systems.

Substitute "suppliers of gas" for "producers" and add "reticulators".

(g) third parties must have access to uncommitted capacity in storage facilities on commercially negotiated terms between willing customers and the storage company;

(i) storage companies are not obliged to incur any additional capital expenditure to provide the changes contemplated in paragraph (h) and the resultant storage tariff for accessing the storage facility must be costed equitably between the existing customers of the storage company and the party requesting the change, using combinations of total operating and capital costs, capacity and commodity charges and the specifications of the co-mingled gas;

See remarks for (e) above.

No change recommended.

Despite the object contemplated in clause 2 (d) regarding the "promotion (of) companies in the gas industry that are owned or controlled by historically disadvantaged South Africans by means of licence conditions so as to enable them to become competitive", there is no further reference to this object other than 34 (1) (u), which stipulates that the Minister may make regulations regarding "mechanisms to promote historically disadvantaged South Africans".

Shell fully subscribes to HDSA or BEE involvement in the South African gas industry. However, there are no clear provisions in the Bill regarding the criteria, terms and conditions relating to the issue of licenses to HDSA. We assume that these details will be contained in the detailed regulations, to be established by consultation with the Gas Regulator.

It is proposed that the Bill should include some provisions that spell out the principles for HDSA or BEE participation in the gas industry, as a condition of licence in clause 21 (1). These principles will then form a predictable basis for any commercial agreements. Shell would welcome further consultation in this regard.

21. (1) The Gas Regulator may impose licence conditions within the following framework of requirements and limitations:

(new a) "Licensees shall provide information to the Gas Regulator of the commercial arrangements regarding the participation of historically disadvantaged South Africans in the licensee’s activities, in particular details of any equity participation, skills and technology transfer, procurement policies and compliance with employment equity; "

No provision is made for safety, commercial and operational considerations. Specifically:

There is no recognition of contractual commitments to supply gas to customers of a specific specification.

The Department of Labour has jurisdiction over safety matters.

No changes recommended.

The trigger for this severe intervention is inadequate competition as contemplated in Chapters Two and Three of the Competition Act, 1998" ‘clause 21(1)(n).

This reference to the Competition Act is ill-conceived. In none of these chapters is the question of "adequate" or "inadequate" competition defined or even contemplated at all. Chapter Two prohibits certain restrictive practices (which lessen competition) and a number of abuses by dominant firms, quite irrespective of the question of "adequacy" of competition. It is no defense against a complaint of a prohibited practice, that there is ‘adequate competition" in the market.

Chapter Three of the Competition Act deals with the control of mergers. Mergers can of course substantially lessen competition, and this effect may or may not be justified by efficiency or public interest considerations. But nothing in this chapter contemplates the question whether competition in an industry is "adequate" or "inadequate". It fundamentally deals with the impact of a merger.

M Moreover, the Competition Tribunal and Competition Appeal Court share exclusive jurisdiction in respect of the interpretation of chapters 2 and 3 in terms of section 62(1) of the Competition Act. This excludes the Competition Commission, civil courts and certainly also the Gas Regulator. The reason for this exclusive jurisdiction is clearly the complexities that arise in the highly specialised area of competition law.

There is no doubt that the very trigger for the Gas Regulator’s usurpation of a businessman’s right to determine his prices and conditions of supply, is on a slippery slope.

Section 7 of the Competition Act precisely defines dominant firms in a specific market The tests are if any firm has:

1. at least 45% of the market;
2. at least 35% but less than 45% of the market, unless it can show that it has market power;
3. less than 35% of the market, but has market power.

Market power is defined as "the power of a firm to control prices, to exclude competition or to behave in an appreciable extent independently of its competitors, customers or suppliers".

Competition is clearly inadequate where there is a dominant firm in that market and there is therefore no difficulty whatsoever in objectively establishing whether or not there is inadequate competition as contemplated in section 21 (1) (n).

The reference to Chapter Three of the Competition Act is necessary as, for example, section 12 (2) defines control of a firm and this is needed to establish whether or not firms are controlled by one entity for purposes of determining if there is inadequate competition in terms of section 7.

Section 21 (1) of the Competition Act reads "The Competition Commission is responsible to-

(h) negotiate agreements with any regulatory authority to co-ordinate and harmonise the exercise of jurisdiction over competition matters within the relevant industry or sector, and ensure the consistent application of the principles of this Act;

(i) participate in the proceedings of any regulatory authority.

(j) advise, and receive advice from, any regulatory authority.

(k) over time, review legislation and public regulations, and report to the Minster concerning any provision that permits uncompetitive behaviour.

From the above it is clear that;

• The Competition Act makes provision for other regulatory bodies and there is no question of exclusive jurisdiction.
• The Competition Act calls for consistent application of its principles by other regulatory authorities and therefore it is logical and appropriate for the Gas Bill to refer to the wording of that Act.

The remark on the "businessman’s right to set prices" indicates a complete lack of understanding of the relationship between the service authority (the Regulator acting on behalf of the State) and the service provider (the licensee). Pricing in infrastructure monopolies must not be confused with pricing of, say, food or clothing. South Africa is highly unusual in that it has unregulated private monopoly gas industry with no price regulation.

It is recommended that the present wording of section 21 (1) (n) be retained.

The framework for regulation should be guided by a policy framework and clear policy objectives that are determined by Government. This should be sufficient to then empower the Regulator to regulate an industry in the manner it determines most appropriate to achieve the stated policy objectives.

The manner in which these policy objectives are achieved should be developed by the Regulator, on the basis that the necessary expertise pertaining to the particular industry would be found in the Regulator.

The latest version of the Gas Bill recognises this need for a policy determination by Government coupled with regulatory issues that should be determined later.

However, the policy issues that are prescribed in terms of section 21, dealing with the conditions of licences, are too detailed and also prescriptive; and may pre-empt a future framework.

Regulation must be able to respond to the circumstances that evolve within an industry, and the prescriptive nature of section 21 may make this difficult for the Regulator. In addition, in the event that any particular aspect of the framework set out therein needs to be changed, this will require a legislative amendment.

The Regulator is required to "take decisions that are not at variance with published Government policy" (section 4 (l))

Agreed

Agreed

Other parties are arguing for more certainty.

A strong case can be made for more discretionary powers for the Regulator based on the fact that it is difficult to make detailed legislation for an industry that largely does not exist at this stage. The DME has drawn on experience in other countries in formulating this framework. Gas suppliers are arguing for more certainty while Eskom (the only prospective consumer to make a submission) is arguing for more discretion. It seems that the balance in the Bill is correct

There is no current provision which prohibits any person from purchasing gas directly from any supplier. Before one can provide for an exception to a rule, one first needs to create the rule itself. Accordingly, we propose that a provision to the following effect be included in an appropriate place within the Act:

"No person, other than an eligible customer, may purchase Gas directly from a supplier without the intervention of a distribution company."

With such a provision included, the exclusion granted to eligible customers will be given meaning.

This proposal would prevent reticulators and other persons listed in Schedule 1 from selling to their customers.

Under the present provisions customers other than eligible customers outside distribution areas may buy gas from suppliers although this is not a right (as is the case for eligible customers). Under this proposal a small or medium customer near a supply of gas pipeline (e.g. situated next to an eligible customer) but outside distribution areas would not be able to purchase gas. This restriction serves no purpose and is counter-productive.

Adopt a new 21 (1) (p)

"No person, other than an eligible customer or customers of persons listed in Schedule 1, may purchase Gas directly from a supplier in a licensed distribution area without the intervention of a distribution company."

For the reasons given in paragraphs 10 – 14 of the memorandum, it is unwise to create "concurrent jurisdiction" and the problems arising there from by regulating competition matters in this industry specific Act. The Competition Act 1998 is at all events fully applicable to deal with any anti-competitive conduct by licencees. Clause 22 can lead to severe and harmful jurisdictional conflict. It is not worh it.

Delete clause 22 of the Bill.

The Competition Act clearly recognises the need for other regulatory bodies to be involved in competition matters as can be seen from the provisions of section 21 of that Act (see above).

This approach, despite the undoubtedly good intentions, sends a strongly negative message to potential investors in that is supposed to be a rapidly expanding industry in a country where local as well as foreign direct investment is a real problem.

The message is this: ‘By definition you are goinq into this business for a limited period of time. You have no certainty of renewal. The license conditions (which presumably include the term) may be varied by the Regulator upon application of any "affected party" (clause 24(1) (e)). At any time, if the same Regulator thinks that competition is inadequate, he may impose control of prices and conditions on you. So, if you are wise, you will invest frugally (if at all). Don’t waste money on expensive quality infrastructure, because

eventually someone else, not you, is likely to get the benefit. And as far as the law is concerned, you are not in the gas industry for profit. Recovery if investment is the criterion. Therefore invest as little as possible and take out what you can in the short run — because you are not allowed to plan and do business for the long run. Above all, you are at the mercy of officials in this business."

8. Even if one accepts the need for licensing, it can be dealt with far more constructively. As a matter of principle a license should be granted for an indefinite period so that investment and planning are based on the long term. There is nothing wrong with penalties, including withdrawal of the license, for good cause. But don’t stunt the industry at its birth by over-zealous regulation which instills an atmosphere of temporariness and uncertainty.

The lifetime of individual gas pipes exceeds 50 years and the there is no foreseeable limit to the life of a licensee’s gas system.

The main reasons for not having permanent licences are:

• The term of licence will depend on project specific conditions and will form part of the licence conditions negotiations.
• Gas legislation is still developing e.g. third party access to distribution pipelines is becoming the norm internationally for mature gas industries. It will probably be necessary to renegotiate the licence conditions after 20-30 years in the light of these developments.

Note that licences can only be revoked by the Courts.

• No certainty of renewal.
• Introduces unnecessary risk for potential investors.
• License should be issued for an indefinite period.

This is consistent with the Electricity Act and is prudent considering the state of development of the industry. The decisions on the term of licences and whether or to renew the licence will be subject to the principles of the Bill and stringent requirements of section 10 (decisions of the Regulator).

The DME is inclined to accept a minimum period of 20 years.

The powers of the Regulator to decide on the duration of licences causes major concerns and uncertainties. In the first place, a prospective investor in the transmission or distribution network (which is extremely expensive) will have no assurance that its licence will be renewed at the time that it terminates. It will accordingly be faced with a possibility of having invested millions of Rands in distribution pipelines, or in the case of transmission pipelines billions of Rands, only to find that after 10 years when its licence expires, it may not use its assets any longer because its licence is not re-newed. Empty words outside of the Act that the Regulator will not do this does not provide the certainty which one seeks within the legislation itself. Further, the Bill is silent as to what happens to the assets of the licensee once its licence terminates. Is the new licensee expected to construct its own pipelines, thus duplicating infrastructure whilst, simultaneously effectively sterilising one set thereof. Is there to be expropriation of the pipelines of the original licensee in order to transfer it to the new licensee? If so, how constitutional will such provisions be?

Section 4 The Gas Regulator must, in accordance with this Act-

Section 21(1) The Gas Regulator may impose licence conditions within the following framework of requirements and limitations:

This clause is in line with the NER practice. Indefinite is a long time in a changing world. The PPC may wish to set a minimum period (say 20 to 30 years) and add a new subsection to section 24 (amendment of licence) i.e. "in terms of amendments to the Act". For example this would cater for the eventual introduction of third party access to distribution areas.

This is an improvement

Accept this proposal.

Section 4 (c) "issue notices in terms of sections 23(1) and 26(1) and, if necessary, take remedial action in terms of section 26(2);"

Accept this proposal.

Section 21(1)(k) "a distributor will be granted a the trading licence within its exclusive geographic area, which trading licence will, for a period determined by the Gas Regulator, be exclusive ;"

1. in accordance with the provisions of section 25;
2. if the licensee, without good cause, ceases to be engaged in the activity in respect of which it is licensed and fails to resume such activity within 60 days of receipt of an applicable notice from the Regulator calling upon it to do so; and
3. if the licensee wilfully fails on a continuous basis to comply with a condition or conditions of its license, notwithstanding an applicable notice from the Regulator calling upon it to so comply.

3. An application for renewal must be dealt with as a new licence application.

Section 23 refers to the term of licence and not to the revocation of licences, which is covered in sections 26 (revocation of licences on application) and section 27 (revocation of licence by court). These recommendations resort under section 27. The basic problem with revoking a licence is that provision must be made to maintain the service and this cannot be done by the Regulator unless it is to be given much stronger powers e.g. the right to appoint a third party to oversee the offending licensee’s business and assets to maintain the service. In discussions with the State Law Adviser it was felt that these powers more properly belong to the courts and section 27 was framed accordingly.

It is strongly recommended that this proposal be rejected.

Clarity is required on the interpretation of the provisions for "Term of licence" in clause 23. This is essential for investors and financiers alike to determine whether the provisions contemplated will provide an equal basis for various licensees to earn a fair return on investment. In particular, it is not clear what the basis will be by which the Gas Regulator determines the period of licence and what criteria will be used to establish whether investors have recovered their investments.

23. (1) Any licence issued in terms of this Act is valid for an indefinite period subject to the provisions contemplated in sections 24, 25, 26 and 27.

The DME is inclined to accept a minimum period of 20 years.

No change recommended.

SECTION 26: PENALTIES FOR CONTRAVENTION OF LICENSE.

Texaco supports the use of penalties as an enforcement tool. We believe, however that the fine should be tailored to the severity of the offense and that the maximum amount should not be applied routinely.

Note: this would require the following changes to the Gas Bill

26 – Contravention of license

(3) "The Gas Regulator shall consider the severity of the non-compliance in deciding the amount of any penalty."

The need for a penalty, as provided in clause 26 is understood. But this is a case where the same institution acts as regulator, prosecutor and judge. What would be totally wrong is if the same institution is also the beneficiary of the very substantial fine (up to two million rand per day) that it imposes. Filling one’s own coffers with the proceeds of fines imposed by oneself is a dangerous incentive.

As in the case of an administrative penalty in terms of section 59 of the Competition Act 1998, the fine payable must be paid into the National Revenue Fund (Section 59(4)).

The recommendation should be rejected.

There is no point in suspending a licence as this would lead to a loss of the service to the customers.