Comments on the gas regulations discussion document

							                    MEMORANDUM
To:                Dr A.D. Surridge

From:              Adv. Menzi Simelane

Date:              20 September, 2004

Subject:           Comments on the Gas Regulations Discussion Document



Dear Dr Surridge

COMPETITION COMMISSION’S COMMENTS ON THE GAS REGULATIONS
DISCUSSION DOCUMENT

Attached herewith please find the Competition Commission’s comments on the
Gas Regulations Discussion Document for your attention.

Yours sincerely,



____________________
ADV. MENZI SIMELANE
 COMMISSIONER




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Draft Comments on the Gas Regulations Discussion Document
Introduction

The Department of Minerals and Energy (DME) released the ‘gas regulations discussion
document’ for public comment. The discussion document is being released as a
preliminary step to the drafting of gas regulations in terms of the Gas Act No 48 of 2001.
The Competition Commission welcomes the opportunity to give input to this process.

Eligible customers

Regulation 3 (5) allows an integrated gas company to only supply customers via pipelines
of another licencee if such customers would qualify as eligible customers for the
company’s own transmission pipelines. The wisdom of this regulation is not stated. It is
not clear at what stages of the supply chain should the company be integrated for this
restriction to apply since ‘integrated gas company’ is not defined, but can be construed to
mean integration at the transmission and distribution levels. Regardless of the nature of
integration, the purpose of vertical integration in the gas industry would be to enable a
company to carry product from manufacture right through to delivery to the final
consumer, if possible. Limiting company activity to certain sections of the supply chain
in this regard defeats the whole purpose of integration. A justification of this restriction
would be in order.

Price regulation principles and procedures

Regulations 4 (2) and (11) state that maximum prices where there is inadequate
competition as contemplated in chapters 2 and 3 of the Competition Act, shall be subject
to approval by the Energy Regulator. Reference to chapters 2 and 3 of the Competition
Act in this manner is vague since these chapters deal with specific contraventions and
merger evaluations. This particular regulation is meant to assess the level of competition
for purposes of determining whether price regulation would be appropriate or not. The
likely section of the Competition Act that deals with an assessment of the strength of
competition in a market would be section 12A (2). It lays down factors that need taking
into account in assessing the intensity of competition for merger evaluation purposes. If
regulation 4 (2) contemplates to apply this section of the Competition Act, it should be
stated explicitly. However, it is not clear as to who will be responsible for determining
the level of competition in this regard. It should also be born in mind that section 12A of
the Competition Act does not offer an exhaustive list of factors to take into account when
assessing the level of competition in a market. This leaves room for the consideration of
factors peculiar to the particular industry or market, in this case the gas market.

Notwithstanding this, a clause must be inserted in the regulations to the effect that the
Energy Regulator should consult with the Competition Commission in making the
determination contemplated in clauses 4(2) and (11); and where, in carrying out its
functions (be it through market surveillance or research), the Regulator discovers,


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unearths or notices anticompetitive practices, these should be referred to the Competition
Commission for further investigation and/or to the Competition Tribunal for prosecution.

In the same line in which regulation 4 (2) talks about the Regulator ‘approving’
maximum prices it also refers to the ‘setting’ of prices by the Energy Regulator, yet it
does not specify the type of methodology to be used in setting such prices. This also is
confusing because it is not clear whether the Regulator will set or approve prices. Since
the electricity regulatory framework will in time move towards price cap regulation, it
would be advisable to use this form of regulation in the gas market as well for the sake of
consistency and following on international best practice, if ‘setting’ of prices is what is
contemplated in this section.

Licence conditions, 3rd party access to transmission pipelines

Regulation 9 (2) stipulates that access to transmission pipelines owned by non-integrated
gas companies should be based on a first-come-first-served basis. However, it further
stipulates that where two or more applications are made simultaneously, access must be
determined according to the most favourable contract in terms of volume, length of
contract and other factors. This provision leaves room for abuse. It may be used by
suppliers to discriminate against smaller players or new entrants. After all, it’s the
supplier who has the knowledge of whether or not applications have been submitted
simultaneously. A more objective criterion that removes the incentive to discriminate
must be provided.

Regulation 9 (23) states that eligible customers may cede contracted capacity to other
eligible customers. This provision needs qualifying to prevent abuse of such capacity
during times of shortage e.g. being ‘resold’ at a premium by one customer to another.

Licence conditions, 3rd party access to storage facilities

Similar concerns as discussed in 9 (2) above arise with respect to section 10 (1); access to
storage facilities. Again a more objective criterion should be used to allocate storage
capacity in case of simultaneous applications.
Regulation 10 (2) does not make provision for an objective criteria to be used by the
Energy Regulator in assessing uncommitted capacity as is done under section 9 (19).
Further, uncommitted capacity in storage facilities is not defined as is done for
transmission pipelines under 9 (20).

Tariffs

Regulations 4 (11), 9 (15) and 10 (14) make reference to the need for distribution prices,
transmission tariffs and storage tariffs, respectively, to be (a) objective, i.e. based on a
systematic methodology applicable on a consistent and comparable basis; and (b) fair,
among other things. There is however, no mention or recommendation of such
methodology for purposes of (a) nor is there a suggested way of determining a fair price
for purposes of (b).



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Expropriations

Section 17 gives certain rights to a holder of a servitude. One such right under regulation
17 (13) is the right of access to land for purposes of construction, altering, replacing,
inspecting, maintaining, repairing or operating the relevant gas infrastructure. Such right
infringes on the right of the landowner and may cause damage to the environment or
disrupt social order. Whereas an environmental impact assessment is required under
section 19 for purposes of terminating, relinquishing or abandoning licenced activities no
such requirement is made under section 17 for purposes of carrying out licenced
activities. It is thus recommended that social and environmental impact assessments be
carried out before such rights as conferred by section 17 (1) can be exercised.

Conclusion

Network industries are characterized by large economies of scale that make the
duplication of facilities uneconomical. Access to existing infrastructure by new entrants
then becomes paramount. Regulatory authorities have a duty to ensure access to such
facilities on fair, equitable and non-discriminatory terms, conditions and prices. Besides
the above concerns or un-clarified issues, the document appears to be based on thorough
research to ensure fair competition and a level playing field, among other things, in the
gas sector.




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