Fuels sector heats up over Transnet tariff bid
Nersa to determine public's interest in pipeline dispute
April 3, 2009
By INGI SALGADO
Transnet's bid to raise pipeline tariffs substantially to pre-fund its R12.5 billion multiproducts pipeline from Durban to Gauteng is pitting inland producers of fuel against coastal refiners.
The battle highlights just how little love is lost between the rivals.
The point of contention is money - in particular, the windfalls heading towards South Africa's biggest inland fuel producer, Sasol, and the inland refinery in which it has a stake, Natref, because of their location.
BP, perhaps the most vocal campaigner against the proposed tariffs, estimates Sasol will earn between R2 billion and R5 billion a year from the raised tariffs just for sitting pretty. Chevron projects the windfall at a more modest but nonetheless substantial R1.75 billion a year.
If there is uncertainty about the size of the figure, there is none about the source of the funds: it will come directly from the pockets of motorists because of the regulated zone differential that helps to determine fuel prices.
When the pipeline tariff increases, the zone differential escalates, raising the price paid to all producers of fuel.
Those that use the pipeline will be able to recover their costs. Those that don't will not receive a windfall at the expense of consumers.
Ironically, it is the National Energy Regulator of SA (Nersa) that will decide the outcome of this competitive tiff in the fuel industry - even though it has no jurisdiction over the regulation of fuel prices.
Is it the regulator's job to consider the competitive outcomes of its decisions? Rod Crompton, the regulator member for pipelines and the former deputy director-general of hydrocarbons in the Department of Minerals and Energy, says Nersa has to operate within its legal mandate.
Legislation governing Nersa compels the regulator to take decisions in the public interest, so its board will have to decide whether its pending decision on the pipeline tariff is in the public interest - as well as whether it has the capacity to deal with the "complex story" of South Africa's fuel history, says Crompton.
A decision on 2009/10 pipeline tariffs is due by the end of the month.
Is there something wrong with our fuel pricing model, so that instead of giving consumers a financial break when they are located near a fuel producing facility, we charge them as if they must import that fuel from far away and pass the payment on to the fuel producer concerned?
Russel Glass, the chief economist at BP Southern Africa, thinks not. "If the pricing model moves away from the principle of import parity, it creates diseconomies with other parts of the world.
"This is about regulation of tariffs for pipelines, more than about pricing of fuel."
BP is not against Sasol earning something for its location advantage. It simply believes the new tariff grossly exaggerates that advantage.
Chevron, in its submission to Nersa, puts the current windfall at about 0.6c a litre for fuel produced at the Natref refinery and about 14.35c a litre for fuel produced by Sasol at Secunda.
Glass says BP will "definitely consider" taking the matter to the competition commission, depending on the outcome of Nersa's pricing recommendations.
The oil company, which, with Shell, owns South Africa's biggest refinery, in Durban, is concerned that the windfalls give Sasol the ability to undercut its competitors at the retail level for diesel, whose price is unregulated.
Sasol has been distinctly quiet on the matter.
The group already invited the attention of the commission after it admitted competition breaches across several divisions this year and applied for corporate leniency.
Sasol spokeswoman Jacqui O'Sullivan says it's not appropriate to comment at this stage, as it is "very early days, and discussions are still under way".
Muddying the waters is a deal signed a few years back between Transnet and Sasol, which ties up one of Transnet's pipelines from Gauteng to the KwaZulu-Natal coast with Sasol's methane gas for the rest of the pipeline's useful life.
The terms of that deal have never been made public.
The pipeline, in the words of one fuel company insider, is "greatly underutilised".
Despite concerns about its relationship with Sasol, Transnet has distanced itself from the competitive issues raised by its tariff application.
Acting chief executive Chris Wells said recently that the problem was not in the transport parastatal's hands. Transnet failed to respond to several requests for comment.
Even if it prefers not to delve into competition issues in the fuel industry, Transnet is dealing with competition concerns of its own.
iPayipi, a private sector consortium that had hoped to build the new pipeline but failed to secure a licence from Nersa last year, sees Transnet's application to raise tariffs as proof of its desire to reinforce its monopoly, financed via direct subsidy from Gauteng motorists.
Clifford Elk, a director at Benhove Investments, the lead member of iPayipi, says the consortium's proposed tariff from Durban to Watloo in Pretoria has been 13c a litre.
This compares with 34c a litre in Nersa's draft tariff determination, released ahead of hearings in February.
Glass believes the disparate prices are the result of Nersa's proposed new pricing system, which allows both prefunding of the new pipeline by users of the existing pipeline and deductions that are not real costs.
He says the system allows for accelerated depreciation, a return on investment at replacement cost and a debt calculation based over the lifetime of the pipeline.
Crompton points out that accelerated depreciation over the life of assets is in line with the government's tax dispensation.
He notes that Nersa, which is required by legislation and regulations to use historic costs plus inflation to calculate tariffs, has appointed auditors to determine the historic costs of Transnet's regulatory asset base, having failed to secure this information from the utility in spite of requests.
The auditors are expected to wrap up "in a few months". The information they glean could cause the tariffs to be adjusted, Crompton says.
Nersa, in its draft tariff determination, says Transnet's failure to provide the information "presents the single largest challenge to setting tariffs" for its pipelines unit.
At the end of last year, Transnet requested an average pipelines tariff increase of 82.5 percent for 2009/10.
It said the new multiproduct pipeline, which was "critical" to maintain and expand supply in the economic heartland, required "large increases" in tariffs to keep its pipelines division financially viable.
Although it applied only for the 2009/10 tariff, Transnet estimates that tariffs would increase 156 percent over the next four years as a result of the pipeline's construction, assuming stable inflation scenarios.
BP, on the other hand, projects tariffs will increase 300 percent, based on Transnet's revenue requirements to 2013. At these levels, says Glass, the cost of transporting fuel by pipeline would start to equate the cost of transport by road.
And at the proposed levels for 2009/10, the cost is positioned "very close" to the cost of rail. "So what can we expect? A massive rise in rail rates at the next negotiations."
Transnet says in its application that the multiproducts pipeline remains the cheapest form of transporting refined products from the coast to the inland market.
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