National Electricity Regulator (NER)

1
National Electricity Regulator (NER) National
Energy Regulator (NERSA)
Annual Reports 2005/2006
2
Content

• Introduction
• NER
• Structure of the Board
• Structure of the Secretariat
• Strategic Objectives
• Performance Against Objectives
• Highlights
• Staff Analysis
• Financial Performance
• NERSA
• Structure of the Energy Regulator
• Structure of the Secretariat
• Strategic Objectives
• Performance Against Objectives
• Highlights
• Staff Analysis
• Financial Performance
• Conclusion

3
Introduction

• The National Electricity Regulator (NER) was
  established in 1995 to regulate the electricity
  industry
• NER discontinued its operations on 30 September
  2005 but continued regulating the electricity
  industry until 16 July 2006 when it ceased to
  exist
• Therefore the NER Annual Report covers the period
  1 April 2005 to 30 September 2005. The
  electricity regulation report continues until 31
  March 2006. The period 1 April 2006 to 16 July
  2006 is covered with an attached addendum

4
Introduction (Cont.)

• The National Energy Regulator (NERSA) was
  established on 1 October 2005 and the Regulator
  Members were appointed with effect from that date
• NERSA took over all assets and liabilities of NER
  as well as all personnel and other resources on
  its establishment date, 1 October 2005. Therefore
  the NERSA Annual Report covers the period 1
  October 2005 to 31 March 2006
• NERSA started regulating piped-gas and petroleum
  pipeline industries on 1 November 2005 and
  electricity industry on 17 July 2006

5
National Electricity Regulator (NER)
6
Structure of the Board

• The NER Board consisted of 9 Board Members
• 8 Members were part-time
• 1 Member was full-time (CEO)
• Board Members were appointed by the Minister of
  Minerals and Energy
• The Board had 7 committees
• Policy
• Regulatory Committees
• Pricing and Tariffs
• Licensing, Compliance, Complaints and Customer
  Services
• Governance Committees
• Audit and Risk
• Finance
• Human Resources
• Ad Hoc Committee on the establishment of NERSA

7
Structure of the Secretariat

• 3 Divisions each with a number of departments
• Headed by Executive Managers
• 3 Specialised Support Units
• Headed by Senior Managers
• Executive Managers and Senior Managers report
  directly to CEO
• Total staff complement 115

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Strategic Objectives

• Ensuring the effective and efficient regulation
  of the existing electricity industry
• Ensuring that the NER is appropriately prepared
  and able to effectively regulate the future
  reformed electricity industry
• Promoting appropriate procurement mechanisms and
  regulatory frameworks for new generation capacity
• Developing and retaining requisite skills and
  competencies within the NER
• Improving and sustaining the good image of the NER

9
Strategic Objectives (Cont.)

• Enhancing the integrity of the NER by improving
  internal management systems and procedures
• Effectively contributing to the socio-economic
  development programmes of government
• Establishing a single energy regulator (which
  will incorporate gas and petroleum pipelines
  regulation, in addition to electricity
  regulation) on the foundation of the experience
  of the NER

10
Performance Against Objectives

• Of the planned activities 57 were executed as
  planned
• Of the 37 planned activities, 30 were on track
• Key factors impacting on execution
• ESI/EDI restructuring process
• Slow responses from external participants
• Challenges in the effective management of
  projects
• High staff turnover experienced during the year

11
Highlights

• The Multi-Year Price Determination (MYPD)
  mechanism was approved by the Board and published
  for stakeholder comments followed by a well
  attended stakeholder workshop
• The Board approved the MYPD for Eskom

Price Basis 2006/07 2007/08 2008/09
Average price increase excluding EDI restructuring costs 4.57 5.37 5.67
Average price increase including EDI restructuring costs 5.10 5.90 6.20
12
Highlights (Cont.)

• Licensed RED 1 before it was formally launched on
  1 July 2005
• Announced the findings of an independent
  technical audit of City Power
• Conducted independent technical audits in eleven
  municipalities and Eskom electricity distributors
• Launched second National Integrated Resource Plan
  (NIRP2) and commenced with development of NIRP3
  under the guidance and approval of the NIRP
  Advisory and Review Committee
• Western Cape Power Outages investigation and
  report
• Tariff review of 157 municipalities

13
Highlights (Cont.)

• Participated in a Take a girl-child to work
  programme where six girls from Khayelitsha,
  Mitchells Plain and Langa were mentored by the
  Board members, CEO and Executive Managers
• NER Staff raised an amount of R17 000.00 for the
  Schaaphok School near Entabeni Game Farm in the
  Limpopo Province
• Launched the National Energy Regulator (NERSA) on
  22 November 2005
• Participated in and contributed to regional and
  continental initiatives (RERA AFUR)

14
Staff Analysis (Race)
Level African Coloured Asian White Total
Top Management 3 (75) 1 (25) 4
Senior Management 10 (77) 3 (23) 13
Professional Middle Management 30 (69) 2 (5) 2 (5) 9 (21) 43
Skilled and Technical 19 (83) 1 (4) 1 (4) 2 (9) 23
Semi-skilled 14 (93) 1 (7) 15
Total 76 (78) 3 (3) 4 (4) 15 (15) 98
15
Staff Analysis (Gender)
Level Male Female Total
Top Management 3 (75) 1 (25) 4
Senior Management 6 (46) 7 (54) 13
Professional and Middle Management 22 (51) 21 (49) 43
Skilled and Technical 12 (52) 11 (48) 23
Semi-skilled 4 (27) 11 (73) 15
Total 47 (48) 51 (52) 98
16
Financial Analysis

• Financial Management and Accounting at the NER is
  governed by
• PFMA
• Treasury Regulations
• Generally Accepted Accounting Practices (GAAP)

17
Financial Analysis (Cont.)

• Approved expenditure budget (excluding Capex) for
  the period 1 April 2005 to 30 September 2005 was
  R36.2 million
• Actual Expenditure for the period 1 April 2005 to
  30 September 2005 was R33.5 million
• Surplus as at the end of the financial period was
  R2.8 million

18
Financial Analysis (Cont.)

• Budget Variance Analysis

Budget Actual
Income (R000)
Levies R 34.0 million R 35.3 million

Expenditure (R000)
Employee Costs R 18.2 million R 16.3 million
Other Operating Costs R 11.1 million R 14.2 million
Fees for Services R 6.1 million R 2.1 million
Board Members R 0.8 million R 0.9 million
Total Operating Expenditure R 36.2 million R 33.5 million
Capex R 1.1 million R 3.9 million
Total Expenditure R 37.3 million R 37.4 million
19
Financial Analysis (Cont.)

• Expenditure categories in relation to the total
  operating expenditure
• Employee Costs 49
• Fees for Services 6
• Board Members 3
• Capital expenditure amounts to 10 of total
  expenditure

20
Financial Analysis (Cont.)

• NER received an unqualified audit opinion from
  the Auditor-General
• The audit did however raise the following
  emphasis of matter
• Payroll (Salary) Fraud
• Transfer of operational activities to NERSA

21
Financial Analysis (Cont.)

• Operational Results
• Total assets have increased to R54.8 million
  indicating an increase of 24 from 31 March 2005
• Cash and cash equivalent of R23 million consists
  of the NERs main bank account and deposits held
  at the Reserve Bank in terms of Co-operation of
  Public Deposits (CPD)
• Other operating expenditure includes rental under
  operating leases for office equipment, variable
  costs and notional depreciation charges
• 12 of capital expenditure was spent on
  acquisition of computer hardware and accessories,
  14 on computer software, (16) on office
  equipment and the balance on the building
• Land and building is fully paid up and owned by
  NERSA with a carrying value of R20.0 million as
  at 30 September 2005
• The ratio for current assets to current
  liabilities is 61 which indicates that NER was a
  viable entity as a going concern on 30 September
  2005 when all assets and liabilities were
  transferred to NERSA and NER discontinued its
  operations

22
National Energy Regulator (NERSA)
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Structure of the Energy Regulator

• 9 Regulator Members
• 5 part-time Members
• 4 full-time Members
• Appointed by Minister of Minerals and Energy
• Chairperson Deputy Chairperson part-time
• Full-time Regulator Members
• Chief Executive Officer
• 3 Regulator Members primarily responsible for
  each of electricity, piped-gas and petroleum
  pipelines regulation

24
Structure of the Energy Regulator (Cont.)

• 8 Subcommittees of the Energy Regulator
• Policy
• Regulatory
• Licensing
• Pricing and Tariffs
• Compliance and Dispute Resolution
• Governance
• Finance
• Audit and Risk
• Human Resources
• Remuneration

25
Structure of the Secretariat

• 4 Divisions each with a number of departments
• Headed by Executive Managers
• 5 Specialised Support Units
• Headed by Senior Managers
• Executive Managers and Senior Managers report
  directly to CEO
• Total staff complement 143

26
Strategic Objectives

• To monitor and administer the Mozambique Gas
  Pipeline Agreement
• To implement the Gas Act
• To license existing and new activities in the
  piped-gas industry
• To implement the Petroleum Pipelines Act
• To license new and existing activities in the
  petroleum pipeline industry
• To facilitate access to the petroleum pipeline
  infrastructure

27
Strategic Objectives (Cont.)

• To develop and implement appropriate pricing and
  tariff methodologies for the petroleum pipeline
  industry
• To implement the National Energy Regulator Act,
  especially in areas of public hearings,
  enquiries, tribunals and resolution of disputes
• Effectively contributing to the socio-economic
  development programmes of government
• To establish and maintain a comprehensive
  database for the energy industry
• To promote competition and BEE in the three
  industries
• To ensure that the requirements of the industry
  acts on safety, environmental, health and
  security in the industry are complied with

28
Performance Against Objectives

• NERSA Strategic Plan (2005/06 2007/08) and
  Business Plan (2005/06) was developed under the
  assumption that NERSA would be established on 1
  April 2005
• This only took place on 1 October 2005
• Gas Act, 2001 (Act No. 48 of 2001), Petroleum
  Pipelines Act, 2003 (Act No. 60 of 2003), Gas
  Regulator Levies Act, 2002 (Act No. 75 of 2002)
  Petroleum Pipeline Levies Act, 2004 (Act No. 28
  of 2004) came into operation on 1 November 2005
• Activities relating to the regulation of the
  piped-gas and petroleum pipeline industries only
  started on 1 November 2005 (7 months later than
  planned for in the Business Plan)
• Therefore it was expected that all projects
  relating to the regulation of piped-gas and
  petroleum pipelines will not be concluded as
  planned
• Of the 35 planned projects work on only 7 (20)
  commenced
• 28 projects that were not started did not form
  part of the basis of reporting

29
Performance Against Objectives (Cont.)

• 84 of activities executed as planned
• Of the 56 planned activities 73 on track
• Key factors impacting on execution
• Start-up momentum associated with a new Energy
  Regulator, especially regulating piped-gas and
  petroleum pipelines industries for the first time
• High staff turnover
• Number of secondments due to the establishment of
  NERSA

30
Highlights - Regulatory

• Inaugural meeting of the Energy Regulator on 9
  November 2005
• Gas Act Rules Part One Licensing 2006 were
  approved by the Energy Regulator and promulgated
• Petroleum Pipelines Act Rules Part One Licensing
  2006 were approved by the Energy Regulator and
  promulgated
• Energy Regulator submitted comments on the draft
  Piped-Gas and Petroleum Pipeline Regulations to
  the Minister of Minerals and Energy

31
Highlights - Governance

• Members of the Energy Regulator appointed with
  effect from 1 October 2005
• As required by the National Energy Regulator Act,
  2004 (Act No. 40 of 2004), all staff in the
  employment of the NER on 30 September 2005, were
  transferred to the employment of NERSA with
  effect from 1 October 2005
• NER assets and liabilities transferred to NERSA
  on 1 October 2005

32
Highlights Governance (Cont.)

• Ring-fencing methodology was implemented as part
  of National Energy Regulator Act requirement for
  financial reporting structure
• The proposed piped-gas and petroleum pipeline
  levies were gazetted in November 2005 and
  representation received, analysed and taken into
  account in revising the 2006/07 budget
• Revised Strategic Plan (2006/07 2008/09) and
  Business Plan with Budget (2006/07) was submitted
  to the Minister of Minerals and Energy for
  approval
• Participated in and contributed to regional and
  continental initiatives (RERA AFUR)

33
Staff Analysis - Race
Level African Coloured Asian White Total
Top Management 4 (80) 1 (20) 5
Senior Management 15 (75) 1 (5) 4 (20) 20
Professional Middle Management 27 (69) 3 (8) 1 (3) 8 (20) 39
Skilled and Technical 17 (85) 1 (5) 2 (10) 20
Semi-skilled 17 (89) 2 (11) 19
Total 80 (78) 5 (5) 2 (2) 16 (15) 103
34
Staff Analysis - Gender
Level Male Female Total
Top Management 4 (80) 1 (20) 5
Senior Management 10 (50) 10 (50) 20
Professional and Middle Management 20 (51) 19 (49) 39
Skilled and Technical 10 (50) 10 (50) 20
Semi-skilled 3 (16) 16 (84) 19
Total 47 (46) 56 (54) 103
35
Financial Performance

• Financial Management and Accounting at NERSA is
  governed by
• PFMA
• Treasury Regulations
• Generally Accepted Accounting Practices (GAAP)

36
Financial Performance (Cont.)

• Approved expenditure budget (excluding Capex) for
  the period 1 October 2005 to 31 March 2006 was
  R53.5 million
• Actual Expenditure for the period 1 October 2005
  to 31 March 2006 was R49.3 million
• Deficit as at the end of the financial year was
  R15.6 million

37
Financial Performance (Cont.)

• Ring-fencing methodology
• According to Section 13 of the National Energy
  Regulator Act
• All direct costs allocated directly to the
  three regulated industries
• The common costs will be apportioned based on the
  direct employment costs for each industry
• All common costs will thus be allocated on the
  following ratio
• 60 electricity industry
• 20 piped-gas industry
• 20 petroleum pipeline industry

38
Financial Performance (Cont.)

• Budget Variance Analysis (Combined)

Budget Actual
Income (R000)
Levies R 56.2 million R 31.0 million

Expenditure (R000)
Employee Costs R 24.5 million R 16.9 million
Other Operating Costs R 20.6 million R 23.7 million
Fees for Services R 6.9 million R 6.5 million
Regulator Members R 1.5 million R 2.2 million
Total Operating Expenditure R 53.5 million R 49.3 million
Capex R 5.9 million R 2.6 million
Total Expenditure R 59.4 million R 51.9 million
39
Financial Performance (Cont.)

• Budget Variance Analysis (Electricity Industry)

Budget Actual
Income (R000)
Levies R 34.0 million R 31.0 million
Other Income R 0.8 million R 1.3 million

Expenditure (R000)
Operating Expenditure R 36.2 million R 36.0 million

Deficit from Operations - R 3.3 million
40
Financial Performance (Cont.)

• Budget Variance Analysis (Piped-gas Industry)

Budget Actual
Income (R000)
Levies R 11.1 million -
Other Income - R 0.5 million

Expenditure (R000)
Operating Expenditure R 8.7 million R 6.7 million

Deficit from Operations - R 6.2 million
41
Financial Performance (Cont.)

• Budget Variance Analysis (Petroleum Pipeline
  Industry)

Budget Actual
Income (R000)
Levies R 11.1 million -
Other Income - R 0.5 million

Expenditure (R000)
Operating Expenditure R 8.7 million R 6.6 million

Deficit from Operations - R 6.1 million
42
Financial Performance (Cont.)

• Expenditure categories in relation to total
  operating expenditure
• Employee Costs 34
• Fees for Services 13
• Regulator Members 4
• Capital expenditure amounted to 5 of total
  expenditure

43
Financial Performance (Cont.)

• NERSA received an unqualified audit opinion from
  the Auditor-General
• The audit did however raise the following
  emphasis of matter
• Payroll (Salary) Fraud
• Establishment of NERSA
• Implementation of audit findings are being
  addressed and monitored by the Operational Risk
  Committee at staff level and reported on to the
  Audit and Risk Subcommittee of the Energy
  Regulator to ensure compliance

44
Financial Performance (Cont.)

• Operational Results
• Net deficit for NERSA for the year ended 31 March
  2006 was R15.6 million
• R30.9 million was collected as levies from the
  electricity industry for the period 1 October
  2005 to 31 March 2006. No levies were received
  from the piped-gas and petroleum pipeline
  industries
• Expenditure incurred of R49.3 million was within
  the approved budget
• Fees for Services included Auditor General
  Remuneration and technical consultancy costs for
  projects
• More than 50 of NERSA purchases are made through
  BEE companies

45
Financial Performance (Cont.)

• Operational Results (Cont.)
• Total assets have increased to R47.8 million
  indicating an increase of 8.4 from 31 March 2005
• The ratio for current assets to current
  liabilities is 1.61 which indicates that NERSA
  is a viable entity as a going concern
• Cash and cash equivalent of R21 million consists
  of NERSAs main bank account and deposits held at
  the Reserve Bank in terms of Co-operation of
  Public Deposits (CPD)

46
Financial Performance (Cont.)

• Operational Results (Cont.)
• Other operating expenditure includes rental under
  operating leases for office equipment, variable
  costs and notional depreciation charges
• 40 of capital expenditure was spent on
  acquisition of computer hardware and accessories,
  29 on office equipment, (8) on computer
  software and licenses and the balance on the
  building
• Land and building is fully paid up and owned by
  NERSA with a carrying value of R20.6 million as
  at 31 March 2006

47
Conclusion

• NER formed a good basis for NERSA establishment
• Electricity regulation existed since 1995 whilst
  hydrocarbons regulation is at its infancy (2005)
  licensing in particular is a challenge
• On the date of transfer of the assets and
  liabilities NER was a viable entity as a going
  concern
• Transition from NER to NERSA is being managed
• Cash-flow mitigating strategies and (piped-gas
  and petroleum pipelines) levies collection
  mechanism are being developed, formalised and
  implemented
• Staff recruitment, development, motivation and
  retention remain a challenge

48
Thank You