The Industrial Gas Users Association of Southern Africa (IGUA-SA) has lodged a High Court application to set aside the National Energy Regulator of South Africa’s (NERSA’s) decision to approve Sasol Gas’s maximum gas prices for the period March 2014 to June 2023.
The application further seeks that NERSA should more effectively balance Sasol Gas’s market power through determining Sasol Gas’s maximum prices by the “cost-plus” method. NERSA and Sasol Gas are cited as respondents in the application. Sasol Gas is a regulated entity under the Gas Act and the monopoly supplier in the piped-gas industry.
Background
IGUA-SA is a public-interest, non-profit organisation, whose members are large industrial users of gas who form the back-bone of the manufacturing sector in South Africa. The central purpose of IGUA-SA is to ensure the efficient availability of hydrocarbon gas in Southern Africa to meet significant and growing demand, both by organisations requiring more gas to expand their operations and by those intending to switch to gas from alternative energy sources that are more costly than gas and/or are more harmful to the environment.
NERSA was established to regulate, inter alia, the piped-gas industry in South Africa under the Gas Act, which further requires NERSA to promote the development of a competitive market for piped gas and gas services in South Africa, on an equitable basis, considering the interests and needs of all parties concerned.
In July 2021, NERSA approved a new methodology (the second methodology) for determination of maximum gas prices, after a first methodology, implemented by NERSA in 2013, had been set aside as irrational by a Constitutional Court order.
The second methodology applies an international benchmarking approach. The maximum gas price is calculated as a weighted average of the prices associated with the USA Henry Hub, the Dutch Title Transfer Facility and the UK National Balancing Point.
Despite NERSA clearly and repeatedly stating that its objective is to regulate Sasol Gas’s prices based on a competitive benchmark, the maximum gas prices generated by the second methodology bear no relationship to any reasonable proxy for competitive prices.
The new methodology, as implemented by Sasol Gas from the third quarter of 2021, results in a gas price of about R68 per GJ until June 2022. Under the same methodology, this price is forecasted to increase significantly in 2022 – by about a further 220%.
Between the third quarter of 2022 and the second quarter of 2023 alone, the second methodology will result in a cost to gas users and the economy of around an additional R8.9 billion, which will adversely impact South African inflation, investment and global competitiveness.
“Such exponentially escalating costs will not only substantially prejudice downstream gas users, but it will also harm the manufacturing industry, which is vital to the future growth and development of South Africa’s fragile economy,” said Jaco Human, IGUA-SA’s Executive Officer.
Application details
IGUA-SA contends that like the 2013 methodology, the 2021 methodology is unreasonable and irrational. This is so for three main reasons, all of which are fully explained in IGUA-SA’s expert economic report.
Firstly, reliance upon foreign and/or international benchmarking models, in which the gas price is effectively tied to gas prices in foreign gas markets, is unreasonable and irrational. This is because the competitive conditions of the international hubs – including supply and demand conditions; suppliers’ costs; and the risks faced by investors – are likely to be substantially different to South Africa.
Secondly, the prices that NERSA’s new methodology generates are in fact higher than the monopolist prices that were charged by Sasol Gas in the so-called grace period (2004–2014) before it became subject to NERSA’s regulation, and in the period under NERSA’s regulation from 2013 to 2021.
Thirdly, in its decision setting aside the 2013 decision, the Constitutional Court emphasised the importance of dividing equitably between suppliers and consumers the economic surplus. While it splits the economic surplus that is derived between consumers and suppliers, the 2021 decision does not achieve a split of the economic surplus that is reasonable and rational.
Accordingly, IGUA-SA’s application seeks the review and setting aside of the 2021 decision.
A more reasonable and rational basis for pricing
NERSA has thus far ignored an obvious, practical and rational alternative that would easily fulfil all its regulatory objectives, namely a cost-plus approach.
The cost-plus approach is a well-understood and widely-adopted price-setting methodology applied in many regulatory settings, including in the trading and transmission of piped gas in South Africa – indeed by NERSA itself. The cost-plus approach has also been strongly endorsed by the Constitutional Court.
The cost-plus approach, unlike NERSA’s second methodology, is grounded in the South African piped-gas market; is based on Sasol Gas’s actual costs; allows NERSA to choose a maximum level of allowable profit for Sasol Gas; allows Sasol Gas to cover all relevant prudently incurred costs and earn a profit commensurate with risk; divides the economic surplus between Sasol Gas and consumers in a way that is reasonable and rational; generates a competitive price; promotes efficiency, entry and investment in the piped-gas industry; and is transparent, predictable and objective.
IGUA-SA’s application therefore also seeks an order that NERSA adopts the cost-plus approach to approving the maximum price of the gas molecule. This would allow Sasol Gas to recover all the efficiently and prudently incurred investment and operational costs involved in the production of the gas molecule and to make a profit on its investment commensurate with risk – but no more.
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