The National Energy Regulator of South Africa (Nersa) reports that it will continue to implement the maximum price methodology for piped gas, following a recent court ruling dismissing a move by large industrial gas users to have the 2013 approval of a Sasol Gas application under the methodology set aside.
On March 26, 2013, Nersa approved a Sasol Gas application for a maximum gas price, as well as a trading margin until June 30, 2017. Prior to that date, a market value pricing methodology had prevailed – one that arose as a direct result of a ten-year special dispensation agreed between Sasol and government in 2001 to facilitate an investment in a gas pipeline from Mozambique to South Africa.
The Gas Act, which came into force in 2002, envisaged a transition from the “discriminatory” market value pricing methodology, which allowed Sasol to set prices based on what it would cost a customer to switch to an alternative fuel.
Following public consultations, Nersa opted for the maximum price methodology, despite opposition from large users, which showed a preference for a cost-plus methodology.
Sasol said at the time that a small minority of its gas customers would experience an increase in the short term, but emphasised that the vast majority of its clients would benefit from lower prices.
However, the Gas Users Group (GUG) – comprising South African Breweries, Consol Glass, Nampak, Mondi, Dawn and Illovo Sugar – launched a legal challenge, arguing that the new methodology would result in an escalation of gas prices at a pace that far exceeded producer price inflation.
In its initial High Court application, GUG raised a wide range of substantive and procedural problems with the methodology and called for it to be reviewed and for Nersa approval of Sasol Gas’s maximum price, trading margin and transmission tariffs to be set aside.
The case was heard in the Pretoria High Court in May and Judge AA Louw dismissed the application with costs on October 4, noting the steps taken by Nersa to both finalise the methodology, as well as to determine Sasol Gas’s maximum prices.
Nersa regulatory member for piped gas Nomfundo Maseti says the implication of the judgment is that the maximum price methodology remains valid. “Nersa will, therefore, continue to implement the current methodology, as well as monitor and enforce compliance.”
However, Maseti adds that Nersa is willing to review the methodology should market conditions change and should increased gas-to-gas competition arise. At present that methodology uses a basket of alternatives, such as electricity, coal, diesel, liquid petroleum gas and heavy fuel oil to determine the maximum price.
Maseti argues that gas prices have moderated since the introduction of the methodology and currently stand at R130/GJ. Prices are adjusted on a quarterly basis.
The methodology will not be applied for any liquefied natural gas (LNG) that could be imported into South Africa as part of the Department of Energy’s LNG Independent Power Producer Procurement Programme, which could be initiated later this year. Instead a cost pass-through methodology will be used.
“If we, at some point, begin receiving imported LNG at Richards Bay and Coega, the cost pass-through should be sufficient to enable such investments, as it will enable the LNG importers to charge prices that are appropriate.”