South Africa: Regulatory Issues in Energy

Last Updated: 8 October 2004
Article by David Thompson

Doing deals in any business sector requires some understanding by principals and their advisors of the regulatory framework. If regulatory approvals are required, what are the time frames for and probabilities of obtaining these? Does the subject business require a license to operate and is this affected by changes in the identity or control of the owner of the business arising from the deal? What is the risk that regulatory change may limit or destroy the ability of the business to operate or to grow in future? A key requirement for any industry is achieving certainty regarding the structure, powers and functions of its regulator or regulators.

The new National Energy Regulator ("NER") due to be established in early 2005 in terms of the Energy Regulator Bill ("the Bill") currently before Parliament, illustrates some of the problems associated with the establishment of a new regulatory framework.

The NER replaces the Petroleum Pipeline Regulatory Authority established under the the Petroleum Pipelines Act, 2003, the Gas Regulator established under the Gas Act, 2001 and the National Electricity Regulator established under the Electricity Act, 1987. A single regulator for "carriers of energy" should save costs of administration. However, it is questionable whether the skills required to regulate gas, electricity and petroleum pipelines can successfully be established in a single regulator. The explanatory memorandum to the Bill anticipates that the existing Electricity Regulator's infrastructure will be used and expanded for the NER and that ultimately the NER will regulate the whole petroleum products industry and not only petroleum pipelines. The petroleum products industry faces numerous issues which require significant attention from its regulator. For example, implementing the clean fuels program by 2006 and the whole process of "managed liberalisation" of an industry with a complex mix of regulated and unregulated aspects.

Complicating the NER process is the fact that save for the Electricity Act, none of the legislation referred to above is yet operative. Furthermore, draft regulations under the Petroleum Pipelines Act have not yet been published and the controversial Petroleum Products Amendment Bill ("PPAB") is also before Parliament. The PPAB provides a completely new framework for licensing wholesalers and retailers of petroleum products. A controversial provision included the obligatory purchase of synfuels (i.e. from Sasol and Petro SA) as a prerequisite for licensing. This has apparently now been dropped, although the redrafted Bill is not yet public at the time of writing. That licensing system (and its regulations – also still to be drafted) will require substantial NER skills and resources to implement.

Furthermore, once the NER becomes the licensing authority for the whole petroleum industry, the complexities of licensing under the new regime created by the Broad Based Black Economic Empowerment Act and the codes (still to be published) under that Act, will add to the burden on the NER.

Regarding electricity, fears of substantial future electricity blackouts due to insufficient investment in electricity distribution infrastructure suggests that this industry will also require significant attention from the NER. The NER will have its work cut out to avoid the criticism that South Africa is over regulated and under policed. We may have all the regulatory structures but are they implemented effectively?

Turning to the details of the Bill, it generally follows the unexceptional structure of legislation creating a regulator. One concern is that a provision in the original draft has been removed. This provided that no person who is an employee of, or affiliated to, an organ of state in any sphere of government may be appointed as or remain a member of the NER. Regulators must stand independent of government, while balancing the interests of all stakeholders (including government) in that industry.

There are many positive aspects to the Bill. The provisions in Sections 6 and 9 of the Bill regarding declarations of interest, avoiding conflicts of interest and acting independently of undue influence or instruction are far-reaching, but will require effective policing. Section 10 (3) provides that any person adversely affected by a decision of the NER may bring such a decision under review by the High Court.

The Department of Minerals and Energy has other major tasks such as implementation of the Mining and Liquid Fuels Charters and the clean fuels program. The stitching together of the revised legislative framework under the single NER should be completed as soon as possible and the NER must be staffed with sufficient independent and skilled personnel to perform its multi-faceted mandate.

Cabinet approved the establishment of a single regulator for these three industries in April 2002. The NER must be fully functioning by the second quarter of 2005. The passing of the Bill into law and the establishment of the NER as a fully functioning organisation should therefore be a government priority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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