Tariff Decision Application by: License number: Type of facility: Locality of facility: Period covered by tariff application: NERSA decision forum: BP Southern Africa (Pty) Ltd (BPSA) PPL.p.F3/35/6/2006 ORTIA Jet Fuel Pipeline Between Isando and OR Tambo International Airport (ORTIA) 01 January 2013-31 December 2015 Regulatory Executive Committee (REC) Date of decision: 12 December 2013
Table of Contents Tariff Decision... 1 Reasons for decision... 2 Introduction... 2 The licensee... 2 Applicable law... 2 The Methodology... 2 The decision making process... 3 The application... 4 Allowable Revenue and Tariffs... 4 Allowable Revenue... 4 Regulatory asset base (RAB)... 5 Weighted average cost of capital (WACC)... 7 Expenses... 8 Depreciation... 9 Taxation... 10 Volumes... 10 Tariffs... 11 Conclusion... 12 i
List of Tables Table 1: BPSA storage tariffs approved by NERSA... 1 Table 2: Differences in working capital and RAB... 6 Table 3: Differences in WACC... 8 Table 4: ORTIA s Expenses items in tariff application... 9 Table 5: Differences in Tax and Allowable Revenue... 10 Table 6:Differences in allowable revenue and tariff levels... 11 ii
NATIONAL ENERGY REGULATOR (NERSA) In the matter regarding THE APPLICATION FOR THE AMENDMENT (TARIFF ADJUSTMENTS) OF ITS LICENCES TO OPERATE ITS PIPELINE By BP SOUTHERN AFRICA (PTY) LTD THE JET FUEL PIPELINE BETWEEN THE TRANSNET PIPELINES DISCHARGE MANIFOLD AT ISANDO AND THE INLET FLANGE OF THE OR TAMBO INTERNATIONAL AIRPORT Licence no: PPL.p.F3/35/6/2006 Tariff Decision 1. At its meeting on 12 December 2013 the National Energy Regulator (NERSA ) set the following the multi-year pipeline tariffs to be charged for the transport of product in the Jet fuel pipeline between the Transnet Pipelines discharge manifold at Isando and the inlet flange of the OR Tambo International Airport storage facility (ORTIA Jet fuel pipeline). The tariff application was submitted by BP Southern Africa (Pty) Ltd (BPSA). The schedule of tariffs covering the tariff period between 01 January 2013 and 31 December 2015 is presented below in Table 1. Table 1: ORTIA pipeline tariffs set by NERSA ORTIA Jet fuel Tariffs 2013 2014 2015 2.11c/l 2.24c/l 2.37c/l 2. These are maximum tariffs and exclude VAT. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 1 of 12
Reasons for decision Introduction 1. On 01 August 2013 BP Southern Africa (Pty) Ltd (BPSA) submitted to NERSA an application for the approval of its ORTIA Jet fuel pipeline multi-year tariffs listed above in Table 1. The licensee 2. BPSA submitted the application on behalf of the following owners of the pipeline: - BP Southern Africa (Pty) Ltd - Chevron South Africa (Pty) Ltd - Engen South Africa (Pty) Ltd - Excel (Pty) Ltd - Shell South Africa Marketing (Pty) Ltd - Total South Africa (Pty) Ltd Applicable law 3. The legal basis for NERSA for setting tariffs for petroleum pipelines is derived from the National Energy Regulator Act, 2004 (Act No. 40 of 2004), (the NERSA Act), read with the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003), (the Act). The Methodology 4. In terms of section 28 of the Act, tariffs to be charged by licensees must be based on a systematic methodology applicable on a consistent and comparable basis 1. To this end, NERSA has published the Tariff Methodology for the Setting of Pipeline Tariffs in the Petroleum Pipelines, Version 6 of 29 1 Section 28(2)(a)(i) of the Act RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 2 of 12
July 2013 ( the Methodology ) 2 that outlines the approach taken in this decision. The methodology meets the requirements of the current Regulations in terms of the Petroleum Pipelines Act, 2003 (Act N0. 60 of 2003) as published in Government Notice R3342 GG 30905 ( the Regulations ). The decision making process 5. The tariff application submitted by BPSA on 01 August 2013 is a multi-year tariff application covering the period between 01 January 2013 and 31 December 2015. 6. Notices inviting the public and interested parties to comment on the tariff application were placed in the Independent Newspapers 3 and Die Beeld on 17 October 2013 as well as on NERSA s website. For this purpose the full tariff application was published on NERSA s website between 17 October 2012 and 25 November 2013. The closing date for comments on the tariff application was 18 November 2013. 7. NERSA received no comments on the tariff application. 8. A public hearing was scheduled for 25 November 2013 but in view of NERSA having received no confirmation of any person wanting to make representations at the public hearing, it did not take place. Notes: i. The advertisement in the newspapers did indicate that if NERSA does not receive requests to make representations by Wednesday, 20 November 2013, the public hearing would not take place. ii. The date for the public hearing was originally advertised to be Wednesday, 27 November 2013. This date was subsequently changed to 25 November 2013 and on 18 November 2013 notices to this effect were placed on NERSA s website as well as in the same newspapers 2 Available on NERSA s website at www.nersa.org.za 3 The group of newspapers include The Cape Times, Cape Argus, The Mercury, The Star, Daily News and Pretoria News RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 3 of 12
carrying the original advertisement. These notices however, indicated 25 November 2013 to be a Wednesday while in fact 25 November 2013 was a Monday. This error was corrected by placing an erratum notice in all the newspapers in which this notice appeared and this was done on 19 November 2013. The application Allowable Revenue 9. As per the Methodology, NERSA applied the following formula to determine BPSA s allowable revenue: AR = (RAB x WACC) + E + D + F ± C+ T Where: RAB = Regulatory Asset Base WACC = Weighted average cost of capital D = Depreciation: the charge for the tariff period under review E = Expenses: maintenance and operating expenses for the tariff period under review F = Approved revenue addition to meet debt obligations for the tariff period under review C = Clawback adjustment from a preceding tariff period in relation to the latest estimates for that tariff period T = Tax: estimated tax expense for the tariff period under review Allowable Revenue 10. BPSA applied the principles for determining the allowable revenue in accordance with the Methodology. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 4 of 12
Regulatory asset base (RAB) 11. The Methodology indicates that the RAB is to be determined by applying the following formula: RAB = (PPE d) + w ± dtax Where: RAB = Regulatory asset base PPE = Value of original and inflation write-up of operating property, plant and equipment d = Accumulated depreciation and accumulated amortisation of inflation write-up for the period up to the commencement of the tariff period under review w = Net working capital dtax = Deferred tax Property, plant and equipment 12. Regulation 4(6) of the Regulations prescribes the following principle for determining the value of the RAB: the regulatory asset base which should be determined based on the assets inflation-adjusted historical cost less accumulated depreciation;. 13. Regulation 4(7) (b) of the Regulations provides that for assets for which historical cost records do not exist, an estimated value that the Energy Regulator accepts as most closely approximating historical cost must be used. 14. BPSA indicated that the replacement cost of the regulatory asset base (RAB) has been derived using an estimated cost to reconstruct a similar pipeline. This estimation was done in 2011. The reason for this is because BPSA has indicated that the original cost and commissioning dates of these assets are not available. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 5 of 12
15. NERSA is of the view that it has not yet been established that the approach followed by BPSA for establishing the value of the RAB for the ORTIA pipeline meets the requirements of the Regulation 4(6) or Regulation 4(7)(b). For the purpose of this tariff decision, NERSA accepts the value of the RAB as provided by BPSA. For future tariff decisions NERSA will make determinations on whether the RAB values submitted by BPSA closely approximates the trended historical (original) costs. Working capital 16. BPSA s value of the working capital was based on the line fill of 61.3 kilolitre and an allowance for accounts receivable. The accounts receivable allowance has been derived by BPSA by using the allowable costs as a proxy for receivables. The total allowable cost for the year has been factored by BPSA to 30 days based on an assumption of 30 days outstanding debtors. 17. NERSA s calculation of the receivables was done in accordance with the Methodology which requires the accounts receivables to be calculated on the basis of 30 days of a licensee s allowable revenue. The difference in the calculation by BPSA and NERSA can be seen in Table 2. The end result of this difference is that the RAB value as calculated by NERSA is higher than the RAB value calculated by BPSA. Table 2: Differences in working capital and RAB (R million) Applicable in 2012 Applicable in 2013 Applicable in 2014 Applicable in 2015 RAB Calculated by NERSA - PPE 00000 00000 00000 00000 - Woking Capital 00000 00000 00000 00000 Total 00000 00000 00000 00000 Calculated by Applicant - PPE 00000 00000 00000 00000 - Working Capital 00000 00000 00000 00000 Total 00000 00000 00000 00000 RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 6 of 12
Weighted average cost of capital (WACC) 18. NERSA s tariff methodology prescribes the use of an after tax, real WACC on a depreciated trended original cost base for the RAB. BPSA followed this approach in its tariff application and used as the departure point for trending the RAB, the value of the RAB as determined in 2011. 19. NERSA s Methodology also requires that the values of the variables in the formula for determining the WACC have to be as at 12 months prior to the tariff period. 20. In calculating its WACC, BPSA used the South African Reserve Bank s CPI value for 2012. This value is coincidently the same CPI value published by NERSA on its website as the CPI value to be used for tariffs commencing in January 2013. 21. BPSA also used the values of the economic indicators as published by NERSA on its website. However, for the 2013 tariff period, BPSA used the values applicable for the 2014 tariff year and this explains why there is a difference of 0.73% in the value of WACC as calculated by NERSA.. 22. The data applicable for December 2013 will be published on NERSA s website soon after the first quarter in 2014. If there is a material difference in the value of the WACC and the resultant allowable revenue and tariff levels because of using the actual data for December 2013, clawbacks to or from BPSA will be applied in the assessment of its next tariff application. This practice is in accordance with NERSA s approach on the treatment of multiyear tariffs as published in the following document on NERSA s website: Frequently Asked Question (FAQ): Tariff Methodologies for the Setting and Approval of Tariffs in hte Petroleum Pipelines Industry. 23. The differences in the value of WACC as calculated by BPSA and NERSA is presented on the next page in Table 3. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 7 of 12
Table 3: Differences in WACC WACC Calculation BPSA applied this to all 3 years (2013 2014 2015) 1 NERSA decision 2013 2 NERSA decision 2014 3 NERSA decision 2015 4 Cost of equity (ke) SA risk free rate Rf 4.53% 4.49% 4.53% 4.53% Beta β 0.00 0.00 0.00 0.00 Market risk premium EMRP 6.11% 4.68% 6.11% 6.11% Small stock premium SSP 0.0% 0.0% 0.0% 0.0% Liquidity premium LP 0.00% 0.00% 0.00% 0.00% Country Risk adjustment CRA - - - - Alpha α - - - - Ke 0.00% 0.00% 0.00% 0.00% Cost of debt (kd) Pre tax cost of debt kd 0.00% 0.00% 0.00% 0.00% Tax rate t 28% 28% 28% 28% Inflation rate 5.60% 5.60% 5.60% 5.60% Real kd * (1-t) Kd 0.00% 0.00% 0.00% 0.00% Capital structure % of equity 0.00% 0.00% 0.00% 0.00% % of debt 0.00% 0.00% 0.00% 0.00% WACC 0.00% 0.00% 0.00% 0.00% 1 Data for Jan 2012 as published on NERSA website (should have used data for Dec 2011). 2 Data for Dec 2011 as published on NERSA s website. 3 Data for Dec 2012 as published on NERSA s website. 4 Data for Dec 2013 to be published on NERSA s website when it becomes available. Expenses 24. BPSA indicated that the expense items have been determined in accordance with the NERSA s Regulatory Reporting Manuals (Volume 1 and Volume 2) which require the fully attributable allocation of costs. Where this was not done, BPSA had identified an appropriate cost driver to allocate the cost to RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 8 of 12
the respective storage facilities. NERSA will assess the correct application of BPSA s RRM practices when it evaluates BPSA s implementation of the RRMs during 2014. 25. BPSA used its costs levels of 2012 and escalated these with the South African Reserve Bank s 2012 CPI forecasted value of 5.6%. NERSA finds this CPI value acceptable. All over or under estimates will be clawed back in future tariff periods once audited figures become available. NERSA therefore applied the costs as presented in the tariff application. The cost items and its corresponding levels as provided by BPSA are presented in Table 4 on page 10. Table 4: ORTIA s Expenses items in tariff application Operating costs - 2012 RRM OM code Total 701 - Salaries and wages 0000 702 - Materials and supplies 0000 703 - Outside services 0000 704 - Other expenses 0000 Total 0000 BP Air Management and Support costs RRM GE code Total 731 -Salaries and Wages 732 - Materials and Supplies 733 - Outside Services 734 - Other expenses 0000 740 - Employee Benefits Total 0000 Grand Total - 2012 0000 Depreciation 26. In the applicant s written tariff application it is indicated that the depreciation is to be calculated over a 00 year period. The applicant s tariff model, on the other hand, states an economic life of 000 years. In its model the applicant uses an economic life of 00 years for the primary value of the RAB and uses an economic life of 000 years for writing-off of the trended part of the RAB. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 9 of 12
This dual treatment of the economic life is not correct and NERSA therefore allowed an economic life of 000 years throughout its tariff model. The applicant s inconsistent application of 00 years versus 000 years as the economic life for the RAB is the reason why the tariffs calculated by the applicant is higher than the tariffs calculated by NERSA. Taxation 27. BPSA indicated that it uses the standard corporate tax rate of 28% and from the tariff models submitted to NERSA it became clear that BPSA calculates the tax on a notional tax basis. 28. In view of the different values calculated by NERSA on the WACC and the working capital component in the RAR, the tax calculations by NERSA is therefore also more than the value calculated by BPSA. The difference is presented in Table 5 on page 11. Table 5: Differences in Tax and Allowable Revenue Applicable to 2013 Applicable to 2014 Applicable to 2015 NERSA calculation Allowable Revenue 0000 0000 before tax 0000 TAX 0000 0000 0000 Allowable Revenue 0000 0000 0000 after tax Applicant calculation Allowable Revenue 0000 0000 0000 before tax TAX 0000 0000 0000 Allowable Revenue 0000 0000 0000 after tax Difference in tax calculations 000% 000% 000% Volumes 29. The volume applied is the actual 2012 throughput volume for the facility of 00000 ML of jet fuel. RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 10 of 12
Tariffs 30. The difference in allowable revenue as calculated between BPSA and NERSA is the cumulative result of the differences in the WACC, the working capital, the depreciation over a period of 100 years and not 20 years and the resultant effect of these differences on the calculation of the tax. A summary of the tariffs and the differences between BPSA and NERSA is presented in Table 6 on the next page Table 6: Differences in allowable revenue and tariff levels (R million) Allowable Revenue and NERSA NERSA NERSA NERSA tariffs Base 2013 2014 2015 NERSA calculation Ke 0.00 0.00 0.00 0.00 KD 0.00 0.00 0.00 0.00 WACC earnings 0.00 0.00 0.00 0.00 Depreciation 0.00 0.00 0.00 0.00 Amortization 0.00 0.00 0.00 0.00 Opex 0.00 0.00 0.00 0.00 AR before tax 0.00 0.00 0.00 0.00 TAX 0.00 0.00 0.00 0.00 AR after tax 0.00 0.00 0.00 0.00 Working Capital Inventory 0.00 0.00 0.00 0.00 Receivables 0.00 0.00 0.00 0.00 Working Capital 0.00 0.00 0.00 0.00 No days Receivables 0.00 0.00 0.00 0.00 AR per day 0.00 0.00 0.00 0.00 Volumes(million litres] 0.00 0.00 0.00 0.00 Tariff [cents per litre] 2.01 2.11 2.24 2.37 Applicant Applicant Applicant Applicant Applicant calculation Base 2013 2014 2015 Ke 0.00 0.00 0.00 0.00 KD 0.00 0.00 0.00 0.00 WACC earnings 0.00 0.00 0.00 0.00 Depreciation 0.00 0.00 0.00 0.00 Amortization 0.00 0.00 0.00 0.00 Opex 0.00 0.00 0.00 0.00 AR before tax 0.00 0.00 0.00 0.00 TAX 0.00 0.00 0.00 0.00 AR after tax 0.00 0.00 0.00 0.00 Working Capital Inventory 0.00 0.00 0.00 0.00 Receivables 0.00 0.00 0.00 0.00 Working Capital 0.00 0.00 0.00 0.00 RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 11 of 12
No days Receivables 0.00 0.00 0.00 0.00 AR per day 0.00 0.00 0.00 0.00 Volumes(million litres] 0.00 0.00 0.00 0.00 Tariff [cents per litre] 2.05 2.15 2.27 2.39 % difference (NERSA tariffs lower) 1.7% 2.1% 1.1% 0.9% Conclusion 31. On the conspectus of the facts and evidence, it is appropriate and in compliance with the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to make the decision set out above. It finds a reasonable balance between the interests of customers on the one hand and the interests of investors on the other hand. ****************** RfD on ORTIA jet fuel pipeline tariffss for 2013-2015 tariff period (BPSA submitted) Page 12 of 12