TRANSNET SOC LIMITED’S PETROLEUM PIPELINES SYSTEM TARIFF APPLICATION FOR THE 2021/22 FINANCIAL YEAR Discussion Document 12 November 2020 DISCUSSION DOCUMENT ON THE PRELIMINARY ASSESSMENT OF THE TRANSNET SOC LIMITED’S PETROLEUM PIPELINES SYSTEM TARIFF APPLICATION FOR THE 2021/22 FINANCIAL YEAR This discussion document on the preliminary assessment of Transnet SOC Limited’s (Transnet or ‘the Applicant’) application for the pipelines system tariff is based on information supplied by Transnet. The National Energy Regulator of South Africa’s (NERSA) assessment is as per the Tariff Methodology for the Petroleum Pipelines Industry, 7th Edition, approved on 29 October 2015 (‘the Tariff Methodology’). NERSA is publishing this discussion document on the tariff application to solicit comments from the public and other stakeholders. In providing comments, stakeholders may consider the published Tariff Methodology and the Frequently Asked Questions (FAQ): Tariff Methodology for the Setting and Approval of Tariffs in the Petroleum Pipelines Industry, approved on 26 May 2016. Members of the public wishing to submit comments should do so in writing. The deadline for comments is 15 January 2021. Written comments are to be submitted to NERSA at: Fax: 012 401 4700 Email address: [email protected] Physical address: Kulawula House 526 Madiba Street Arcadia Pretoria Postal address: Petroleum Pipelines Tariffs Department The National Energy Regulator of South Africa PO Box 40343 Arcadia Pretoria 0007 In addition, NERSA will conduct a public hearing on this application where oral representations may also be made. This public hearing is scheduled to be held at NERSA’s offices at 526 Madiba Street, Arcadia, Pretoria, South Africa. The public hearing may also be held via Microsoft Teams, NERSA will inform stakeholders closer to the scheduled public hearing. Discussion Document: Transnet SOC Limited’s Petroleum Pipelines System Tariff Application for the 2021/22 Financial Year Page 2 of 33 ABBREVIATIONS AND ACRONYMS AR Allowable Revenue ATO Ability to Operate Capex Capital Expenditure COP Crude Oil Pipeline CPI Consumer Price Index CWIP Construction Work in Progress FFC Forecast Final Cost IFRS International Financial Reporting Standards MPP Multi Product Pipeline NERSA National Energy Regulator of South Africa NMPP New Multi Product Pipeline Opex Operational Expenditure PPE Property, Plant and Equipment RAB Regulatory Asset Base RfD Reasons for Decision TM1 Coastal Terminal TM2 Inland Terminal WACC Weighted Average Cost of Capital Discussion Document: Transnet SOC Limited’s Petroleum Pipelines System Tariff Application for the 2021/22 Financial Year Page 3 of 33 1. INTRODUCTION AND BACKGROUND 1.1. Transnet SOC Limited (Transnet or ‘the Applicant’) is a diversified transport and logistics group wholly owned by the South African Government. Transnet is a public company registered and incorporated as such, in terms of the company laws of the Republic of South Africa, pursuant to the Legal Succession to the South African Transport Services Act, 1989 (Act No. 13 of 1989). Its company registration number is 1990/000900/06, and its registered head office is at Waterfall Business Estate, 9 Country Estate Drive, Midrand, 1662. Transnet operates the country’s rail network, through its Transnet Freight Rail division (TFR); ports, through its Transnet National Ports Authority division (TNPA); petroleum pipelines system, petroleum storage facility and a gas pipeline, through its Transnet Pipelines division (TPL); as well as other businesses through divisions such as the Transnet Ports Terminals (TPT) and Transnet Engineering (TE). 1.2. TPL operates approximately 3,800 km of high pressure petroleum and gas pipelines, as well as a storage facility for petroleum products in Tarlton near Krugersdorp. It is the dominant pipeline operator in South Africa, and has a de facto monopoly of the pipeline conveyance of petroleum from Durban to the inland destinations. The petroleum pipeline system operated by Transnet includes the Durban to Johannesburg Pipeline (DJP), the Avtur Pipeline1, the Crude Oil Pipeline (COP) and the Multi-Product Pipeline (MPP). 2. THE APPLICATION 2.1. On 30 September 2020, Transnet submitted a tariff application to the National Energy Regulator of South Africa (NERSA) for its licensed Petroleum Pipelines System (licence number: PPL.p.F3/20/1/2006). 2.2. Transnet is required to submit a tariff application for its Petroleum Pipelines System eight (8) months prior to the commencement of the tariff period (which, in this case, commences on 1 April 2021, thereby making 1 August 2020 the due date of lodgement 1 Jet Fuel Pipeline from Natref to OR Tambo International Airport. Discussion Document: Transnet SOC Limited’s Petroleum Pipelines System Tariff Application for the 2021/22 Financial Year Page 4 of 33 of the tariff application). This requirement is provided in the 2020/21 Transnet Tariff Decision for the Petroleum Pipelines System. 2.3. However, some of the information used as input in Transnet tariff model, normally published by NERSA on its website, was late due to the delayed updates of economic data by the Reserve Bank and the Johannesburg Stock Exchange. Moreover, the Transnet and NERSA technical teams held a series of meetings aimed at resolving any issues that were identified in previous and current determinations. These meetings were held on 18 June 2020, 13 July 2020 and 15 July 2020. 2.4. Due to the matters above, Transnet requested an extension of the date to submit its tariff application for the 2021/22 tariff year, from 1 August 2020 to 30 September 2020. Transnet stated that it would not have sufficient time to carry out the necessary checks and controls on the tariff model, as well as allow for Transnet governance processes for approval of the filing of the application on 1 August 2020. The Energy Regulator granted Transnet’s request for the extension. 2.5. In its tariff application, Transnet applied for an Allowable Revenue (AR) of R5,503.67 million. This is a decrease of 11.15% (R690.78 million) when compared to the AR of R6,194.45 million set by NERSA in the 2020/21 financial year. The AR applied for translates to an increase of 2.39% in the Durban-to-Alrode tariff, which results in an increase of approximately 1.22 cents per litre (cpl) in the fuel price in the 2021/22 financial year (FY) (from 51.18 cpl to 52.40 cpl). 2.6. The decrease in AR is mainly due to a lower Weighted Average Cost of Capital (WACC) 7.89% in 2020/21 vs 6.36% in 2021/22. The increase in tariffs is due to the decrease in volumes from 17,656.6 ML forecasted volumes per the 2020/21 Reasons for Decision (RfD) to 15 849.7 ML per the application. The Multi-Product Pipeline (MPP) Project 2.7. On 12 September 2007, NERSA issued Transnet with a construction licence (licence number PPL.p.F1/74-75/2007) to construct a 24-inch diameter petroleum product pipeline from Durban to Jameson Park and three 16-inch diameter pipelines, as Discussion Document: Transnet SOC Limited’s Petroleum Pipelines System Tariff Application for the 2021/22 Financial Year Page 5 of 33 follows: (a) from Jameson Park to Alrode; (b) from Alrode to Langlaagte; and (c) from Kendal to Watloo, inclusive of accumulator facilities in Durban and Jameson Park. Transnet named this project the New Multi-Product Pipeline (NMPP later changed to MPP). 2.8. According to Transnet, long-term projected demand for pipeline capacity and inherent integrity issues with the DJP necessitated the construction of the MPP. On 20 December 2007, the Energy Regulator approved Transnet’s application for a licence to construct the MPP. 2.9. The following MPP project assets have been completed and have been brought into operation as per notification to NERSA at the time: a) A 16-inch pipeline from Jameson Park to Alrode (25 May 2011) b) A 16-inch pipeline from Alrode to Langlaagte (25 May 2011) c) A 16-inch pipeline from Kendal to Waltloo (30 April 2011) d) A 24 inch trunkline from Durban to Jameson Park and its related pump and metering stations (9 January 2012) e) Close Out on Pipelines and Pump Stations (operationalised on 1 March 2016); f) Tightlining at Island View Durban (08 August 2017) g) TM2, an inland accumulation facility at Jameson Park (operationalised on 15 December 2017) h) Close Out of Tightlining and TM2 (operationalised on 26 June 2018) i) Deferred scope (operationalised on 26 June 2018). 2.10. The infrastructure that is presently under construction as part of the MPP assets comprises: a) TM1 Tanks, an accumulation facility at Island View (forecasted to be operationalised on 30 June 20232); and b) SAPREF replacement tanks (forecasted to be operationalised on 30 June 2022); 2 Exact date to be finalised upon completion and approval of the TM1 tanks business case. Discussion Document: Transnet SOC Limited’s Petroleum Pipelines System Tariff Application for the 2021/22 Financial Year Page 6 of 33 2.11. The project was initially projected to cost about R11,137 million, the latest final forecast cost (FFC) of the MPP project (in the 2019/20 tariff application) was R29,332 million3. The initial scheduled completion date was the third quarter of 2010 and Transnet’s latest projections show that the project will be completed on 30 June 2023. Timelines and cost escalations on the MPP project are highlighted in Table 1 below. Table 1: MPP FFC by Transnet over the calendar years Projection years 2007 2009 2010 2010* 2014 2015 2016 2017 2018 2019 2020 Not FFC (R' million) 11 137 12 600 15 400 23 400 25 800 26 211 29 500 29 678 29 322 29 322 provided** Sep Sep Sep Sep Mar Mar Mar Jun Jun Jun Not** Completion date 2010 2011 2011 2011 2018 2018 2018 2019 2023 2023 provided *Revised projection for 2010 and there were no changes in the projections for 2008, 2011, 2012 and 2013.