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Frequently Asked Questions (FAQ):

Tariff Methodology for the Approval of Tariffs for

Petroleum Loading Facilities and Petroleum Storage Facilities

Version 3

Approved

26 May 2016

[i]

Frequently Asked Questions (FAQ): Tariff Methodology for the Approval of Tariffs for Petroleum

Loading Facilities and Petroleum Storage Facilities Version 3

26 May 2016

Glossary of Terms and Abbreviations ................................................................... ii

Regulatory Asset Base (RAB) ................................................................................. 1

Weighted Average Cost of Capital (WACC) ......................................................... 11

General notes on WACC .................................................................................... 11

Debt ratio ............................................................................................................ 13

Beta [ ] .............................................................................................................. 14

The Market Return Premium (MRP) .................................................................. 19

The risk free rate (Rf) ......................................................................................... 20

Cost of Equity (Ke) ............................................................................................. 21

Cost of debt (Kd) ................................................................................................ 25

Depreciation ........................................................................................................... 28

Expenses – Operating and Maintenance ............................................................. 28

F-Factor .................................................................................................................. 32

Clawback ................................................................................................................ 33

Tax ........................................................................................................................... 33

Tariff Design ........................................................................................................... 35

Standard Costing ................................................................................................... 37

[ii]

Glossary of Terms and Abbreviations

ALSI - All share total return index on the Johannesburg stock exchange

CPI CPI headline index as published by Statistics South Africa

E - Expenditure. Maintenance and operating expenses for the tariff period

under review.

FYn Financial year for which the tariff is being determined

FYn-1 Financial year prior for which the tariff is being determined

IOC Indexed Original Cost

IRR - Internal rate of return

JSE - Johannesburg stock exchange

Kd - Cost of debt

Ke - Cost of equity

MEA Modern equivalent asset

MR - Market return

MRP - Market return premium

NRBTA - Net revenue before tax allowance

PPE - Value of property, plant and equipment

RAB - Regulatory asset base

RV Replacement value

Rf - Risk free rate of interest

ROE - Return on Equity

T - Tax expense.

t - Prevailing corporate tax rate of licensee

TOC Trended original cost

TRI - Total return index

w - Net working capital

WACC - Weighted average cost of capital

WA - Weighted average beta of proxy firms’ asset betas.

Beta: The systematic risk parameter for regulated entities providing

pipeline, loading and storage facility services.

[iii] ________________________________________________________________________________ NERSA 990-161 FAQ: Tariff methodology for the approval of Loading and Storage tariffs

List of Tables

Table 1: Determining the value of operating asset [PPE] .......................................... 6

Table 2: Template for Plant, Property and Equipment .............................................. 7

Table 3: Economic data sources and frequency of updates ................................... 20

Table 4: Treatment of WACC with Notional Tax ...................................................... 27

Table 5: Example on the calculation of land rehabilitation costs ............................. 32

Table 6: Example on the calculation of notional tax ................................................ 34

Table 7: Impact of the tax shield when notional tax is used .................................... 35

Table 8: Template on Standard Costing .................................................................. 38

Table 9: RAB/PPE as per 2015 "epcm" consulting study ........................................ 39

Table 10: Proxy value for a Standard WACC .......................................................... 40

Table 11: Proxy value for a Standard WACC Comparison of RAS and NERSA operational costs standard allowance ...................................................................... 41

Table 12: Stock turns (excluding outliers) ............................................................... 41

Table 13: Indicative Steps and Timing differences................................................... 44

List of Figures

Figure 1 Replacement value at various Capacity Levels (Year: 2015) ................ 39

________________________________________________________________________________ NERSA 990-161 FAQ: Tariff methodology for the approval of Loading and Storage tariffs

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Regulatory Asset Base (RAB)

The components of the regulatory asset base are presented in the following formula:

RAB = PPE + w

Where:

RAB = Regulatory asset base

PPE = Property, plant and equipment (operating, non-current assets)

w = working capital

Question 1

Why is the value of PPE based on Indexed Original Cost [IOC] or Replacement

Value [RV]?

Answer

1.1 The IOC or RV basis puts similar assets competing in the market and

rendering the same basic service on the same basis for the purposes of

determining a return on assets.

1.2 The return on RAB is calculated in real terms on the nominal RAB value.

1.3 The result of applying a real return on a nominal RAB is that tariffs become

back-loaded. Back-loading of tariffs implies that tariff levels will increase in

real terms over time. This approach ensures that tariffs do not deflate in real

terms as the asset ages, but keep up with the trend of inflation.

1.4 The back-loading of tariffs also reflects the economic reality of prices

generally inflating over time and will therefore counter the effect of large step

tariff increases when new assets replace old assets.


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Question 2

How is AFUDC treated?

Answer

2.1 AFUDC includes the net cost for the period of construction of borrowed

funds (finance) used for construction purposes and a reasonable rate of

return on other funds (financing) like equity. Allowances must be computed

in accordance with the formula prescribed in paragraph 2.2.

2.2 The formula and elements for the computation of the allowance for funds

(financing) used during construction shall be the approved weighted

average cost of capital multiplied by the sum of:-

i) average balance in construction work in progress,

ii) plus average capital inventory balance,

iii) less construction accounts payable,

iv) less asset retirement costs (if any are included in construction work in

progress).

2.3 The weighted average cost of capital rate shall be determined in the manner

indicated and approved by the Energy Regulator for the applicable year. As

Capital Work in Progress is not subjected to TOC/IOC this WACC rate

should be nominal

2.4 When a plant or project is placed in operation or is completed and ready for

service cost of the property placed in operation or ready for service, shall be

treated as Plant in Service and allowance for funds (financing) used during

construction. The capital expenditure thereof to become the starting PPE

cost for that asset.

Note:

1. When only a part of a plant or project is placed in operation or is completed and

ready for service but the construction work as a whole is incomplete, that part of the


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cost of the property placed in operation or ready for service, shall be treated as

Plant in Service and allowance for funds (financing) used during construction

thereon as a charge to construction shall cease. Allowance for funds (financing)

used during construction on that part of the cost of the plant which is incomplete

may be continued as a charge to construction until such time as it is placed in

operation or is ready for service, except as limited above.

2. No allowance for funds (financing) used during construction will be included for the

portion of projects where a contribution has been received up front on a direct

assigned project. For those projects where contributions are received up front and

no allowance for funds (financing) used during construction is calculated, the

contribution would be included in the rate base in the same period as the asset.

Question 3

Is IOC or RV for PPE “in accordance” with the requirements of the Act and the

Regulations?

Answer

2.1 Section 28(3)(a) of the Petroleum Act instructs the Regulator to approve tariffs

that must enable the licensee to recover "the investment". This is further

enlightened by:

Regulation 4(2) - The tariffs set by the Authority must enable an efficient

licensee to—

(b) recover capital investment and make profit thereon commensurate with

the risk; and

AND

Regulation 4(7)- The regulatory asset base contemplated in Regulation

4(6)(e) must-

(a) be calculated as the total investment in the regulatory asset base;


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(aA) fairly reflect the investment in the regulatory asset base.

(b) for assets in operation at the time of promulgation of these Regulations

and for which historical cost records do not exist, an estimated value that

the Authority accepts as most closely approximating their historical cost;

and

(c) include only those assets that are prudently acquired.

2.2 The IOC reflects “the investment” adjusted for inflation and RV represents an

estimated value that the Energy Regulator accepts as most closely

approximating the indexed historical cost.

Question 4

How will the IOC value of property, plant and equipment be determined?

Answer

3.1 For the comprehensive option, The IOC is determined by indexing the original

prudently acquired cost [if available] of the asset in operation by the inflation

rate [CPI] using the following formula:

IOC FYn = IOC-FYn-1 x KCPIn

Where:

FYn = Financial year for which the tariff is being determined

FYn-1 = Financial year prior to which the tariff is being determined

KCPIn = CPI headline index value for twelve (12) months before the

commencement of FYn divided by the CPI headline index twelve

(12) months before the commencement of FYn-1.


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Note:

An example of how to determine the value of the IOC is provided in Table 1.


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Table 1: Determining the value of operating asset [PPE]

IOC Example Formula

FYn-1 1 April 2015 to 31 March 2016

Fyn 1 April 2016 to 31 March 2017

Headline CPI March 2014 index value a 102.5 Headline CPI March 2015 index value b 108.7 IOC value used in determination of FYn-1 c 300 105 789

KCPIn d=b/a 106.05%

IOC value used in determination of FYn e=c*d 318 262 189

The calculation of IOC Asset values should preferably be performed by using individual Asset items as per audited Asset Registers.

Question 5

How will the RV of property, plant and equipment be determined?

Answer

4.1 If the original prudently acquired costs are not available and the Regulator is

in agreement with the non-availability, the replacement cost of operating

assets [PPE] can be used and must be valued by the licensee and supported

by a valuation performed by an appropriate independent professional firm on

a Modern Equivalent Asset [MEA] basis.

4.2 Definition of Modern Equivalent Asset [MEA]: An asset which has a similar

function and equivalent productive capacity to the asset being valued, but of

a current design and constructed or made using current materials and

techniques.

4.3 If certain capital expenditure incurred by the licensee is not included in the

definition of MEA such expenditure could be brought to the Regulator's

attention with a request that it be considered for inclusion in the regulatory

asset base or to be recovered as a part of the operational expenditure. This

is subject to approval by the Regulator.


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4.4 This valuation is to be performed at least every five years and indexed at an

appropriate inflation rate in the years between valuations.

4.5 The valuation should be broken up into the different asset components as

indicated in Table 2.

Table 2: Template for Plant, Property and Equipment

Cost element

[R- million]

Land

General and civil works

Building Works

Road gantry

Road receipt

Rail gantry

Tank farm

Site product piping and equipment

Fire protection facilities

Electrical Infrastructure

Security Systems

Instrumentation and Control

Other [supply detail]

Engineering, Management and Construction Margin

Total Cost

Capacity[million litres]

Replacement costs per Million litres

4.6 For standard options one and two, the replacement cost can be read off the

graph/table of design capacities and replacement costs that Nersa will make

available on its website.

Question 6

What does an appropriate independent professional firm constitute as referred to

above in question number 2?


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Answer

5.1 Firms registered with at least one of the following:

- Consulting Engineers of South Africa [CESA];

- Independent Regulatory Board for Auditors [IRBA];

- South African Council for the property valuer profession (SACPVP);

- South African Institute of valuers (SAIV); and

- Royal institute of Chartered Surveyors (RICS)

Question 7

Will the Energy Regulator (ER) allow a transition period before assessing tariff

applications on the IOC or RV basis?

Answer

6.1 Depending on the information submitted by licensees, the Energy Regulator

will assess tariff applications on either the Trended Original Cost (TOC) basis

or on the IOC or RV basis for tariff periods ending December 2017.

6.2 Tariff applications for the period commencing on or after 01 January 2018 will

only be evaluated on the IOC or RV basis.

6.3 Should a licensee not be in a position to implement the IOC or RV approach

by 01 January 2018, a motivation for extending this date is to be submitted to

the Energy Regulator for consideration.

Question 8

Will there be any clawback implications when tariff applications convert from

TOC to the IOC or RV basis?


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Answer

7.1 No clawbacks will be implemented. The concept is that the TOC basis for

calculating the Allowable Revenue includes two elements relating to the

Regulated Asset Base: (i) Return on RAB [WACC*RAB (a lower RAB value)]

and (ii) depreciation over the useful life of the asset. The IOC or RV basis of

calculating the Allowable Revenue includes only one element relating to the

Regulated Asset Base: Return on RAB [WACC*RAB (a higher RAB value)]

with NO depreciation. Over time these elements will balance out.

Question 9

What is an appropriate inflation rate?

Answer

8.1 The Energy Regulator will accept the Consumer Price headline index [CPI]

as published by Statistics South Africa as the default for the inflation rate. If

licensees propose alternative recognised inflation indexes for all or

components of the asset base it would be considered and used if so accepted

by the Energy Regulator.

Question 10

If a new asset is built, would the actual value of such an asset represent an

acceptable MEA replacement value?

Answer

9.1 If the IOC basis is used, it would not be necessary to perform a MEA valuation

for New assets.

9.2 No, an MEA valuation study still has to be done if the RV basis is used. If a

new asset is built, the value of the operating assets should be close to the


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MEA value, but inefficiencies and construction problems could incorrectly

overstate the value which would compensate licensees for their inefficiencies.

Question 11

Why is replacement value not applied to the working capital component of the RAB

formula?

Answer

10.1 Working capital resets itself each year and therefore there is an automatic

annual adjustment for inflation in the components of the working capital.

10.2 If a multi-year tariff application is submitted, the working capital (w) should be

inflated with the CPI.

Question 12

What benchmarks are used for determining the allowable amounts for the respective

components in the formula for determining the working capital.

Net working capital = inventory + tank bottoms + receivables +

operating cash – trade payables

Answer

11.1 Tank bottoms / unpumpables and inventory: Line fill and inventory is to be

valued at the lower of cost or net realisable value.

11.2 Receivables: Receivables is to be based on a maximum of 30 days of a

licensee’s annual allowable revenue.

11.3 Operating cash: Operating cash is to be based on a licensee’s standard

practice subject to a maximum of 45 days’ maintenance and operating


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expenses, excluding depreciation and deferred taxes. Added to this amount

will be the minimum cash requirements of a licensee’s lender(s).

11.4 Trade payables: Trade payables is to be based on a maximum of 45 days of

a licensee’s annual allowable revenue.

11.5 If licensees have proof that their historical values for the above benchmarks

are higher, the higher values can be used.

Question 13

NERSA determines the value of the operating assets of pipelines (property, plant

and equipment) on a TOC basis, while the value of the operating assets for loading

and storage facilities is determined on an IOC or RV basis. Why are different

approaches used within the same industry?

Answer

12.1 Pipelines and loading and storage facilities operate in different markets. On

one hand the market structure for pipelines is more of a natural monopoly and

dominated by state owned companies (SOCs). On the other hand Loading and

Storage facilities are operated in a more competitive market which requires a

different approach.

Weighted Average Cost of Capital (WACC)

General notes on WACC

Question 14

Why is a real WACC and not a nominal WACC applied?

Answer

13.1 Because the nominal [IOC or RV] of the RAB is used, a real rate of return is

used [as reflected in the after tax, real weighted average cost of capital


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(WACC)]. This requirement is also stipulated in section 28(3)(c) of the

Petroleum Pipelines Act, 2003 (Act No. 60 of 2003). This requirement is also

stipulated in regulation 4(6)(e) of the Regulations. 1

13.2 Inflation is embedded in the IOC or RV of the asset base (RAB) (PPE and

working capital) and is therefore 'to be taken out' of the nominal return

(WACC). Nominal returns on nominal assets would constitute a double count

of inflation and thus 'real returns' are used.

Question 15

What is to be understood by the following two statements?

i) Section 28(3)(c) of the Petroleum Pipelines Act 2003 (Act No. 60 of 2003) (the

Act):

(3) The tariffs set or approved by the Authority must enable the licensee to-

(a) make a profit commensurate with the risk;

ii) Regulation 4(6) of the Regulations made in terms of the Petroleum Pipelines Act

(see Government Notice R432, Government Gazette No. 30905 of 04 April

2008):

(6) The allowed revenue to be derived from tariffs contemplated in sub-regulation

(2) must include -

(a) reasonable operating expenses;

(b) reasonable maintenance expenses;

(c) ……..(deleted with amendment on 28 August 2015);

(d) reasonable working capital;

(e) reasonable real return on the regulatory asset base which should be

determined in accordance with section 28(2)(a) of the Act; and

(f) other applicable obligations.

1 Regulations in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) GNR. 342 in GG No. 30905 of 4 April 2008 as amended by GNR 764 in GG No. 39142 of 28 August 2015.


Page 13 of 44

Answer

14.1 The reasonable return relates to the return earned by the licensee on the RAB

and not to the return earned by an equity investor in the RAB. Note that Sub-

regulation (2) refers to an ‘efficient licensee’ and not an equity holder which

is an entity different from the licensee.

14.2 In view of the fact that Section 28(3) of the Act does not stipulate that the

‘profit commensurate with risk’ is to be earned in each year, it is taken that

the ‘profit’ (return) is to be earned over the total life of the asset. This profit

relates to the profit of the licensee on the RAB and not to the profit of an equity

investor which is a separate entity.

14.3 The actual return that will be earned by the equity investor each year is a

function of the capital structure of the licensee. If the funding structure of the

licensee requires the debt funding to be repaid earlier or faster than the life of

the asset, it is viewed that the equity holder has chosen to become a 'patient

capital' investor. The ‘patient capital’ investor will therefore wait for the debt

capital to be repaid before the full return on equity can be earned.

Debt ratio

Question 16

Why is a target debt ratio used and what is the target debt ratio set by the

Energy Regulator?

Answer

15.1 Using IOC or RV to determine the value of RAB has the effect that RAB values

and "ACTUAL" debt values will delink and actual debt becoming an ever

decreasing % of IOC or RV. Therefore a target debt ratio is used.


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15.2 If licensees want to fund new projects with higher debt they are allowed to do so

and use the gearing effect and earn higher returns. The return on assets will

effectively be calculated at the higher Ke rate for all assets above 35% debt ratio.

So Ke rate will be earned on debt funding above 35%. As IOC or RV [constantly

increasing] and debt funding [constantly decreasing] will delink, therefore actual

cost of debt [Kd] will also delink.

15.3 The target debt ratio set by the Energy Regulator to calculate the beta and the

weighted average cost of capital [WACC] in the methodology is 35%. This target

debt ratio was arrived by taking the average debt ratio of the proxy companies

used to calculate the beta into consideration.

Question 17

Can Licensees have a different [higher or lower] actual debt ratio?

Answer

16.1 The actual debt ratio of the licensee will not affect the target debt ratio (35%)

used for the calculations of WACC and tariffs. A Licensee is then in a position

to decide on its own optimal gearing ratio which will not influence the tariff

determination.

Beta [ ]

Question 18

Why is a beta derived from international companies used in relation to the

conditions of the local stock market?

Answer

17.1 There are no suitable comparative companies listed on the local stock market.


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Question 19

What are the criteria for selecting companies as a proxy for local companies?

Answer

18.1 The proxy companies must be listed on stock exchanges.

Question 20

Does NERSA publish beta values?

Answer

19.1 Yes. NERSA publishes the value of the unlevered beta applicable to the

petroleum industry. The names of the proxy companies utilised for determining

the beta value as well as quarterly updates of monthly beta values are published

on NERSA’s website.

19.2 The unlevered beta is re-levered using the Harris and Pringle formula as

explained in more detail in paragraph 22.2 below.

Question 21

When are adjustments to the industry beta allowed?

Answer

20.1 No adjustments to the beta are allowed. The beta is a measure of systematic

risk. Company or project-specific risks should be accounted for separately from

the beta as explained in the tariff methodology.

Question 22

Which company is used as a supplier of data on beta values of proxy companies?


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Answer

21.1 Data is collected monthly on the beta values of proxy companies and is

based on data provided by Bloomberg.

Question 23

At what frequency and over which period is data on the beta value of proxy

companies collected?

Answer

22.1 Monthly data for a period of five years is collected. The five-year period is the

period ending the year immediately preceding the date of publication.

Question 24

Is a statistical correction factor applied to the values of the beta?

Answer

23.1 NERSA does not apply any additional correction factor to data utilised for

calculating the beta.

Question 25

How is the beta calculated?

Answer

24.1 For licensees that are not publicly listed and where there are insufficient publicly

listed competitors, the equity beta is derived from a proxy beta. To make

adjustments for differences in gearing between the proxy and the licensee the

process involves ‘un-levering’ and ‘re-levering’ as follows:

i. obtaining the equity beta for the proxy company;


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ii. un-levering the beta of the proxy company by the gearing level of the

proxy company – this unlevered beta is known as the asset beta;

iii. calculating the weighted average of the asset betas for the chosen proxy

companies; and

iv. re-levering the average asset beta by the standard gearing of 53.85%

[(65/35) * 100] calculated from the standard debt ratio of 35%.

24.2 Further clarification

i. The Harris and Pringle formula, which excludes the tax shields in the

notation, will be used.

ii. The following steps must be followed when calculating the beta value:

Step 1 – Calculate asset beta (or un-levered beta) for proxy firms

The following formula must be used to determine the asset beta:

β a1 = β1 / [1 + Dt/Eq]

Where:

βa1 = Asset beta for proxy company 1

β1 = Beta of proxy company 1

Dt = Debt of proxy company 1

Eq = Equity of proxy company 1

Repeat Step 1 for each of the chosen proxy firms.

Market capitalisation values for proxy companies will be used

where such market values exists. Where no market values exist

for proxy companies, book values will be used.

Step 2 – Calculate weighted average asset beta of proxy firms

Weight each of the proxy firm asset betas by their proportion of the total

debt plus equity of the proxy firms and sum the results using the following

formula:


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n

n

1nna

n

1nn

na )(*

EqDt

EqDtE

Where:

βaE = Weighted average asset beta of the proxy companies

nEqDt = Sum of the debt and equity for a specific proxy

company

na = Asset beta of the corresponding specific proxy

company

nEqDtn

n

1

= Sum of debt and equity for all proxy companies

n = Number of proxy companies

Step 3 – Calculation of beta (β) for licensee (re-levering of beta)

The following formula must be used to determine the beta for the

licensee:

BL = βaE * [1 + Dt/Eq]

Where:

ΒL = Beta for the licensee

βaE = The weighted average β of the proxy firms asset betas

from Step 2. The Energy Regulator may adjust this

factor to take account of a difference in country risk

ratings between the host country of the proxy firms and

South Africa.

Dt = The target debt ratio of 35 per cent

Eq = The target equity of the licensee being 65% (RAB-debt]


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The Market Return Premium (MRP)

Question 26

What market index will be used as a proxy for the performance of the South

African market?

Answer

25.1 The All Share Total Return Index (ALSI) is used as a proxy for the performance

of the South African market as it represents the widest possible spectrum of

industries trading in the South African market, as measured by the Johannesburg

Stock Exchange (JSE).

Question 27

Why is a post-tax market return (MR) used for determining the market risk

premium (MRP)?

Answer

26.1 The market returns, as represented by the various JSE indices, reflect earnings

after taxation has been provided for (i.e. data is presented on an after-tax basis).

26.2 No adjustment for Capital Gains tax is made as it is assumed that the equity

return holders will hold the investment to maturity and therefore the total return

index (TRI) is used.

26.3 There are flaws and challenges inherent in using the ‘post-tax’ MR as a basis

and converting it to a ‘pre-tax’ MR by grossing it up with the tax rate. This method

is thus not used by NERSA.

26.4 As the Allowable Revenue formula treats Taxation as a separate ‘operational’

item (T), the WACC calculations are all performed on a post-tax basis.


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The risk free rate (Rf)

Question 28

Why are government bonds with a maturity of ten years or longer used?

Answer

27.1 An investor in storage infrastructure normally has a long-term investment horizon

of at least ten years. A maturity of less than ten years is considered to be subject

to short-term fluctuations in the economic environment which could impact on the

volatility and validity of this measure for the industry. Longer term investment

instruments are also more in line with the 30-year MR data used in calculating

the WACC.

Question 29

What data sources does NERSA use and how frequently does NERSA publish

economic data for the purposes of tariff setting and approval?

Answer

28.1 The sources of the economic data utilised by NERSA and the frequency of

updating the economic data are provided in Table 3.

Table 3: Economic data sources and frequency of updates

Source Date & frequency of updating the data on NERSA’s website

CPI-Historical Statistics SA Quarterly updates of monthly data

RSA 10-year Bonds Reserve Bank of SA Quarterly updates of monthly data

Market Return ALL Share Total Return Index (ALSI-TRI) on the JSE

Quarterly updates of monthly data

List of proxy companies and value of the beta

Bloomberg Quarterly updates of monthly data


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Cost of Equity (Ke)

Question 30

Are any adjustments to the cost of equity allowed?

Answer

29.1 The following adjustments to the Cost of Equity (Ke) will be considered on a case-

by-case basis:

SSP = Small stock premium. An adjustment to compensate for the

lack of specific qualitative abilities of a licensee if warranted

α = Project specific risk if the circumstances warrant such an

adjustment

LP = Liquidity premium to accommodate assets which are not

publicly traded if the circumstances warrant such an

adjustment.

Note:

A small stock premium and project specific risk adjustment will

be considered in the following cases:

a) SSP adjustments:

If the answers to the following two questions are ‘no’ (both

answers must be ‘no’), then a SSP adjustment may be

applied:

In running its business:

i. does the licensee have access to legal, financial and

operational/technical expertise within its own

structures/or can the licensee obtain this expertise

from its shareholders; and


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ii. is there a history of the licensee having had access to

this expertise under its a previous shareholding

dispensation?

b) Project specific risk adjustments (if the circumstances

warrant such an adjustment)

The Energy Regulator needs to be provided with proof of

the following project specific risk factors:

i. construction;

ii. management;

iii. technology;

iv. customer base;

v. supplier chain; and

vi. other.

29.2 In any valuation model, the risk factor can either be dealt with in adjusting the

cash flow estimates [capital expenditure, operational expenditure, volume or

turnover and claw back arrangements] OR as part of project specific risk. The RV

approach adopted the principle to allow for these risks in the cost of equity [Ke]

and use a MEA value for capital expenditure to place all market participants on

a comparable basis and eliminate claw back mechanism. For licensees who use

IOC, the construction risk is dealt with in the cash flow [actual investment cost]

and this has to be taken into consideration when project risk is determined.

Question 31

How is the cost of equity calculated?

Answer

30.1 A practical example for calculating the Ke is presented below, making use of

assumed values for the respective elements in the formula for calculating Ke.


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The formula for determining the Ke is:

Ke = Rf + (β *MRP)

Where:

Ke = Post-tax, real cost of equity

Rf = Riskfree rate of interest (real).

(This is the average of the real monthly marked-to-market

riskfree rate for the preceding 360 months for all Government

bonds with at least a 10 year maturity as at 12 months before

the commencement of the tariff period under review)

β = ‘Beta’ is the systematic risk parameter for regulated entities

providing pipeline, storage and loading facility services

(The beta must be determined by proxy. As a proxy the

average of at least six pipeline companies listed on stock

exchanges is used. The value of the proxy is as at 12 months

before the commencement of the tariff period under review).

MRP = Market return premium (post-tax, real).

[The proxy used for the market is the Johannesburg Stock

Exchange (JSE) All Share Total Return Index (ALSI with JSE

Code J203T) for the preceding 360 months as at 12 months

before the commencement of the tariff period under review.

The arithmetic average for the 360 months is used.]

Note:

Two scenarios are considered – the first where the cost of equity is adjusted for

liquidity by multiplying a factor, and the second where the cost of equity is

adjusted for liquidity by adding a factor. Examples to calculate these are

presented next.


Page 24 of 44

Multiplying to adjust for liquidity:

In the practical example for calculating the Ke (and multiplying to adjust for

liquidity), the values for the elements in the Ke formula are assumed to be as

follows:

Rf = 4.5%

CRA = 0.2%

MRP = 7%

β = 0.5

SSP = 2.25%

α = 0.10%

LP = 5%

Based on the above assumed values, the value of the Ke is calculated to be:

Ke = [(Rf + CRA) + (MRP * beta) + SSP + α] * (1 + LP)

= [(4.5% + 0.2%) + (7% * 0.5) + 2.25% + 0.10 %] *(1 + 5%)

= (4.7% + 3.5% + 2.25% + 0.10%) *1.05

= 11.08%

Adding to adjust for liquidity:

In the practical example for calculating the Ke (and adjust for liquidity through

adding), the values for the elements in the Ke formula are assumed to be as

follows:

Rf = 4.5%

CRA = 0.2%

MRP = 7%

β = 0.5

SSP = 2.25%

α = 0.10%

LP = 0.53%


Page 25 of 44

Based on the above assumed values, the value of the Ke is calculated to be:

Ke = (Rf + CRA) + (MRP * beta) + SSP + α + LP

= (4.5% + 0.2%) + (7% * 0.5) + 2.25% + 0.10 % + 0.53%

= 4.7% + 3.5% + 2.25% + 0.10% + 0.53%

= 11.08%

Cost of debt (Kd)

Question 32

Why is the real cost of debt (Kd) used and not the nominal cost of debt?

Answer

31.1 The inflation adjustment in the cost of debt (Kd) is ‘taken out’ as inflation is

“embedded” in the Replacement value of the asset base which, in fact, is the

nominal value of the asset base.

31.2 Nominal returns on nominal assets would constitute a double count of CPI and

therefore ‘real returns’ (in this instance the Kd) is used.

Question 33

Under what scenario will equity investors be in a position to earn their full

return as embedded in the Ke portion of the WACC?

Answer

32.1 The reasonable return relates to the return on the asset for the licensee and

not for the equity investors. The actual return that will be earned by the equity

investor is a function of the capital structure of the licensee as was explained

under Question 13. If the funding structures of the licensee require the debt

funding to be repaid earlier or faster, it is viewed that the equity holder has


Page 26 of 44

chosen to become a ‘patient capital’ investor. The ‘patient capital’ investor will

wait for the debt capital to be repaid before they receive their required return.

32.2 The conversion of the asset base (PPE) to IOC or RV and the subsequent

conversion of WACC into real WACC results in the ‘addition’ of CPI to the asset

that does not ‘match’ the ‘reduction’ of the rate in earlier years. Therefore, the

returns in earlier years are lower as it takes time for the replacement value

effect to catch up with the real return effect. Once the catch up has taken place

the return will be superior.

Question 34

Does the post-tax, real WACC allow the entity enough allowable revenue to pay

back its debt which is payable in pre-tax nominal terms? [The WACC (Ke & Kd)

is provided for only on a post tax, real basis.]

Answer

33.1 No. The tax shield in the Kd is provided for in the tax formula where the post-

tax Kd is grossed up with the tax shield portion of the Kd. This ensures a pre-

tax Kd is provided for in the allowable return to match the payment of the

financing costs in nominal values. (See formula in paragraph 7.3 of

Methodology.)

33.2 In Table 4, the calculation of tax (as per the tax formula in the tariff Methodology)

is demonstrated. For each component which is taxable, a gross-up at the

existing tax rate is performed. Tax allowances are therefore provided for in these

grossed-up balances and will be included in the total balance of the allowable

revenue. As can be seen from Table 4, the grossing up of balances also applies

to the Kd to ensure the tax shield on the Kd is properly accounted and provided

for.


Page 27 of 44

Table 4: Treatment of WACC with Notional Tax

Allowable Revenue = (RAB x WACC) + E + T RAB WACC E T(taxation) Total

Allowable revenue

WACC=[Rf+(MRP*beta)*eq]+[Kd*debt] Ke Kd WACC

Gearing 65% 35%

Returns % 9.52% 3.47% 7.40%

Returns (R million) 105.00 6.50 1.27 7.77 10.50 18.27

NPBT excl tax allowance={(RAB*WACC)+E}-E 0.00 0.00 0.00 (10.50) (10.50)

NPBT excl tax allowance 6.50 1.27 7.77 0.00 0.00 7.77

Taxation (Gross up and notional tax) 2.53 0.50 3.02 0.00 3.02 3.02

Add back tax deductions 0.00 0.00 0.00 10.50 0.00 10.50

Total revenue including Notional tax

9.03

1.77

10.80

10.50

3.02 21.30

All these WACC components are not deducted to arrive at a taxable income before tax allowance. By grossing up

and then adding a notional tax allowance they all effectively become

pre-tax. The applicant therefor receives the tax which he is going to

pay.

These components are tax deductible and therefor do not need a tax shield


Page 28 of 44

Question 35

Why is a Vanilla WACCreal (pre-tax Kd and post-tax Ke) not used instead of grossing up

the post-tax Kd to ensure that the tax shield of the Kd is provided for in the before tax

allowable revenue?

Answer

34.1 A Vanilla WACC is a calculation where the Ke is post-tax and the Kd is pre-tax.

34.2 The taxation component for the cost of debt is ‘given’ to the investor by allowing the

‘tax shield’ in the calculation of taxation allowance (T) as is demonstrated in the above

Table 4.

Depreciation

Question 36

How is the depreciation of assets treated in an IOC or RV approach?

Answer

35.1 Depreciation is not taken into consideration as the value of assets are considered at

replacement value.

35.2 Therefore there is no return OF investment but rather a return ON a constantly “New”

investment.

Expenses – Operating and Maintenance

Question 37

Why are actual repairs and maintenance and refurbishment not allowed at actual

costs?


Page 29 of 44

Answer

36.1 Property Plant and Equipment is valued at IOC or RV NO depreciation and therefore

represent a new asset base which would require lower repairs, maintenance and

refurbishment cost as opposed to the actual repairs, maintenance and refurbishment

cost of older assets. Allowing actual costs would have the effect that investors are

overcompensated by allowing a return on new assets and repairs, maintenance and

refurbishment costs of older assets.

36.2 Repairs and maintenance will be allowed at 2% of the IOC or RV of PPE.

Question 38

What is the legal and regulatory foundation for the recovery of land rehabilitation cost?

Answer

38.1 In terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) the authority

may require a licensee to submit a financial security, or make such other

arrangements as may be acceptable to the Authority, to ensure compliance with

any licence condition relating to health, safety, security, or the environment, prior

to, during or after the period of validity of the licence. Regulation 9 (3) of the

regulations in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)

provides that the authority must require the licensee to provide financial security

for the purpose of rehabilitating land used in connection with a licensed activity

and the composition and amount of such security. Paragraph 6.4.7 of the

Methodology states ‘Provision for land rehabilitation costs are permitted, subject

to adequate justification. These funds must be kept in accordance with the

Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) and sub-regulation 9 of

Regulations made in terms of the Act published under GN R342 in Government

Gazette 30905 of 4 April 2008’.


Page 30 of 44

38.2 Paragraph 6.2 and 6.3 of the methodology refers to the classification and

calculation of the operating expenses (inclusive of the land rehabilitation costs

as per paragraph 6.4.7)

38.3 Sub-regulation 9 states:

(1) A licensee must inform the Energy Regulator in writing when it applies to the

relevant environmental authority for an environmental impact assessment for

the termination of or abandonment of the licensed activity in accordance with

the National Environmental Management Act, 1998.

(2) A licensee must, at least six months prior to the termination or abandonment

of a licensed activity, submit to the Authority, proof of the approval of the

termination or abandonment of the licensed activity.

(3) The Authority must require the licensee to provide financial security or make

arrangements as may be acceptable to the Authority for purposes of

rehabilitating land used in connection with a licensed activity.

(4) Financial security contemplated in sub-regulation (3) may be in any form

acceptable to the Authority and may only be used with the approval of the

Authority.

(5) The Authority may, in writing, at any time, require written confirmation from a

licensee that it is in compliance with the requirements of the National

Environmental Management Act, 1998.

(6) The Authority may require written proof from the licensee that the authority

responsible for administering the National Environment Act, 1998 has

approved the environmental impact assessment required by the Act.

(7) The Authority may not revoke the licence in respect of a licensed activity,

before it is in receipt of a certificate from an independent consultant competent

to conduct environmental impact assessments in accordance with the National

Environmental Act, 1998, which states that the site has been rehabilitated.


Page 31 of 44

38.4 The financial instrument must be in a form acceptable to the Energy Regulator

as required by section 9 (4) of the regulations. To ensure compliance in this

regard it would be the most practical for the financial security structure to be

approved by the Energy Regulator in advance.

Question 39

How should land rehabilitation costs be calculated and recovered through the

Allowable Revenue?

Answer

39.1 Land rehabilitation costs are recovered as part of operating expenses.

38.1 Land rehabilitation cost can therefore NOT be included as part of Property, Plant and

Equipment (RAB) and therefore no return is earned thereon.

38.2 The mechanism to collect the land rehabilitation costs is the present value of the

future liability less the value of funds in the ‘decommissioning fund’ to arrive at a

balance still to be collected. The remaining balance is then divided by the remaining

years to decommission the asset. The formula for this is:

PMT=[PVfund value]/n

Where

N = the number of remaining years to decommission

PVfund value = the present value of decommissioning costs

Fund value = the current balance in the decommissioning fund, being historic

contributions (provision for decommissioning costs) plus net returns

on such contributions.


Page 32 of 44

38.3 An example of how the land rehabilitation cost is to be calculated is presented below

in Table 5.

Table 5: Example on the calculation of land rehabilitation costs

Asset value 10,000

PV of expected rehabilitation cost 6,000

Life of Asset 10yrs

1 2 3 4 5 6 7 8 9 10

CPI a 5% 6% 4% 4% 6% 7% 8% 5% 4% 5%

Net returns [after tax] in the fund b 6% 7% 5% 4% 6% 7% 8% 4% 4% 5%

Remaining Life c 10 9 8 7 6 5 4 3 2 1

Present value of Land rehabilitation liability

d=opening* (1+a) 6,000 6,360 6,614 6,879 7,292

7,802 8,426 8,848 9,202 9,662

Fund value at beginning of the year e= 0 (618) (1,317) (2,061) (2,846) (3,780) (4,877) (6,190) (7,341) (8,584)

Still to be recovered over remaining life f=d+e

6,000

5,742

5,297

4,817

4,446

4,022 3,549

2,658 1,860 1,078

To be recovered "this" year g=f/c

600

638

662

688

741

804 887

886 930 1,078

Value of fund

Opening Balance h=j

-

618

1,317

2,061

2,846

3,780 4,877

6,190 7,341 8,584

Contribution from allowable revenue via the tariff g

600

638

662

688

741

804 887

886 930 1,078

Net returns [after tax] in the fund i=(h+g*50%)*b

18

61

82

96

193

293 426

265 312

Closing Balance of fund j=h+g+i

618

1,317

2,061

2,846

3,780

4,877 6,190

7,341 8,584 9,662

Liability less Fund value k=d-j

5,382

5,043

4,553

4,033

3,512

2,925 2,236

1,506 618 -

Note

The value of the land rehabilitation liability in year 10 (R9,662) is covered by the value of

the fund at the end of that year (R9,662) excluding the investment returns in that year.

F-Factor

Question 40

Why is the F-factor not applicable to loading and storage facilities?


Page 33 of 44

Answer

39.1 The Regulations in terms of the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)

(‘the Regulations’) does not allow the consideration of funding requirements and debt

service requirements for loading and storage license holders.

Clawback

Question 41

When will clawbacks be applied?

Answer

40.1 When an IOC or RV approach is used, there would be no clawback calculations on

past allowable revenue and tariffs but annual tariff applications will be analysed in

depth to ensure assumptions correspond with recent history.

Tax

Question 42

How will tax be calculated when aIOC/RV approach is followed?

Answer

41.1 Flow-through tax is not applicable when a IOC or RV approach is used as the IOC

or RV approach does not consider depreciation (no historic, current or timing

differences pertaining to depreciation for tax purposes can be considered under the

IOC or RV approach as “Depreciation” plays no role in the IOC or RV approach. This

has the effect that flow-through taxation cannot be calculated as an actual taxation

wear and tear allowance does not exist for the assets that are determined on a

Replacement value basis.


Page 34 of 44

Question 43

How is the Notional tax calculated?

Answer

42.1 An example of the calculation of Notional tax is provided in Table 6 and the impact of

the tax shield is shown in Table 7.

Table 6: Example on the calculation of notional tax Tax = {(NRBTA) / (1-t)}*t

Where

NRBTA = Net revenue before tax allowance

= {(RAB*WACC) +E} - E

t = prevailing corporate tax rate of the licensee

NPBT excl tax allowance={(RAB*WACC)+E}

Ke a 5.10

Kd(real) b 1.78

WACC c=a+b 6.88

E d 10.50

Allowable revenue before tax allowance e=c+d 17.38

Tr f 28%

NPBT excl tax allowance={(RAB*WACC)+E}-E [Note interest and amortisation of write up is not deducted to allow Tax shield]

g=e-d

6.88

Allowable revenue pre tax e 17.38

Tax={(NPBT excl tax allowance)/(1-Tr)}*Tr h={g/(1-f)}*f 2.68

Total Allowable revenue i=e+h 20.06

Test tax rate f/(h+g) 28.00%


Page 35 of 44

Table 7: Impact of the tax shield when notional tax is used

Allowable Revenue = (RAB x WACC) + E + T RAB WACC E T(taxation) Total

Allowable revenue

WACC=[Rf+(MRP*beta)*eq]+[Kd*debt] Ke Kd WACC

Gearing 65% 35%

Returns % 9.52% 3.47% 7.40%

Returns (R million)

105.00

6.50

1.27

7.77

10.50 18.27

NPBT excl tax allowance={(RAB*WACC)+E}-E 0.00 0.00 0.00 (10.50) (10.50)

NPBT excl tax allowance 6.50 1.27 7.77 0.00 0.00 7.77

Taxation (Gross up and notional tax) 2.53 0.50 3.02 0.00 3.02 3.02

Add back tax deductions 0.00 0.00 0.00 10.50 0.00 10.50

Total revenue including Notional tax 9.03 1.77 10.80 10.50 3.02 21.30

Tariff Design

Question 44

What would be the typical factors taken into account when a licensee’s specific

tariff design is evaluated for approval?

Answer

43.1 The basis would be the Allowable Revenue [AR] as calculated by the methodology.

The sum of designed tariffs multiplied by expected or forecast volumes for the various

tariff classes must add up to the Allowable Revenue [AR] as calculated by the

methodology.

43.2 The licensee must present a tariff design which takes the expected volumes, business

model(s), utilisation rates, business and volume ramp-up etc with a detailed

description of the assumptions and calculations.

43.3 Assumptions must be supported by comparisons with recent history [at least 3 years]

if available. The tariff design must comply with Section 28(2) (a) of the Petroleum

Pipelines Act, 2003 (Act No. 60 of 2003).


Page 36 of 44

(2) A tariff charged in terms of subsection (1)—

(a) must be—

(i) based on a systematic methodology applicable on a consistent and comparable

basis;

(ii) fair;

(iii) non-discriminatory;

(iv) simple and transparent;

(v) predictable and stable;

(vi) such as to promote access to affordable petroleum products;

Question 45

Is there any guidance on how tariffs could be designed or structured?

Answer

44.1 Simplistic form: Divide Allowable Revenue by Volume to arrive at a uniform tariff.

Variables to be taken into account in designing a tariff system or a schedule of tariffs

include batch sizes, bulk use, take or pay agreements, length of time stored.

44.2 Tariff design for the licensees specific needs, circumstances and business model: The

licensee can propose any tariff design as long as the volumes multiplied by the tariffs

equal Allowable Revenue AND the proposed tariffs comply with Section 28(2) (a) of the

Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).

44.3 If forecast volumes are erratic or ramp-up volumes on new projects cause tariffs to be

volatile from period to period, a pure IRR or Levelised methodology would solve the

erratic nature of tariffs. A similar effect can be achieved if Allowable Revenue is

calculated based on the IOC or RV approach and then in the “Tariff design” step use

the NPV of expected volumes to determine the starting level of real tariff.


Page 37 of 44

Standard Costing

Question 46

Is it possible to apply for a tariff based on a standard costing approach as applied

by the Department of Energy (DOE) in their Regulatory accounting system (RAS)?

Answer

45.1 Yes. The calculation of a tariff based on a standard costing approach is presented in

Table 8 In this calculation the following values were obtained from standard tables:

- the Regulated Asset Base [RAB], where the value of the licensed capacity of

the facilities are utilised;

- the operational expenditure; and

- the Weighted Average Cost of Capital [WACC].

Note: For access to the excel spreadsheets on these tables, open the following file on

the website of the Energy Regulator: FAQ - Standard costing Tariff Model - Loading

and Storage Tariff Methodology – Sept 2015.


Page 38 of 44

Table 8: Template on Standard Costing

Volume on Standard Capacity Turn R/litre/%

Applicant

Licence Number

Facility Known as

Services rendered at facility

Licensed Capacity [litre] a 1 500 000 10 000 000 50 000 000 100 000 000

Replacement value as read from Standard table for Design Capacity b=lookup 78 742 664 207 600 059 472 499 273 673 329 237

Operational Expenditure as read from Standard Table c=lookup 1 530 000 10 200 000 51 000 000 102 000 000

Wacc as read from Standard Table d=lookup 11.84% 11.84% 11.84% 11.84%

Return on RAB e=b*d 9 323 131 24 579 847 55 943 914 79 722 182

Corporate taxation rate f 28.00% 28.00% 28.00% 28.00%

Taxation Allowance g=e/(1-f)*f 3 625 662 9 558 829 21 755 967 31 003 071

Total Allowable Revenue h=c+e+g 14 478 794 44 338 676 128 699 880 212 725 252

Actual expected or Forecast volumes i=a*j 36 000 000 240 000 000 1 200 000 000 2 400 000 000

Standard Licenced Capacity turn j 24 24 24 24

Tariff [Rand /Litre] k=h/i 0.40 0.18 0.11 0.09

Tariff [Cent /Litre] m=k*100 40.22 18.47 10.72 8.86

Question 47

On which assumptions is the Standard Costing approach based?

Answer

46.1 The Department of Energy [DOE] is regulating the retail price of petrol. One of the

elements included in the price is the cost of Secondary Storage based on a replacement

value as determined by the DOE [originally in the ME 686 project for both the value of

the regulatory asset base as the value of the operating costs] in 2009 and subsequently

updated by the “epcm consulting report” in May 2015 [only the regulatory asset value].

NERSA used this [the “epcm consulting report” in May 2015 ] as the basis for

assumptions to calculate a “Standardised Allowable Revenue” for licensees opting to

apply for a tariff based on the “Quick” process option requiring very little input from the

licensee. The Standard Costing model is for the tariff year commencing on January

2016 as presented in Table 9 on the next page.


Page 39 of 44

Table 9: RAB/PPE as per 2015 "epcm" consulting study

Cost element [R million] Capacity[ml]

1 10 50 100

Land 5.79 12.51 32.71 55.50

General and civil works 3.45 5.58 13.38 18.99

Building Works 2.49 4.01 9.13 10.93

Road gantry 11.14 15.58 27.57 35.38

Road receipt - - - -

Rail gantry - 10.64 18.07 26.84

Tank farm 6.66 43.84 119.52 208.26

Site product piping and equipment 2.70 8.62 12.79 18.16

Fire protection facilities 6.21 16.56 28.34 33.44

Electrical Infrastructure 3.99 8.63 22.56 38.28

Security Systems 0.65 1.19 2.67 4.24

Instrumentation and Control 5.20 16.66 43.56 73.91

Engineering, Management and Construction Margin 17.86 53.21 122.21 193.84

Total Costs 66.15 197.02 452.51 717.75

Replacement costs per Million litres 66.15 19.70 9.05 7.18

Note:

From the data in the above table, a “regression” graph was created in Figure 1 from

which the various Capacity values can be read.

Figure 1: Replacement value at various Capacity Levels (Year: 2015)

y = 64.007x-0.489

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

0 20 40 60 80 100 120

Re

pla

cem

en

t co

st (

R/l

)

Capacity (million litres)

Replacement cost versus Capacity(Year: 2015)


Page 40 of 44

46.2 As per the methodology, proxy values as at 31 December 2014 [1 year prior to January

2016] were used to determine a Weighted Average Cost of Capital (WACC). This

calculation is presented in Table 10.

Table 10: Proxy value for a Standard WACC

Weighted Average Cost of Capital

Risk free [Rf] 4.12%

Market Risk Premium [MRP] 5.84%

Debt ratio 35.00%

Beta 0.739

Risk Factors 9.00%

Cost of Equity 17.44%

Nominal Debt pre tax 9.50%

Nominal Debt post tax 6.84%

CPI 5.30%

Tax rate 28.00%

Real Kd [Post tax] 1.46%

WACC 11.84%

BETA

Unlevered Industry Beta 0.480

Debt Ratio Of Applicant 35.00%

Equity Ratio of Applicant 65.00%

Gearing of Applicant =1/(1+D/E) 53.8%

Applicants Final Beta for tariff period under review 0.739

Note:

i) The value for the operational expenses are as per the values utilised in the

ME686 project as the DOE did not commission the “epcm consulting” firm to

update the standard operational expenditure basis.

ii) In order to have a more recent perspective on operational costs, NERSA will

soon commence its own study.

46.3 In its RAS model the DOE uses a value of 238 cents per Capacity Litre to calculate the

2016 operational expenditure. After a comparative study, NERSA came to the

conclusion that head office and non-depot costs, double handling costs and


Page 41 of 44

extraordinary item costs included in the RAS amount cannot be allowed by NERSA and

has reduced the value to 102 cents per Capacity Litre to calculate the 2016 operational

expenditure. See calculation below in Table 11. With a Throughput/ Capacity turn of

24 times per annum this results in 9.92 cents per litre.

Table 11: Proxy value for a Standard WACC Comparison of RAS and NERSA operational

costs standard allowance

NERSA database RAS

Cpl Capacity % Cpl Capacity %

Staff Related Costs 14.6 17% 33.65 14%

Utilities/Communications 3.2 4% 3.7 2%

Repairs and Maintenance 2.8 3% 14.0 6%

Sum of all other costs 43.9 51% 24.6 10%

Sub Total "direct costs" 64.5 76% 76.0 32%

Extraordinary Item - 0% 27.3 11%

Double Handling 0 0% 12.23 5%

Head office and allocated costs 20.9 24% 122.8 52%

85.4 100% 238.3 100%

Inflation for 3 years 85.4

6% 90.5

6% 95.9

6% 101.7

46.4 The Energy Regulator determined the Throughput / Capacity turn by taking a statistical

average of the actual volumes stored for 2014/15. These values resulted in an Actual

volume / licenced capacity of 24 times per annum as presented below in Table 12. The

Standard licenced capacity turn was therefore set at 24 per annum or two times per

month.

Table 12: Stock turns (excluding outliers)

Type Sample size (n)

Min. stock turns

Max. stock turns

Range Median Average

Storage tanks 78 4.30 57.80 53.50 20.25 23.60


Page 42 of 44

Question 48

If the volumes and business model of a licensee is different from the standard

capacity turn of 24 used above , could the licensee still use the standard Allowable

Revenue [AR] calculation and then use its own volume forecast and tariff

Answer

47.1 Yes, on the following conditions:

a) The application must include detail volume assumptions and forecasts and

comparison of these with the actual volume in the previous 3 financial years;

b) Details reasons and explanation if the variance is more than 10% from the

average 3 year actual volume.

c) Detail explanation, reasons for differentiations and calculations on the tariff

structure if it is not a simple Allowable Revenue / volumes.

Note:

For access to the excel spreadsheets on Table 13, open the following file on the

website of the Energy Regulator: FAQ - Standard costing Tariff Model - Loading

and Storage Tariff Methodology – Sept 2015.


Page 43 of 44

Own Volumes in tariff design R/litre/% In

pu

t re

qu

ired

by A

pp

lic

an

t

Applicant

Licence Number

Facility Known as

Services rendered at facility

Licensed Capacity [litre] a 20 000 000

Last 3 years Actual Volume [litre] if available

Year-3 b1 200 099 999

Year-2 b2 209 999 999

Year-1 b3 198 999 999

Average for last 3 years average=b 203 033 332

Expected or Forecast volumes c 190 000 000

%Variance Forecast to Actual Average d=c/b-1 -6.42%

If forecast volumes is lower than the Average for last 3 years give detailed explanations

Replacement value as read from Standard table for Design Capacity

e=lookup 295 837 893 Cents per litre

102 Operational Expenditure as read from Standard Table

f=lookup 20 400 000 10.7

Wacc as read from Standard Table g=lookup 11.84%

Return on RAB h=e*g 35 027 206 18.4

Corporate taxation rate i 28.00%

Taxation Allowance j=h/(1-i)*i 13 621 691 7.2

Total Allowable Revenue k=f+h+j 69 048 898 36.3

Actual expected or Forecast volumes d 190 000 000

Licenced Capacity turns l=d/a 9.50

Tariff [Rand /Litre] m=k/d 0.36

Tariff [Cent /Litre] n=m*100 36.3

Tariff can be designed to suite the Licensee's own business model. Detail of such tariff design must be submitted. Forecast volume at these tariffs MUST add up to the Allowable Revenue (k) above

Question 49

How does the processing of the two Standard Costing options differ from a

comprehensive tariff application?


Page 44 of 44

Answer

48.1 Guidelines on the differences applicable to the respective options are presented in

Table 14.

Table 13: Indicative Steps and Timing differences

Steps in Processing application

Comprehensive tariff application

Standard application with

STANDARD Volumes, Costing and

Tariffs

Standard application with

OWN Volumes, Standard Costing and

Standard Tariffs

Estimated Duration in Days



Submit and acknowledge tariff application (TA).

X 4 X 4 X 4

Assess and obtain additional information

X 18 X 18 X 18

Prepare and publish confidential version of application

X 10 0 0

Publish application for comment X 30 0 X 30

Prepare and conduct Public hearing

X 14 0 0

Decision on TA - Comprehensive X 30 0 X 14

Decision on TA - Standard X 2 X 2

Publish standard TA X 2 X 2

Prepare and publish confidential version of decision on application

X 14 X 14 X 14

Estimated days: 120 40 84

Question 50

How should multi-year tariffs be calculated?

Answer

49.1 The same principles of the Methodology applies. The re-opening of a multi-year tariff

application is dealt with in sections 7.2-7.4 of the Methodology

faq for setting of petroleum pipelines - nersa · regulatory asset base (rab) ... site product...

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