NATIONAL ENERGY REGULATOR OF SOUTH AFRICA

Transcription

1 NATIONAL ENERGY REGULATOR OF SOUTH AFRICA 13 October 2015 Discussion document 2015, Determination of the inadequate competition in the piped-gas industry as contemplated in chapters 2 and 3 of the Competition Act, 1998 (Act No. 89 of 1998) 1. EXECUTIVE SUMMARY 1. The Energy Regulator is mandated in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to regulate the electricity, piped-gas and petroleum pipeline industries in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006), Gas Act, 2001 (Act No. 48 of 2001) and Petroleum Pipelines Act, 2003 (Act No. 60 of 2003). 2. The functions of the Energy Regulator are to inter alia, as appropriate, regulate prices in terms of section 21(1)(p) in the prescribed manner; 3. Furthermore, the Energy Regulator has a duty in terms of section 21(1)(p) of the Gas Act to approve the maximum prices for distributors, reticulators and all classes of consumers where there is inadequate competition as contemplated in Chapters 2 ad 3 of the Competition Act, 1998 (Act No.89 of 1998) 4. In order to fulfill the above mandate, NERSA has embarked on a process of determining whether or not competition in the relevant market is inadequate as contemplated in Chapters 2 and 3 of the Competition Act, comprising of a Competition Assessment Framework, a Competition Assessment Model and a discussion document regarding the 2015 Piped-Gas Competition Assessment.. 5. One of the objects of the Gas Act is to promote the development of competitive markets for gas and gas services. 6. It must be noted that the determination of inadequate competition contemplated in section 21(1)(p) is made by the Energy Regulator as a determination independently from the approved Methodology for Approving the Maximum Prices of Gas of Piped-Gas in South Africa (the Methodology ). 7. This consultation document on competition in the piped-gas industry provides information on NERSA s preliminary assessment and analysis of the state of competition in the pipedgas industry in South Africa. This includes market characteristics and features which signal uncompetitive and anticompetitive outcomes as indicators that there is insufficient competition in the piped-gas industry. 8. NERSA has previously published its views on the adequacy of competition in the gas industry in the Determination of inadequate competition in the piped-gas market as contemplated in Chapters 2 and 3 of the Competition Act, 1998 (No. 89 of 1998 as amended), as envisaged in section 21(1) (p) of the Gas Act, 2001 (No.48 of 2001) on the 08 February It was indicated in the determination that the assessment would be 1

2 repeated every two years. NERSA would hereby like to solicit views and comments of stakeholders specifically on the (in) adequacy of competition in the gas industry at present as contemplated in contemplated in Chapters 2 and 3 of the Competition Act. 9. Interested parties are invited to provide written comments, by 30 November 2015, which the Energy Regulator will consider in the determination of the adequacy of competition in the piped-gas market. 10. Further, a public hearing regarding the state of competition in the piped-gas industry will be held on a date to be advertised at NERSA offices. 11. The above consultation process is held in terms of section 10(1) of the NERSA Act, which provides that every decision of the Energy Regulator must, inter alia, be in writing and consistent with the Constitution and all applicable laws; and taken within a procedurally fair process in which affected persons have the opportunity to submit their views and present relevant facts and evidence to the Energy Regulator. 2. ASSESSMENT OF THE ADEQUACY OF COMPETITION IN THE PIPED-GAS INDUSTRY 12. The assessment of the adequacy of competition in the piped-gas industry is based on the findings in an independent report prepared by Genesis Analytics. This report will be referred to as the Assessment Report. This part of the discussion document summarises NERSA s assessment of adequacy of competition in the piped-gas industry. The first section provides the industry background that provides context for the assessment. The second section deals with the definition of the relevant markets within the piped-gas industry. The third section assesses the adequacy of the competition in the appropriate relevant markets. Finally, the findings of the assessment are summarised INDUSTRY BACKGROUND 13. This section discusses the market structure of the piped-gas industry including the licensee s active at the different levels of the supply chain, the manner in which gas prices and tariffs are regulated and the developments in the industry since the previous determination Market structure 14. The market structure of the piped-gas industry in South Africa consists of an upstream market which includes production and exploration activities, a midstream market made up of transmission and distribution activities, and a downstream market comprised of the trading and reticulation activities. The following parties are active at the different levels of the supply chain: 2

3 Figure 1: Piped-gas market structure in South Africa Upstream: There are currently three sources of gas in South Africa. This includes natural gas which is imported by Sasol Gas (a subsidiary of Sasol Ltd) from Mozambique, synthetic gas (so-called methane-rich gas) manufactured by Sasol at its Secunda plant and natural gas which is extracted by the Petroleum, Oil and Gas Corporation of South Africa SOC Ltd ( PetroSA ) from the Bredasdorp basin for its own use. Sasol is effectively the sole supplier and importer of piped-gas into the South African market, since PetroSA produces exclusively for own use Midstream: The midstream segment of the supply chain is comprised of the transmission and distribution activities of piped-gas in South Africa. Transmission and distribution pipelines are present in four of the country s provinces Mpumalanga, Free State, Gauteng and KwaZulu-Natal Transmission: The parties involved in the transmission activities are ROMPCO which owns a transmission pipeline from Mozambique to South Africa, operated by Sasol Gas, Sasol Gas and Transnet which own and operate pipelines in South Africa and PetroSA which has a transmission pipeline for its own use. Sasol Gas owns and operates the gas transmission facilities in the Gauteng, Mpumalanga and Free State provinces. Transnet Pipelines owns and operates a singly gas transmission pipeline, known as the Lily Pipeline, from Secunda in Gauteng to Durban South in KwaZulu- Natal. Sasol Gas has contracted most of the capacity of the Lily Pipeline Distribution: Sasol Gas owns the distribution networks for piped-gas in South Africa and has exclusive rights to operate distribution in the specific areas covered by its distribution network licences in Gauteng, Mpumalanga, Free State and KwaZulu-Natal. 3

4 14.3. Downstream: The downstream segment of the supply chain includes activities such as the trading and reticulation of piped-gas in South Africa. These activities involve the trading of gas to other traders (in other markets this would be referred to as wholesaling ) as well as to end customers Trading: Licenced traders that are currently operating in the market include Sasol Gas, Spring Lights Gas, VGN/NGV and Novo Energy. A number of new entrants have been recently licensed however they have not yet started commercial operations. These include Reatile Gas, Columbus Stainless Steel, Molopo SA and SL-CNG Reticulation: Egoli Gas is the primary reticular in the piped-gas market. In addition, there is a small reticulation network in Port Elizabeth operated by Easigas Regulation of gas prices and tariffs 15. Total charges for piped-gas are made up of a price below the maximum price for gas energy, plus transmission and distribution tariffs, and a trading margin. The methodologies used to determine the gas energy price involve the use of energy indicators or the passthrough approach. A detailed discussion of the approach and methodology used to determine these prices and tariffs as well the approved prices and tariffs of the different licensees is included in section 2.2 of the assessment report Developments in the industry since the previous determination 16. Relevant developments can relate to changes in the market structure, policy, legislative and regulatory framework and technological developments, amongst others. These changes, explained below, have not had a significant impact on the market dynamics and competition in the South African gas industry. 17. In particular, the South African gas industry has not seen significant changes in the availability of gas supply or infrastructure since the previous determination The nature and availability of gas supply and gas infrastructure has remained largely unchanged with Sasol Gas being the only gas supplier and main gas infrastructure provider to South Africa. The South African government has begun efforts to stimulate the gas industry through the development of the Gas Utilisation Master Plan ( GUMP ). However, the GUMP has not been published yet and the finalisation of the procurement of a gas-fired power station is unlikely to occur in the short term. 18. Since the previous determination there have been significant changes to the pricing methodology used to determine maximum gas prices The previous market value pricing methodology enabled Sasol Gas to discriminate according to the specific circumstances of each customer and charge different prices to similar individual customers. The new pricing methodology, implemented on the 26 th of March 2014 that makes use of the energy indicator and pass through approaches, combined with maximum prices per class of customer, enables NERSA to eliminate potential price discrimination by licensees. 4

5 19. New entrants at the time of the previous determination have since commenced operations and additional entrants have been granted licences Novo Energy and VGN/NGV who were new entrants at the time of the previous determination have commenced operations and primarily focus on the supply of compressed natural gas for vehicle fuel. However, the volume of gas supplied by these licensees is a small percentage of the total volume supplied in South Africa and the impact of their entry on the market dynamics and competition in the market is therefore negligible. In addition, a number of new entrants have been granted licences, however, they have not commenced operations and hence, their impact on the market structure and competition is also negligible. Question 1: Please comment on the description of the market structure of the industry. Question 2: Do you agree with the assessment of the developments in the industry since the previous determination. Are there any other factors that impact on the market dynamics and competition in the industry that NERSA should take into consideration? Please specify and explain how it impacts on the market dynamics and competition in the industry MARKET DEFINITION 20. A market definition serves to establish a frame of reference used to identify and analyse competitive dynamics. The core objective of defining the relevant markets is to identify significant competitive constraints imposed by a set of products and geographic areas on each other. This section deals with defining the relevant markets in the South African pipedgas industry Product market 21. In defining the relevant product market for piped-gas in South Africa, we have considered delineating the market on the following bases: 22. Alternative energy sources for piped-gas Piped-gas is defined to be in a separate market to other energy sources including coal, diesel, electricity, heavy fuel oil and liquefied petroleum gas. The reasons underlying this delineation are as follows: The price of gas differs considerably from the price of other fuels. In particular, the gas energy price per gigajoule has been found to be significantly less than the average price per gigajoule of other energy sources, and considerably greater than the average price per gigajoule of coal; Customers may face considerable switching costs in changing from gas to other energy sources. For example, industrial customers would have invested in specific infrastructure to enable their production process to convert to the use of gas energy in cases of existing operations, and may no longer be able to accommodate the previous fuel source; and The unique benefits provided to consumers such as the consistent quality and level of energy content, and flexible temperature control compared to other energy sources. Piped-gas is on the whole, and when handled correctly, considered safer 5

6 than many other fuels. It is lighter than air and thus, unlike liquid fuels, it disperses into the atmosphere in the event of a spill or accident. The economic and secure storage methods for piped-gas reduce the risk of spills and theft compared to other types of fuels. In addition, the cleaner nature of gas vis-à-vis conventional liquid fuels in vehicles benefits vehicular customers by extending service intervals and reducing maintenance costs. Question 3: Do you agree with this delineation of the market i.e. that other energy sources are not considered as part of the piped-gas market? If not, please provide reasons why. 23. Activities in the gas market supply chain the transmission, distribution and trading of gas: Separate markets have been defined for the transmission, distribution and trading of gas. This delineation has been attributed to the following: The Gas Act distinguishes between the transmission, distribution, trading and reticulation of piped-gas with reference to the operating pressure of pipelines up to the point of ultimate consumption; The definitions and the markedly different nature of these activities distinguishes them from each other; The delineation of gas markets in international jurisdictions in which distinct markets have been defined for the transmission, distribution and supply of gas; and The structure of the South African gas market in which there is only one integrated transmission and distribution infrastructure provider and two other transmission infrastructure providers, whereas there are a number of traders supplying gas to various categories of customers; and Specific tariffs and prices are charged for each of the separate levels in the gas supply chain. Tariffs relate to the charges for the network or gas service to any customer, and are therefore applied to the transmission and distribution segments of the supply chain. The gas price, however, refers to the charge for a gas molecule to a distributor, reticulator or final consumer. Question 4: Do you agree with this delineation of the piped-gas market into separate markets for the transmission, distribution and trading of piped-gas? If not, please indicate what in your opinion would be a more appropriate definition of the relevant markets and the reasons supporting this definition. 24. Customer segmentation Separate markets for the trading of piped-gas to traders and to end customers: This segmentation has been defined for the following reasons: Sasol Gas is the only supplier of piped-gas to traders such as Spring Lights Gas, Novo Energy, VGN/NGV and Reatile Gastrade, i.e. traders have no alternative gas suppliers; 6

7 24.2. The nature of customers in these segments, in which traders on-sell the gas to other customers whereas end customers use gas for final consumption; An analysis of total charges (prices, tariffs and margins) charged to traders vis-à-vis end customers. Sasol Gas provides a discount of 50% on the trading margin to traders in its approved maximum total charges for gas. This discount is the key difference between the charges applied to traders and end customers. In addition, the difference between the actual average gas charges for traders differs significantly from those for end customers. However, the conclusions drawn from the actual prices may not be definitive at present due the implementation of the Methodology where the current prices do not all fully reflect the changes required by the new Methodology; and This delineation is supported further by the market segmentations found in international jurisdictions. For example, distinct markets have been defined by the EC for the wholesale and retail supply of gas. The wholesale supply of gas encompasses the sale of gas acquired from producers, to wholesalers or downstream distributors. The retail supply of gas is commonly divided into separate markets for the supply of gas to electricity plants, large industrial customers, small industrial customers, and household customers, all of which constitute the supply of gas to end-customers. Question 5: Do you agree with this delineation of the market for the trading of piped-gas into separate markets for traders and end customers? If not, please indicate what in your opinion would be a more appropriate definition of the relevant markets and the reasons supporting this definition? 25. Customer segmentation Separate markets for the trading of piped-gas to different types of end customers: The market for the trading of piped-gas to end customers could be delineated between customer types, i.e. industrial, vehicular and residential customers. This segmentation is supported by the following distinctive characteristics of industrial, vehicular and residential customers Industrial, vehicular and residential customers are differentiated by the manner in which gas is supplied to them by traders. Gas is supplied to industrial customers through transmission and distribution pipelines directly to their premises. For residential customers, reticulators provide the necessary gas transportation infrastructure to the edge of the residents premises. Vehicular customers tend to have their vehicles converted to run on gas at conversion and maintenance centres operated by traders, and tend to collect their CNG from filling stations Industrial, vehicular and residential customers are also distinguished by the volume of gas they purchase. Industrial customers tend to require a larger volume than individual vehicular customers. As residential customers generally use gas for heating and cooking purposes, they may need to purchase a considerably lower volume of gas compared to other customers The tariff and pricing structures also differ for these different categories of customers. For industrial customers, the total charges are made up of gas prices, transmission and distribution tariffs, a trading margin and a levy. Prices charged to vehicular 7

8 customers are based on the petrol price, and the monthly total gas charge to residential customers includes a monthly basic charge and a consumption charge per GJ This market segmentation is also supported by traders classification of the customer types that they service. Question 6: Do you agree with the delineation of the market for the trading of piped-gas to end customers into separate markets industrial, vehicular and residential customers? If not, please indicate what in your opinion would be a more appropriate definition of the relevant markets and the reasons supporting this definition? Summary of product markets 26. Based on the findings above, the following product markets have been defined: Geographic market A market for the transmission of piped-gas; A market for the distribution of piped-gas; A market for the trading of piped-gas to traders; A market for the trading of piped-gas to industrial customers; A market for the trading of piped-gas to vehicular customers; and A market for the trading of piped-gas to residential customers. 27. The geographic market definition has only been considered for the trading of piped-gas to traders, trading of piped-gas to industrial customers and trading of piped-gas to vehicular customers. It is not necessary in terms of NERSA s mandate regarding maximum gas prices for it to assess whether there is inadequate competition in the markets for the transmission and distribution services as these services incur tariffs which are regulated separately. With respect to the market for residential customers, customers are primarily supplied by reticulators which fall outside the scope of NERSA s mandate hence competition in this market is also not assessed. The relevant geographic market is defined as the area in which the firm or firms concerned are involved in the supply and demand of products and/or services, where competition is sufficiently homogeneous, and the conditions of competition are substantially different from the conditions in neighbouring areas. It can be defined as national, regional or even international in scope depending on the particular characteristics and dynamics of the product market considered. 28. The geographic markets for the relevant product markets have been defined as follows: Market for the trading of piped-gas to traders: The scope of the geographic market can be either national or defined as two separate markets viz. the Gauteng/Mpumalanga/Free State region and KwaZulu-Natal. As Sasol Gas is the only supplier of piped-gas to traders, the conclusion of the assessment of inadequate competition will be the same, irrespective of whether a single market is defined or it 8

9 is defined more narrowly into two markets. Hence the scope of the geographic market is undetermined (and the adequacy of competition will be assessed in both identified geographic market definitions). Question 7: Do you agree that the geographic market definition for the trading of piped-gas to traders is undetermined? If not, please indicate what in your opinion would be a more appropriate definition of the relevant geographic market for trading of piped-gas to traders and the reasons supporting this definition? Market for the trading of piped-gas to industrial customers: There is also no definitive way to define this market as either national or regional in scope. A conservative approach is therefore taken which assesses the adequacy of competition in the national market and in separate markets for the trading of gas to industrial customers in the Gauteng/Mpumalanga/Free State and KwaZulu-Natal regions. The reasons for undertaking such an approach are the following: The limited geographic reach of some licensees suggests that the market should be segmented into narrower geographic markets. This can be attributed to the fact that piped-gas is only available in four out of nine provinces in South Africa, and some licensees are limited by their licence conditions to specific areas where they are allowed to trade. However, as traders selling CNG for instance are able to trade in other areas where Sasol Gas is also active suggests that it could be defined as a single market; An analysis of the structure of gas charges and prices provides conflicting evidence of whether there should be a single market or separate geographic markets. The structure shows that a large proportion of the maximum price (the gas energy price) is the same for customers in all regions with only the transmission tariffs, which are a relatively smaller proportion of the total gas charges, differing by region. On the other hand, there are significant differences between the actual average prices in the different regions which could indicate separate geographic markets.; and Exclusive distribution areas do not extend to the trading of gas over the distribution network. However, another licensee with a trading licence can enter into a third party access agreement with the infrastructure owner and supply gas to customers on the network Hence the scope of the geographic market is undetermined. Question 8: Do you agree with the approach taken with respect to the scope of the geographic market for the trading of piped-gas to industrial customers? If not, what in your opinion would be a more appropriate approach and the reasons supporting this? Market for the trading of piped-gas to vehicular customers: The geographic market for the supply of piped-gas to vehicular customers has been defined to be as wide as the greater Johannesburg area which includes all refueling stations operated by VGN/NGV and Novo Energy. This definition was arrived at given the following: 9

10 The market for the trading of gas to vehicle customers is relatively new and small in comparison to the rest of the piped-gas industry; and This makes understanding customer preferences and behaviour difficult as there is insufficient information to draw a conclusion on the geographic market. In particular, the preferences and willingness of customers to travel to purchase compressed natural gas ( CNG ) has not been sufficiently tested. Question 9: Do you agree that the geographic market for vehicular customers is the greater Johannesburg area? If not, what in your opinion would be a more appropriate definition of the relevant geographic market for trading of piped-gas to vehicular customers and the reasons supporting this definition? Summary 29. The adequacy of competition in the piped-gas industry is therefore assessed in the following relevant markets: A market for the trading of piped-gas to traders; A national market for the trading of piped-gas to industrial customers and separate markets for the trading of piped-gas to industrial customers in the Gauteng/Mpumalanga/Free State region and KwaZulu-Natal; and A market for the trading of piped-gas to vehicular customers in the greater Johannesburg area ASSESSMENT OF THE ADEQUACY OF COMPETITION 30. The assessment of the relevant markets listed in paragraph 29 above is based on the economic framework developed for the assessment of the adequacy of competition. The factors that are considered for the assessment of the adequacy of competition, where relevant, include: Level of concentration including market shares; Barriers to entry and evidence of entry; Countervailing buyer power; Dynamic characteristics of the market including growth and innovation; Nature and extent of vertical integration; Access to infrastructure: control of essential facilities; and Evidence of the competitive conduct of firms The market for the trading of piped-gas to traders 31. The assessment reveals that there is inadequate competition in the market for the trading of piped-gas to traders. The assessment remains the same irrespective of whether the 10

11 geographic scope of the market is defined as national or separated into the Gauteng/Mpumalanga/Free State region and KwaZulu-Natal region. The finding of inadequate competition in this market is based on the following factors: The market for the trading of piped-gas to traders is highly concentrated. Sasol Gas has a market share of 100% and is therefore regarded as being dominant in terms of the Competition Act. However, we note that Egoli Gas does supply gas to Reatile Gastrade as well as VGN/NGV. We understand that since the licencing of Reatile Gastrade that the former is now supplying VGN/NGV. As both Egoli Gas and Reatile Gastrade (indirectly) are dependent on Sasol Gas for gas supplies and the total charges for gas offered by Sasol Gas to other traders are significantly lower than the price charged by Egoli Gas/Reatile Gastrade to VGN/NGV, they are not considered as competitors in this market The market is characterised by high barriers to entry as evidenced by the lack of entry of alternative sources of supply into this market. The main hindrance is the lack of availability of new gas supplies which is likely to remain the case in the next few years. Further, in order to supply traders, a new entrant might need access to Sasol s transmission and/or distribution network. Although there is mandatory third party access for the transmission network, this does not apply to the distribution network where a voluntary principle applies As there are no effective alternative suppliers for traders, they have little to no countervailing buyer power to counter Sasol Gas market power. They are wholly reliant on Sasol Gas for their gas supply; Sasol Gas is a vertically integrated supplier with access to gas, as well as the main operator of both the transmission and distribution network infrastructure; Lastly, there has been evidence of anticompetitive conduct in which Sasol Gas charged a higher price than the allowable reference price to traders in terms of Clause 9 of Schedule One to the Agreement Concerning the Mozambican Gas Pipeline between the Government of RSA and Sasol Ltd, Question 10: Do you agree with the assessment that there is inadequate competition in the market for the trading of piped-gas to traders? If not, please provide reasons to substantiate your answer The market for the trading of piped-gas to industrial customers 32. The findings reveal that there is inadequate competition in the market for the trading of piped-gas to industrial customers. The assessment remains the same irrespective of whether the geographic scope of the market is defined as national or separated into the Gauteng/Mpumalanga/Free State region and KwaZulu-Natal. Inadequate competition in this market has been found for the following reasons: The market under consideration is highly concentrated with a significantly high 2-firm concentration ratio and a high Herfindahl-Hirschman Index ( HHI ) levels across the years analysed ( ). The HHI is used to evaluate the overall concentration level in a market and is calculated as the sum of squares of the individual market shares of each of the firms active in the relevant market. During this period, Sasol 11

12 Gas had a market share of between 80% and 100% in the national market of trading piped-gas to industrial customers. When the market is analysed as separate regions, it is found that in the Gauteng/Mpumalanga/Free State region, Sasol Gas has a market share of ranging from 80% and 100% between 2012 and 2014.In the KwaZulu-Natal region, both Sasol Gas and Spring Lights Gas are found to be dominant in terms of the thresholds in the Competition Act on the basis of the estimated market shares; The market is characterised by high barriers to entry hindering the growth and development of new entrants. These barriers include the limited access to gas supply in the South African market, legal and regulatory barriers which may impose a cost on new entrants, and access to infrastructure. Although there has been recent entry into the market, these entrants have not gained much market share There is little to no countervailing buying power in the national market for the trading of piped-gas to industrial customers or in the Gauteng/Mpumalanga/Free State and KwaZulu-Natal regions. This finding is based on the customer concentration levels and the lack of availability of alternative suppliers; The South African gas industry may undergo significant changes in the future that could stimulate the gas industry leading to greater growth, entry and innovation. However, these developments, if they actually occur, will only likely have an impact in the medium to long term and do not impact on the current assessment of the adequacy of competition Sasol Ltd is the vertically integrated incumbent and is active at all levels of the supply chain. Sasol Gas may thus have less of an incentive to treat its downstream competitors fairly and may engage in in conduct aimed at foreclosing competitors access to inputs or customers. Other traders may also be limited in their ability to compete with Sasol Gas since there are no alternative suppliers and they are effectively captive customers as they cannot legitimately threaten Sasol Gas with switching to an alternative supplier.; Access to infrastructure has been limited as no entrant has entered into an agreement for access to Sasol Gas distribution network. Spring Lights Gas is the exception, however, its access was due to a previous shareholding relationship with Sasol Gas; and There has been evidence of anti-competitive conduct in which Sasol Gas was found to have entered into anti-competitive agreements with Spring Lights Gas and Egoli Gas that contravened section 4(1) (b) (ii) of the Competition Act. Question 11: Do you agree with the assessment that there is inadequate competition in the market for the trading of piped-gas to industrial customers? If not, please provide reasons to substantiate your answer. 12

13 The market for the trading of piped-gas to vehicular customers 33. The findings reveal that there is inadequate competition in the market for the trading of piped-gas to vehicular customers in the greater Johannesburg area. The reasons underlying this finding are as follows: The market for the trading of piped-gas to vehicular customers is considered to be highly concentrated with VGN/NGV having a market share of 100% in 2013 and between 55% and 65% in 2014 when NOVO Energy entered the market. NOVO energy has the remaining market of between 35% and 45%. The 2-firm concentration ratio and HHI results further indicate that there is a low level of competition in the market; Barriers to entry are high due to the limited access to gas supply, the capital cost requirements involved in starting a CNG supply business such as the costs for the construction of service stations and the purchasing of assets required to compress gas; and Vehicular customers hold negligible countervailing buyer power over traders in this market due to the high costs of switching between traders once their vehicles have been converted to operate on gas, and their limited size and gas requirements. Question 12: Do you agree with the assessment that there is inadequate competition in the market for the trading of piped-gas to vehicular customers? If not, please provide reasons to substantiate your answer CONCLUSION 34. We have conducted an assessment of whether there is currently inadequate competition in the relevant piped-gas markets as defined by the Gas Act. The following relevant markets have been considered for the assessment of competition in the piped-gas industry: a market for the trading of piped-gas to traders; a national market for the trading of piped-gas to industrial customers or separate markets for the trading of piped-gas to industrial customers in the Gauteng/Mpumalanga/Free State region and the KwaZulu-Natal region; and a market for the trading of piped-gas to vehicular customers in the greater Johannesburg area Once the relevant markets had been defined, the assessment considered competition indicators such as the level of concentration including market shares, barriers to entry and evidence of entry, countervailing buying power; the dynamic characteristics of the market including growth and innovation, the nature and extent of vertical integration, access to infrastructure in particular, the control of an essential facility, and lastly, the evidence available relating to the competitive conduct of the firm An analysis of the various indicators regarding the level of competition has resulted in a finding that there is inadequate competition in the three relevant markets under 13

14 consideration. This finding of inadequate competition therefore requires NERSA to approve maximum prices in the piped-gas industry in terms of section 21(1) (p) of the Gas Act. 14