Petroleum Products Amendment Bill: hearings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
14 August 2003
PETROLEUM PRODUCTS AMENDMENT BILL: PUBLIC HEARINGS

Chairperson: Mr M Goniwe (ANC)

Documents handed out:
Petroleum Products Amendment Bill [B25-2003]
National Industrial Chamber written submission (PPAB:1)
Legal Resources Centre written submission (PPAB:2)
Competition Commission of South African written submission (PPAB:3)
realsearch written submission for Associated Octel Company (PPAB:6)
SAPIA written submission (PPAB:8) (MS Word document)
SAPIA PowerPoint presentation
Chemical and Allied Industries Association written submission (PPAB:10)

SUMMARY
SAPIA expressed concern about a number of aspects, including the wide regulatory powers given to the Minister by the Bill, suggested that the arbitration provisions in the Bill be deleted and questioned the penalties provided by the Bill. Members questioned SAPIA’s reading of the arbitration provision and raised the question of promotions.

CAIA expressed concern about inclusion of ‘safe use’ in Clause 2(a) since the safe use of chemicals was already covered by other Acts. Clause 12C(e) was too broadly drawn and the Standards Act should be used instead to set standards and specifications for petroleum products.

Associated Octel Company stated that the phasing out of leaded fuel could cause environmental damage. Refineries would not be ready in time which would lead to massive job losses. They suggested lead traps as an alternative, with the phase-out delayed to 2010. Members questioned the relevance of Octel’s claims to the Bill – they appeared relevant to the regulations.

The Legal Resources Centre provided a point-by-point refutation of Octel’s claims, noting that they had failed to declare their interest as the last remaining major producer of tetraethyl lead, the octane booster used in leaded petrol. They suggested an amendment to Clause 12C(e) to eliminate an ambiguity and so prevent delaying litigation, which had been experienced in other countries. Members questioned the relevance of a response to Octel to the Bill.

The Competition Commission questioned whether the prohibition on vertical integration would foster new entries to the industry. They stated that the Bill touched on the jurisdiction of the Commission and that the Commission and the Department should settle the matter to avoid forum shopping.

MINUTES
SAPIA (South African Petroleum Industry Association) Presentation
Mr C McCleland (Director, SAPIA) gave the presentation. SAPIA are concerned that there are a number of Bills/Acts that have an impact on the same activities, facilities and operations. This made compliance difficult and did not encourage investment. The presentation questioned the extent of the Minister’s regulatory power, though this was difficult to assess fully without the draft Regulations. SAPIA are of the view that the Bill goes beyond the measures required by the White Paper, though Mr McCleland stated that this concern had been eased by Dr Crompton’s (Deputy Director General: Hydrocarbons and Energy Planning, Department) statement that the Government was on the path to managed liberalisation. The White paper called for limited, interim legislation, but the Bill appeared more than this since it provides for a new overarching licensing system and a new regulator – the Controller of Petroleum Products.

Mr McCleland wondered why the promotion of efficiency in the industry was limited to the retail sector in the criteria for allocating licences – efficiency in all sectors within the industry should be promoted. The Bill lacked detail on how the criteria would be applied. This undermined predictability in the industry and would lead to investor uncertainty. Good legislation required that such criteria be made explicit.

Mr McCleland expressed concern at the wide scope of the wording of Clause 2(b), on prescribing petroleum product prices. The Clause should be amended to reflect the Department’s intention to end hidden cross-subsidisation. SAPIA were of the view that the publication of petroleum product prices, as required in Clause 2(c), should be limited to retail prices of products sold to the general public. As the Clause stood, it could require the publication of wholesale diesel prices.

On Clause 2A(4), SAPIA were comfortable with the current system that allowed ownership of retail outlets by oil companies where the companies did not operate the sites and so did not receive the retail margin. The wording of the Clause, referring specifically to ‘ownership’ should be amended to accommodate this distinction and allow the current practice to continue. Clause 2A(4)(b), on prohibiting self-service, was too broadly drawn and should be worded to apply to retail self-service. Clause 2B(1)(a) should be broadened so that the object of promoting efficiency in the industry did not apply only to the retail sector.

Clause 2B(3), restricting licences to one per site, should be amended to allow temporary retail licences in cases where the licence holder for the site was unable to operate the site. Clause 2C(4)(a) could be interpreted to mean that existing sites had to comply with new regulations on licensing. The Clause should make it explicit that it was not retroactive. Clause 2D provided regulatory powers to the executive that were too wide, giving no detail on how the licence allocation system would be applied.

Clause 12, on offences and penalties, provided for overly onerous penalties – it should be tempered by allowing time to rectify the transgression. Clause 12B, on arbitration, provided no remedy to parties since the arbitrator could only determine whether a contract was fair or not and could not prescribe remedies or relief. Further, it allowed third party interference, by the Regulator, in the relationship between contracting parties. SAPIA felt strongly that Clause 12B should be deleted.

Clause 12C(a)(v) provided overly broad regulatory powers to the Minister. Clause 12C(a)(vii), allowing regulation on the transfer of ownership of licences, was critical. If licences were not transferable, this would inhibit business. Clause 12C(b), on prohibited business practices, was too widely drawn and should be deleted or more narrowly drawn.

SAPIA were concerned about the treatment of training sites, currently legitimately owned and operated by wholesalers. The Department had indicated that it would consider the matter. They were of the view that retail site licences should be site specific, evergreen, held by the supplying wholesaler and transferable to a successor supplying wholesaler. Mr McCleland stated that the Committee should ensure that the Bill was consistent with related legislation and seek to create conditions of certainty.

Discussion
Mr G Oliphant (ANC) questioned SAPIA’s interpretation of Clause 12B, drawing the representatives’ attention to 12B(4)(b), which stated that the arbitrator shall make a final and binding order, including any order as to costs.

Ms T Booth-Oliveira (Manager of Corporate Planning, Caltex Oil) replied that SAPIA’s reading of 12B was that it confined the arbitrator to a finding of whether the contract was fair and reasonable, allowing no finding beyond that. If the arbitrator would be able to require an amendment to the contract, then this should be stated explicitly. As the Clause stood, the scope of the arbitrator’s finding was limited. This is a matter of legal interpretation.

Mr Oliphant responded that SAPIA’s reading did not take account of the provision for a final and binding order in 12B(4)(b).

Mr McCleland responded that whether the SAPIA’s interpretation was correct or not, they remained of the view that the Clause should be deleted. It interfered with commercial agreements, which would likely have arbitration clauses in them anyway.

Mr I Davidson (DA) noted that promotions were to be prohibited because they caused upward price pressure because of the cost-plus system. He asked SAPIA’s view on whether the margins should be cost-based – did this not add to inefficiency in the industry?

Mr McCleland replied that he was not mandated to talk on behalf of the retail industry. He noted though that an average cost was used, so there was an incentive to be efficient in that if an operator had lower costs than average then that operator would make more money. Cost-plus systems would only be a problem if they applied per-operator, an average-based system encouraged efficiency.

Mr Davidson responded that whilst he understood Mr McCleland’s reply, it did not answer his question. The matter is an issue for oil companies as well as retailers since oil companies might want to promote their products. Did promotion really push up prices or is it a legitimate practice?

Mr A Quail (Industry & Government Liaison Manager, Engen) replied that the issue was competition. Government did not want to allow free competition because they wanted to protect small business and jobs. The consequences of free competition would be the closure of sites. The Department were walking a fine line – trying to liberalise over time, but they could not allow too much competition because this would result in closures and job losses. This position is supported if the maintenance of sites and employment was in the public interest.

Mr Davidson responded that Mr Quail was giving the Government’s point of view, not SAPIA’s.

Mr B Douglas (NNP) asked why the price publication provisions in Clause 2C should be limited to retailers.

Mr McCleland replied that SAPIA’s view was that prices of products available to the general public should be published, even if these were not retailer prices. They would not want the results of negotiations between oil companies and transport companies on the cost of supplied diesel, for example, to be published. Such information was commercially sensitive and should not be disclosed.

CAIA (Chemical and Allied Industries Association) Presentation
Mr R Goosen (Sustainable Progressive Solutions) gave the CAIA presentation. CAIA supported an integrated approach to chemicals management. Mr Goosen had two specific points of comment. CAIA welcomed the minimum standards entailed by the regulation of standards and specifications of petroleum products under Clause 12C(e). Mr Goosen stated that the objectives that the standards addressed had to be clearly stated and based on sound science and public policy. CAIA proposed that the Standards Act be used and Clause 12C(e) be deleted or contain a reference to the Standards Act. As it stood, Clause 12C(e) was too vague and would create investor uncertainty.

The inclusion of ‘safe use’ in Clause 2(a)(i)(a) extended the scope of the Bill to areas covered by the Occupational Health and Safety Act and the (Regulatory) Standards Act. If ‘use’ includes transportation, then the scope of the Bill would extend into the domain of the National Road Traffic Act. Whilst CAIA supported legislation to ensure the management of risk associated with hazardous materials, they objected to the fragmentation of the approach. ‘Safe use’ should be deleted to streamline the legislative approach.

Discussion
Mr Oliphant asked if CAIA’s only concern with Clause 2(a) was that ‘safe use’ should not be in the Bill because it was covered already by the Occupational Health and Safety Act. Was the objection to repetition or was there a substantive point?

Mr Goosen replied that the objection was that safe use was not fundamental to the Bill. Adding it led to legislative duplication, which led to fragmentation. The amendment appeared tacked on and could cause confusion.

Mr Oliphant asked that Mr Goosen clarify CAIA’s position on Clause 12C(e).

Mr Goosen replied that the discretion allowed by Clause 12C(e) was too broad. The Standards Act contained well defined processes. If Clause 12C(e) were retained, the discretionary powers of the Minister should be advised by principles in the legislation.

The Chair asked that Mr Goosen share CAIA’s view on the participation of stakeholders.

Associated Octel Company Presentation
Mr I Ayob (Ayob and Partners) gave the Octel presentation. The written submission was prepared by realsearch on behalf of Octel. Mr Ayob stated that there was one issue that needed to be addressed or there would be job losses beyond the forecourt. He stated that additives in unleaded petrol may cause greater damage to health and the environment than lead. Vehicles without catalytic converters would cause damage to the environment when using unleaded petrol and risked damage using such fuel. Such vehicles were largely owned and used by historically disadvantaged South Africans.

Octel accepted that the dealine of 1 January 2006 for the phasing out of leaded fuel has been set by Cabinet in line with undertakings by South Africa in international forums. Octel shared the Government’s concern to ensure a cleaner environment and consequent better health.

He stated that none of the refineries in South Africa had started the conversions necessary to produce only unleaded fuel. Unleaded fuel had a 32% market penetration and imports were already needed at these levels. Refineries would not be ready in 2006 and would have to shut down with the consequent enormous numbers of jobs lost. He noted that the demand for unleaded petrol was growing at 7% per year, so would have 50% of the market by 2006 even without regulation.

He stated that with unleaded fuel, 70% of vehicles will cause the same or worse damage to the environment and human health as they did using leaded fuel. This is because they do not have catalytic converters. He noted that the current best-selling entry-level vehicle in South Africa did not have a catalytic converter and that converters would only be mandatory from 2008. There should thus be an incremental approach to the phasing out of leaded fuel. Experience in other developing countries suggested that additives in unleaded fuel would cause a great deal of damage. The regulations must ensure that additives other than lead are prohibited or regulated.

He stated that the Minister’s authority to ensure that Regulations are enforced could not be proclaimed until the Regulations were drawn up. That part of the legislation should not be promulgated until then.

Mr Ayob suggested that lead traps provided an immediate solution to the emission of lead. Such traps could be produced in South Africa at marginal cost, which would create employment and take care of concerns about lead until a more realistic date for the elimination of leaded fuels. He stated that refineries were all still in the planning stage of conversion and wished to import mid-level skills for the conversion. South Africans could be trained to provide these skills. It would take about four and a half years to convert refineries so they could not meet the 2006 deadline. Converting the facilities had a high cost and had the makings of an ecological disaster.

Mr A Richard (realsearch) added that there was an urgent need for the strict, clear and enforceable regulation of liquid fuel in South Africa. Specifications and standards should be introduced, especially for substances that have a detrimental effect. The framework should evaluate all additives and substances in a proper manner. Octel requested that the Bill set out a framework for the enforcement of principles. Regulation was needed, but it should not be over-hasty. It would be rational to move the 1 January 2006 deadline to limit environmental damage.

Discussion
The Chair stated that the presenters had raised fundamental issues, but that the issue before the Committee was the Bill. Although the raised issues were important, their place was in the discussions about specifications.

Mr J Nash (ANC) stated that clean fuel that met with the 2006 requirements was already being supplied by one petrol company. He asked for the presenters’ comment on this. If one company could already meet the specifications, why would it be difficult for the 2006 deadline to be met?

Mr Oliphant asked what point the presenters wished to make regarding the Bill. Were they suggesting that refineries would be closed if this Bill were passed?

Mr Davidson stated that he understood what Mr Ayob was saying and that it affected the possible ramifications of what may be promulgated in regulations. He asked that the Chair request that SAPIA respond to the presentation in writing.

Mr McCleland responded that Mr A Mulder, SAPIA’s environmental advisor, could respond immediately to the Octel submission.

The Chair stated that the Committee only wanted a brief written response.

Mr Mulder responded that while he could respond to Octel’s points, it would simply set off a long debate that would achieve little. The Department is setting up a project team to look at the changeover and Octel should address this forum.

Prof I Mohamed (ANC) stated that his point was essentially the same as Mr Davidson’s. The issues should be raised when the Regulations were under discussion. He noted that the number of children suffering from lead poisoning in historically disadvantaged communities was high.

Mr Ayob stated that all the questions posed were addressed in the written submission. He asked if, instead of replying to the questions, his team could give a further address to share their concerns. The concerns should not just be addressed to a technical committee.

Mr Oliphant responded that if the answers were in the written submission then the matter should be rested. The submission should be taken as tabled.

The Chair agreed with Mr Oliphant. The issue for the hearings was the Bill. It would be taking a serous detour if the Committee were to do justice to Octel’s issues. Octel, and other associations, might be invited to address the Committee on the regulation process.

Mr Richard responded that he agreed with the Chair. It was important that Octel be included in the committees dealing with these issues.

Legal Resources Centre Presentation
Ms A Andrews (Attorney, Legal Resources Centre) gave the presentation. The Centre was acting on behalf of the Environmental Justice Networking Forum. The forum was concerned about the regulation of additives and the phasing out of lead since this would have a health impact. Generally, they supported the Bill and wished to assist so that it was not susceptible to delaying litigation, as had occurred in other countries.

Ms Andrews gave a point by point, legally-reasoned refutation of Octel’s position. The decision on specifications did not require an environmental impact assessment. There was no question about the constitutionality of the Minister regulating specifications. The 2006 deadline was not legally irrational.

She pointed out that Octel’s submission did not state its interest pertinently at the beginning of the submission. It is internationally the last remaining major producer of tetraethyl lead, the octane booster used in leaded petrol. The concerns it raised purportedly on behalf of other groups were not raised by those groups. The submission employs inaccurate statements about the cost of the phase out of lead. She cited a range of studies that supported the health dangers of leaded fuel disputed by Octel, and questioned the effectiveness of lead traps. The benefits of phasing out leaded fuel fair out-weighed any costs.

Ms Andrews stated that Clause 12C(e), which states that the Minister may make regulations ‘regarding the specifications and standards of petroleum products’, could be read as ambiguous. It might be argued that the sub-Clause did not apply to lead, MMT and other octane boosters. Whilst the Centre did not agree with this interpretation, it could provide an opportunity for litigation to delay the implementation of fuel quality reform, as had occurred in other countries. She suggested that the wording be changed to read ‘specifications and standards including maximum additive and impurity levels’ which would make clear that the regulations could include maximum lead, MMT or MTBE levels. The maximum could be zero or ‘below detection levels’. An alternative would be to replace the words ‘specifications and standards of petroleum products’ with ‘specifications and standards pertaining to the chemical composition and physical properties’. This would clearly contemplate the regulation of octane additives.

Discussion
Mr Douglas acknowledged Ms Andrews’s detailed critique of Octel’s position. He asked for her comment on paragraph 40 on page 49 and paragraph 56 on page 52 of Octel’s submission.

40. However, in the matter of De Lange v Smuts NO and Others 1998 (3) SA 785 (CC), Ackerman J stated at paragraph [60]:
I have no doubt that over time our Courts will develop a distinctively South African model of separation of powers, one that fits the particular system of government provided for in the Constitution and that reflects a delicate balancing, informed both by South Africa’s history and its new dispensation, between the need, on the one hand, to control government by separating powers and enforcing checks and balances and, on the other, to avoid diffusing power so completely that the government is unable to take timely measures in the public interest. [emphasis added].

56. In my opinion, the NEMA principles most applicable to this matter relate to the impact the lead phase out will have on the poor in South Africa. In these circumstances I would add some cautionary remarks. In the context on environmental debates there seems to be an unhelpful amount of cynicism when a large corporation argues for an approach to law which would benefit both the corporation and the public at large, especially the poor. In such event the public tends to recoil in incredulity with sneers of hypocrisy. Yet neither cynicism nor incredulity should dissuade Consultant’s client from engaging all parties on NEMA principles.

Ms Andrews replied that paragraph 40 referred to a case that discusses separation of powers. In the Centre’s submission, they argued that it was perfectly proper to delegate powers of regulation to the Minister – one would not want a situation where one had to come to Parliament whenever fuel specifications were changed. Octel argued that it is trite law that Parliament must give guidelines to officials on how to exercise an administrative discretion. The Minister would be exercising a legislative function not an administrative one. The cases cited dealt with administrative action not delegated legislative power. The Minister would be guided be NEMA anyway. She stated that paragraph 56 was Octel’s opinion. The Centre was putting the case for groups that represented poor and disadvantaged communities.

Mr Oliphant stated that the presentation was helpful. He asked that the submission be made available so that the Committee could study it carefully. It dealt with legal issues which he would prefer were handled by lawyers. The Government was aware of the litigation Ms Andrews had mentioned. The Committee would take note of the points made and the suggested amendment.

Prof Mohamed stated that the issues raised would only come up when the Regulations were considered and were irrelevant to the issue before the Committee – the Bill. He agreed that the damage done by lead, especially in the Western Cape, was disastrous. These issues should be raised at a later stage.

Mr Nash stated that the Legal Resources Centre should be considered to make representations to the Department when the time came for such submissions.

The Chair stated that the issue before the Committee was the Bill. He appreciated that the Centre had taken the time to interrogate Octel’s assertions. This would be useful when dealing with regulations or specifications. The Committee was also not addressing the timeframe for the removal of lead. The Committee valued the presentation and when they had to look at these issues in detail, they would call the Centre again.

Competition Commission of South Africa Presentation
Mr F Sibanda (Head: Policy and Projects, Policy and Research, Competition Commission) gave the presentation. He stated that there were parallels between the Bill and the Competition Act. He noted that the prohibition of vertical integration was included to facilitate the entry of small businesses to the industry. However, vertical integration was not necessarily a barrier to entry and could lead to cost savings – anti-competitive aspects of vertical integration could be addressed by competition legislation. Decisions to integrate vertically should be the prerogative of firms based on efficiency considerations.

He noted that managed liberalisation was an objective of the Bill, but that it appeared to be moving things backwards by proposing these restrictions. He understood what the Bill was trying to achieve. Partnerships between oil companies and small firms should be encouraged to foster entry.

The Competition Commission view was that self-service by consumers should be accommodated by the Bill should unemployment cease to be an economic menace.

He stated that Clauses 12B and 12C touched on the jurisdiction of the Competition Commission. The Commission and the Department should work out issues of jurisdiction. This would avoid forum shopping by industry players, who would not know whether to go to the Commission or the Controller of Petroleum Products.

The Commission proposed that the current arrangement was fair enough. There should not be more restrictions than under the current system. Small firms could participate by entering the retail industry.

Discussion
Mr Davidson asked Mr Sibanda to explain the idea that the break up of the industry due to the prohibition on vertical integration could lead to higher transaction costs.

Mr Sibanda replied that if one company was involved in production and distribution, it was easier to coordinate matters than if there was one for manufacture, another for distribution and another for retail. Easier coordination led to cost savings.

Mr Oliphant stated that the Competition Commission should look at the reality in the industry when considering vertical integration and not just consider it from a competition perspective. The idea that historically disadvantaged South Africans could enter the industry fairly needed to be re-examined.

Mr Sibanda replied that the Commission was not advocating competition for its own sake – they wanted to see Black Economic Empowerment and small enterprise advanced. He understood that the industry was currently dominated by a few oil companies. He stated that he could not see how a restriction on vertical integration would help foster entry of new companies.

Mr Oliphant noted that the Commission suggested that self-service only be prohibited until there was full employment. He asked if they had a timeframe in mind.

Mr Sibanda replied that whilst it was a noble objective, he did not have a timeframe in mind.

Mr E Lucas (IFP) noted that all the presentations had expressed concern about the Regulations. He stated that the Committee should request the Department to brief them on the draft Regulations so that they could take part fully.

The Chair responded that the Department would respond to the submissions and the Committee could pick up on these issues with them then.

The hearing was adjourned.