Last month, the Gauteng High Court Division of South Africa, Johannesburg, ruled that fuel retailers were entitled to full Entrepreneurial Compensation (EC) and should not have to negotiate with the oil companies to ‘forfeit’ a part of the capex.
This after the Fuel Retailers Association (FRA) applied to review and set aside a decision to adopt and implement the regulatory accounting system (RAS) for the Petroleum Sector in a matter which was heard in October last year.
FRA argued the RAS did not make provision in its retail margin for EC for retailers in Company Owned and Retailer Operated (CORO) sites.
The Department of Mineral Resources and Energy (DMRE) contended that the EC should be negotiated from the capex portion of the retail margin by the oil companies forfeiting a portion of the capex.
The South African Petroleum Industry Association contended that the EC should be negotiated from the notional EC published in the BSS Matrix annually, which notional EC was carved out from the capex.
However, the court held further that a decision that required the parties to negotiate was not per se irrational, but a decision that required parties to negotiate where:
- the negotiating power is unequal;
- the default position was that the oil company(the more powerful contracting party) must relinquish something;
– and no guidelines or factors have been put into place to consider during this bargaining process, is irrational.
The court found that the model was fundamentally flawed for CORO sites as the RAS Matrix’s Benchmark Service Station was a Retailer Owned, Retailer Operated (RORO) site.
The majority of service stations in SA were CORO sites - Benchmark Service Station should cater for this reality.
According to the order, the RAS is a model and methodology that stipulates the ‘margin’ (in cents per litre) that accrues to each identified activity along the retail petroleum value chain.
The court said regulated firms might not increase their prices in order to achieve more than this allowable profit margin. In this way, the government not only controlled and determined the end-price of petrol, which is directly regulated through the publication of a regulated pump price, but also the profit that could be earned by each sector within the petroleum retailing industry.
The RAS was contained in three documents: the Regulatory Margin Model Guidelines (the Guidelines), the Benchmark Service Station RAS Matrix (the RAS Matrix) and the 15 principles governing the RAS (the Principles).
The portion of the capex was carved out and is labelled ‘EC’. This was reflected in the RAS Matrix published by the Department of Energy (DoE)/DMRE. This is a recommendation/guideline published by the DoE/DMRE, but one which appears to be adhered to by all stakeholders, reads the order. It would also seem that this notional EC was brought across from the transitional stage (the Rapid RAS stage).
It added that the DMRE had left it to the retailers and the oil companies to negotiate as there were different business models in the petroleum space.
According to the order, the issue in part was whether the EC was to be left to the parties to negotiate or whether the Minister should regulate how much was to go to either party or to, at the very least, provide the factors which ought to be considered when negotiating this split.
In sum, the court said the RAS did not provide for an EC. RAS left it to the investor and the retailer to decide what portion of the investor’s return on investment (capex) it could afford to forfeit to the retailer.
There was no express provision in any of the guidelines, matrices or principles which entitles the retailers to claim an EC from the capex margin.
A notional EC is carved out from the pure capex by the DMRE and published annually in the RAS Matrix.
This notional EC published by the DMRE was, in practice, a split to be negotiated between oil company and retailer.
Judge Ingrid Opperman ordered that:
The original decision of the first respondent or her delegates [the Minister], taken in November 2013, to implement the RAS without providing for a ring-fenced Entrepreneurial Compensation (EC) to be claimed exclusively by the retailers in CORO sites and/or specifying the items to be claimed under the EC by retailers in CORO sites, was reviewed and set aside.
The determination of the treatment and calculation of the EC for retailers in CORO sites as an allocation within the retail margin of the RAS (the determination) was referred back to the first respondent [the Minister] to decide in accordance with this Court’s judgment, within a period of nine months from the date of the order.
Pending the determination, the 2020 RAS Benchmark Service Station Matrix and any subsequently issued (or yet to be issued) Matrices were to remain in force and in effect.
Pending the determination, the status quo of the outcome of each ' CORO site fuel retailer's negotiation with its fuel supplier/landlord was to be maintained, and all new agreements still to be concluded between CORO site retailer's and fuel suppliers/landlords were to be on the basis that the Minister's decision had not been reviewed or set aside.
“In essence, the correctly calculated and regulated EC will ensure that both CORO and RORO sites are rewarded properly for their entitlement to EC. RORO sites, as it stands, also have to forfeit their return on assets towards a notional EC,” Sibiya said.
The court judgment also stated that there was inconsistency in the application of various DMRE regulations. While the licensing regulations prohibit oil companies from operating the retail business, pricing regulations allowed oil companies to have a profit share with the retailer by forced negotiations on the notional EC split. The latter was also not consistent with the DMRE imperative policy to prohibit vertical integration.