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Checking the cost of trade: Electricity tariffs in South Africa under judicial scrutiny

Checking the cost of trade: Electricity tariffs in South Africa under judicial scrutiny

14 Sep 2016

Professor Dawid van Wyk, Independent Consultant, comments on recent developments in the regulation of electricity tariffs in South Africa

Without adequate energy – read ‘electricity’ – the much-desired industrial development and heightened economic integration of Southern Africa will not make headway. This may be one of the reasons, if not the primary one, for a discussion on measures to improve power generation at the 36th SADC Summit in Swaziland at the end of August 2016.[1]

National and regional economies are dependent on a stable and sufficient supply of electricity – which is not the norm in Southern Africa. Traditionally, the regulation of power generation, transmission, distribution and tariffs falls in the domain of governments, often – as in the case of South Africa – via statutory bodies, state-owned enterprises and ‘redistributors’, such as local authorities. It is a complex, highly technical and very expensive supply industry, also from a regulatory point of view. Electricity provision is deeply enmeshed in a strategic, political, policy, social and economic environment, profoundly affecting the commercial nature and viability of the industry, domestically and across borders.

Since most consumers are expected to pay for their power consumption, it stands to reason that they would be interested in keeping the costs down. The obvious way of doing so is the one within their control, namely wise and prudent use. By the same token, they would expect the regulatory authorities and the electricity producers to render the service in a cost-effective manner. Having said this, holding these authorities and producers accountable is easier said than done, especially when accountability is essentially politically-based.

It is against this background that a recent judgment in the Gauteng North High Court of South Africa caused more than a ripple of excitement among a range of interested parties and observers.[2] The ruling in Borbet and others v The National Energy Regulator of South Africa and others[3] must be seen in a wider and narrower South African context. The wider picture includes the much-criticised performance of state-owned enterprises (formally known as state-owned companies or SOCs in terms of the South African Companies Act of 2008): allegations of political interference, corruption, nepotism, ‘plundering’ of the public purse, lack of capacity, delays and overruns on projects and pervasive mismanagement. So-called government bail-outs have become a regular occurrence.

ESKOM, the SOC responsible for the generation, transmission and distribution of electricity in South Africa and beyond, is no exception. Following a growing inability to meet demand in the early years of this century; periods of ‘black-outs’ or ‘loadshedding’; inordinate delays in the completion of two major coal-fired power stations coupled with significant cost escalations; management instability and a host of other woes – most recently the alleged unexplained fourfold cost increase at the Ingula pumped-storage hydro-electric plant on the border of the KwaZulu-Natal and Free State provinces[4] – ESKOM has question marks hanging over it.

Given the crucial importance of electricity to the economy in general, and industrial high volume users in particular, it should not come as a surprise that ESKOM and the National Energy Regulator of South Africa (NERSA) are being watched like a hawk. NERSA determines ESKOM’s prices, charges and tariffs.

It is this watchfulness and some customer activism that created the narrower context of the Borbet case. Borbet South Africa (Pty) Ltd, based in Port Elizabeth in the Eastern Cape, is the South African operation of a well-known German automotive wheel manufacturer. In 2013, Borbet SA led a group of major companies in a judicial review application against the Nelson Bay Metropolitan Municipality.[5] In issue was the question whether the municipality had complied with its constitutional and statutory duty to ensure public participation in its decision-making process, in this case the municipal budget. Part of the relief sought was an order preventing the municipality from recovering certain electricity costs from a previous year. Borbet SA and its co-applicants were only partially successful in this instance. The court declined to rule on the cost-recovery issue, but agreed that the municipality had not met the required level of public participation. It made an order directing the municipality from then on to comply with the applicable legislation in preparing and adopting its annual budget.

At the end of March 2016, Borbet SA, again joined by a group of prominent companies from the Nelson Mandela Bay area, found itself in the Gauteng North High Court for an urgent application, at the same time as an activist group calling itself the Organisation Undoing Tax Abuse (OUTA).[6] Like OUTA, better known for its persistent role in a campaign against the so-called ‘e-tolling’ of highways linking the Gauteng metropolitan cities of Tshwane (‘Pretoria’), Ekurhuleni and Johannesburg, Borbet SA was seeking a remedy to prevent ESKOM from giving effect to a tariff determination by NERSA. Borbet SA and OUTA both approached the case on the basis of irregularities in the NERSA decision to grant a tariff increase.

OUTA’s attack was narrow, aimed at convincing the court that NERSA’s decision and the reasons for the decision should be published simultaneously. The court did not agree.

Borbet SA’s arguments went wider. At the heart of the matter was the application of the pricing methodology followed by NERSA, referred to as the Multi-Year Price Determination (MYPD).[7] It is not necessary to rehearse the finer details; a summary of the process will suffice.

Amongst others, NERSA regulates electricity prices and tariffs through a system of licensing and registration in terms of the Electricity Regulation Act of 2006. A licensee may not charge a customer any other tariff than that approved by NERSA. ESKOM is such a licensee. An Electricity Pricing Policy of 2008 provides NERSA with guidelines on the approval of tariffs for the electricity supply industry, as it is called. For ESKOM, NERSA developed the MYPD, a comprehensive and technical methodology used to assess ESKOM’s applications for its revenue needs. It deals with generation, transmission and distribution formulas; the components of allowed revenues; and risk management. Part of the latter is the so-called Regulatory Clearing Account (RCA) that is used to debit or credit certain cost variances. In accordance with the MYPD, NERSA determines electricity price for 3 to 5 year periods, the most recent of which is from 1 April 2013 to 31 March 2018. In practical terms the RCA permits ESKOM tariffs to be raised above the multi-year approved tariff to compensate for shortfalls in the previous year.

The RCA operates annually on the basis of the financial year. It must be monitored continuously and be updated quarterly by ESKOM to show possible adjustments. Once NERSA has reviewed ESKOM’s update it must be published on the NERSA and ESKOM websites to alert customers of possible price adjustments in the following year.

Borbet SA’s complaint was that NERSA did not comply with the MYPD’s requirements for the RCA. ESKOM did not open an RCA in 2013/2014 and did not submit its quarterly updates for the period 2013/2014. Then, for the 2016/2017 period – that is, more than two years later – it claimed an amount of R11,2 billion for shortfalls dating back to 2013/2014, over and above the approved 8% increase for 2016/2017. The court had to decide whether NERSA was bound by its MYPD or whether NERSA had a discretion, as it claimed, to allow deviations from the methodology ‘in the interest of the consumers and the South African economy’ (para 30 of the judgment).

NERSA tried to persuade the court to refrain from involving itself in issues of policy by intruding in the executive sphere and blurring the hallowed principle of separation of powers. It argued that the matter at hand required a balance between a range of competing interests that required specific expertise in the field of electricity and economics. After quoting a raft of decisions by the South African Constitutional Court and the Supreme Court of Appeal on the separation of powers and judicial deference to the executive, the court stated that it was called upon only to decide whether NERSA’s application of the MYPD methodology was rational, lawful and procedurally fair in the light of all the facts. A decision is rational or it is not, and the separation of powers cannot change that, the court observed, once again on the authority of the Constitutional Court.

In the court’s ensuing analysis of the facts, the ‘signalling’ or ‘alerting’ function of the RCA and the quarterly reports as required by the MYPD kept recurring. In the words of the court (para 89): ‘It is thus clear that the MYPD methodology, which was put in place, was to assist both Eskom and NERSA when required to deal with an RCA application, but furthermore and foremost to inform the SA public, businesses and consumers as to how further price increases are to be expected and to ascertain what impact it may have on their future business and the economy as a whole.’ This led the court to conclude that under the circumstances non-compliance with the MYPD methodology was irrational, unfair and unlawful. A compounding factor was that NERSA at no time notified the public that it intended deviating from the methodology.

The court was not done yet. It went on to consider a further ground of review, which it termed ‘efficiency’. In short, the Electricity Regulation Act allows an ‘efficient’ licensee to recover the full cost of its licensed activities (section 15(1)(a)). Borbet SA argued that NERSA allowed ESKOM to recover costs that were due to its own inefficiencies, including an amount of R580 million that involved a Mozambican power supplier. The court had no hesitation in finding that by allowing this, as well as ESKOM’s practice of ‘double-counting’ (that is, taking money from consumers to pay other consumers to use less electricity and then claiming the loss of income via NERSA), NERSA acted irrationally.

The court’s remedy was guided by two principles, namely that there should be no undue interruption to the electricity supply and pricing, on the one hand, and that consumers who had paid too much should receive just and equitable relief, on the other. It recognised that to ‘unscramble the egg’ would require technical expertise that the court did not possess. As a result it would be proper to defer to the executive sphere in which NERSA operates. Mindful of this, the courts set aside NERSA’s decision about the RCA and referred the matter back to NERSA to manage. It further directed that all future RCA applications by ESKOM had to be dealt with in accordance with the MYPD.

Within days of the judgment in Borbet, NERSA announced that it would appeal the ruling on the basis ‘of it being premised on erroneous information, a non-implementable position, as well as its substitution of NERSA’s decision of 2014’.[8] As things stand, however, the Gauteng court’s judgment has important implications. First, NERSA’s price determinations apply to South Africa and beyond its borders where ESKOM trades in electricity. Apart from other considerations, it is in South Africa’s interest that its regulation of electricity is done – and seen to be done – in a lawful, rational, fair and transparent manner. It adds reputational value.

Secondly, the judgment confirmed that where law rules, failing to observe basic principles could have profound effects.

Thirdly, the ruling in Bobert joined a growing line of judgments in which it was decided that public bodies and officials have nowhere to hide when it is alleged that their actions were irrational and do not comply with their own rules. It also does not matter that the body complained about effectively operates as a state-owned monopoly in its sphere of activity.

Fourthly, in making its order, the court was keenly aware of the separation of powers between the executive and the judiciary. It is clear that the court did not see its role as disruptor but as corrector. It had to be sensitive to the realities of the situation, such as the negative economic impact if it went too far with its order.

A subsequent news report suggests that another court application brought by companies in the Nelson Mandela Bay municipality and the High Energy User Group will go to court at the end of October 2016.[9] This application relates to the tariff municipalities as redistributors of electricity charge their customers. It is unclear whether this application is related to the first Bobert matter. The applicants will certainly be emboldened by the ruling of the Gauteng court.

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[1] See Joseph Ngwawi ‘Harnessing resources for industrialisation – SADC talks energy infrastructure investment’ (https://www.tralac.org/news/article/10306-harnessing-resources-for-industrialization-sadc-talks-energy-infrastructure-investment.html). See also Communiqué of the 36Th Summit of SADC Heads of State and Government – Mbabane, Swaziland; August 30-31, 2016 (https://www.tralac.org/images/docs/10390/communique-of-the-36th-sadc-summit-31-august-2016.pdf).

[2] For example, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) (http://www.polity.org.za/article/seifsa-seifsa-welcomes-the-courts-decision-to-set-aside-eskoms-electricity-price-increase-2016-08-17); Carol Paton ‘Will electricity tariff hike by Eskom now be disallowed?’ (http://www.bdlive.co.za/business/energy/2016/08/16/will-electricity-tariff-hike-by-eskom-now-be-disallowed); Antoinette Slabbert ‘Court sets aside Eskom tariff increase – “irrational, unfair, unlawful”’ (http://today.moneyweb.co.za/article?id=609824#.V73295N96Rs); ‘Eskom tariff ruling a massive win – chamber’ (http://www.fin24.com/Economy/Eskom/eskom-tariff-hike-ruling-a-massive-win-chamber-20160816).

[3] [2016] ZAGPPHC 702 (16 August 2016).

[6] The Organisation Undoing Tax Abuse (‘OUTA’) v The National Energy Regulator of South Africa and others [2016] ZAGPPHC 479 (8 April 2016). Before changing the words making up its acronym, OUTA was known as the ‘Opposition to Urban Tolling Alliance’.

[8] NERSA media statement of 25 August 2016 (http://www.nersa.org.za/ReadNews.aspx?NewsID=302).

[9] Dewald van Rensburg ‘Nersa limps into another legal battle’ (http://city-press.news24.com/Business/nersa-limps-into-another-legal-battle-20160819).