Utilities, State Owned Enterprises, Regulators and Judicial Review: How to rescue a sound original design?
Gerhard Erasmus, tralac Associate, discusses how affected private parties in South Africa increasingly resort to litigation as part of the effort to protect their rights and interests when affected by service delivery collapse
Sophisticated public governance systems were rolled out in South Africa as part of the political and other reforms of the post 1994 era. The new structures and rules include regimes for State Owned Enterprises (SOEs), a new Competition Act, and Regulators to oversee utilities and SOEs. Their proper functioning is vital for tackling the country’s inequality and broader development problems and for ensuring constructive interaction with the international community.
Transparency, accountability and compliance with the law are the oxygen of the structures put in place as part of South Africa’s new governance formula. The bigger picture includes an international dimension. South Africa is party to several regional and multilateral arrangements which require sound domestic procedures and institutions to comply with obligations to foster rules-based governance for inter alia trade in services. Another factor is the fact that political instability and economic decline in South Africa will have serious consequences beyond national borders, such as in the Southern African Customs Union (SACU) and Southern Africa; while weakening the country’s attractiveness for investors. The SACU revenue pool is a major revenue stabilizer for most of the BLNS countries.
Important aspects of the South African governance regime are now in a parlous state, if measured against the number of court cases brought against government institutions and the alarming revelations about the behaviour of political leaders and officials. Newspapers carry daily reports about scandals in government, about corruption, fraud, state capture, violations of legal obligations, and lack of effective oversight of SOEs. Service delivery, the ability to address unemployment challenges, and political stability are undermined. There are international consequences too, such as the downgrading of South Africa’s international creditworthiness and declining investors’ confidence.
National governance arrangements are to be viewed against the backdrop of a comprehensive and modern Constitution, an enforceable Bill of Rights, and the Promotion of Administrative Justice Act (PAJA). Decisions taken by statutory bodies (such as regulators and SOEs) are in principle governed by administrative law and fall within the scope of judicial review. Two recent judgments explain what this entails for matters such as the tariffs set for electricity, the recovery of debts owed for the supply of electricity, and the implications for private sector users of electricity.
This note does not engage the bigger debate about how to address deep seated domestic political problems and how to save the nation and the economy. It discusses a specific development; how affected private parties – firms and investors – increasingly resort to litigation as part of the effort to protect their rights and interests when affected by service delivery collapse; and simply to get the system to function. The judicialization of oversight and regulatory control functions has become part of how businesses respond and operate. This development impacts on original governance assumptions in South Africa and may rewrite some of the rules of the game. It has implications for domestic governance and ultimately for South Africa’s international obligations.
The Role of the Courts
The courts of the land perform a crucial function in protecting the right of citizens and firms; while ensuring that fundamental principles such as separation of powers are given due application. In litigation, involving SOEs and regulators, this calls for a fine balance and the interrogation of difficult factual, policy and legal issues.
As a general principle the Courts can be approached to protect affected rights against the actions of SOEs and regulators. The Constitution and PAJA govern SOEs and public service regulators. This was again confirmed in recent judgments of the High Court of South Africa, Gauteng Division, Pretoria, in an application brought by AfriForum, Astral Operations, Bridgestone SA, and Mediclinic Brits versus Eskom (here referred to as the Afriforum Case), and by the Supreme Court of Appeal in NERSA v Borbet SA (Pty) Ltd . (The latter is here referred to as the NERSA Case.)
Eskom’s continued viability is of vital national importance. It has primary responsibility for the generation and transmission of electricity in South Africa and has a licensed monopoly over the supply of electricity. It is an organ of state. The State is also Eskom’s sole shareholder. The National Energy Regulator of South Africa (NERSA) is charged with an oversight function over Eskom.
Electricity is distributed by municipalities. In terms of the Constitution they must strive, within available resources, to ensure the provision of services to communities in a sustainable manner and to structure and manage their budgeting and planning to give priority to the basic needs of communities. “Services” and “basic needs” include electricity. These constitutional obligations are reinforced by national legislation.
Municipalities licensed by NERSA distribute electricity to end-users such as private firms and factories as well as the public at tariffs approved by NERSA. Municipalities are empowered to manage the bulk supply of electricity to end-consumers.
In the Afriforum Case the applications challenged Eskom’s decisions to implement scheduled interruptions of the supply of electricity to three municipalities. Eskom has resorted to scheduled interruptions in an attempt to collect arrear debts owed to it by certain municipalities. The applicants argued that Eskom’s conduct was unconstitutional, unlawful and unreasonable and should be reviewed and set aside.
In November 2016 Eskom decided to interrupt supply of electricity to forty-four municipalities. This resulted in the conclusion of repayment plans in respect of thirty municipalities and rendered it unnecessary for Eskom to proceed with the scheduled interruptions in those cases. It accordingly withdrew its decisions to interrupt supply. Despite that, the remaining applicants in the Afriforum Case anticipated further disruptions. They accordingly persisted with their challenges to Eskom’s earlier decisions.
The applicants sought declaratory orders to the effect that Eskom is not permitted to interrupt the supply of electricity to any local authority as a means to collect acknowledged debts, orders interdicting Eskom from exercising the power to interrupt electricity as a debt collection measure or; alternatively interdicts restraining Eskom from exercising such power without in each instance first obtaining an order of Court authorising it to do so; and orders reviewing and setting aside Eskom’s decisions to interrupt electricity to the said municipalities on constitutional and administrative law grounds.
The Court accepted that a compelling case was made that the interruption of electricity supplies would have negative and disproportionate financial, commercial, industrial relations and health consequences. The companies are the economic backbone of the areas in which they operate and their sustainable operation is crucial to the survival of the local economy. Their production processes are particularly vulnerable to breaks in the electricity supply and would require additional start-up time after each interruption. The applicants submitted that it was incumbent on Eskom before making a decision to interrupt supply to have regard to the particular facts relevant to their production processes, the extent of their electricity consumption relative to the total electricity consumption, their centrality to the local economy, their unblemished track record of paying their electricity accounts, and their tender to pay electricity accounts directly to Eskom.
For Mediclinic, as the operator of a hospital, the effects on patients, medical practitioners and nursing staff and for the wider general public are to be considered. Mediclinic challenged the rationality of the decision to interrupt the supply of electricity, having regard to its position as an essential service provider and the impact that the limitation of water and electricity would have on the provision of health care.
The Court also accepted that as an organ of state Eskom is bound in terms of section 154(1) of the Constitution and may not impede a municipality’s ability to perform its obligation to supply electricity to its residents. Such actions exercised by Eskom will be administrative action; reviewable by the Courts on the grounds of legality, reasonableness and procedural fairness under section 33 of the Constitution and PAJA.
However, Eskom raised several defences and challenged the relief sought. It also raised a plea of mootness as a preliminary issue based on the fact that after reaching agreement on payment proposals there is no longer a live controversy. Eskom expressly stated that it will not be implementing its decisions to interrupt bulk electricity supply.
The Court accepted this defence; the impugned decisions were declared to be moot and some of the declaratory relief non-ripe. A case is moot and therefore ordinarily not justiciable if it no longer presents an existing or live controversy. Courts must avoid giving advisory opinions on matters in the abstract.
As a balancing gesture the Court ruled that it would be in the interests of justice not to award costs against the unsuccessful applicants. They acted in their own interest to vindicate the constitutional rights of themselves and others but also in the public interest. The Court noted that representative litigants should not be discouraged from pursuing constitutional claims for fear of costs.
The Court of Appeal pronounced on the Extent of Judicial Review
The NERSA Case involved an appeal against an earlier judgment of the Gauteng Division, Pretoria, of the High Court, regarding the granting by NERSA of electricity tariff increases to Eskom. In March 2016 NERSA approved an additional 1,4 per cent increase in the electricity tariff, over and above an earlier, eight per cent increase, that Eskom could impose on its customers in relation to the 2013/2014 financial year. Six private companies, consumers and users of electricity affected by the tariff increase, (Borbet, PG Group, Crown Chickens, Agni Steels, Autocast South Africa, and Autocast Port Elizabeth) and the Nelson Mandela Bay Business Chamber successfully challenged the additional tariff increase in the Pretoria High Court.
The Pretoria High Court reviewed and set aside the decision taken by NERSA, on the basis that it had failed to follow its own statutorily based Multi-Year Pricing Determination Methodology (MYPDM), and the provisions dealing with adjustments to already approved tariffs through a mechanism called the the Regulatory Clearing Account. (RCA).
The judgment of the Supreme Court of appeal starts of by noting that “because of historical inefficiencies leading to what South Africans have come to know as load shedding – a euphemism for electrical power cuts – and because of extensive public debates concerning its competency, Eskom has attained a level of unpopularity in the public eye. In the present case, however, the question is whether NERSA duly discharged its statutory obligations. If it did then Eskom was entitled to charge the tariffs it authorized.”
A detailed discussion of NERSA’s statutory framework (the Electricity Regulation Act 4 of 2006 (ERA)), the Multi-Year Price Determination Methodology (the MYPDM), and the Regulatory Clearing Account (RCA) are then provided. The decision to grant the appeal by NERSA and Eskom involves the limits of judicial review of government policy. Technically this case was concerned with the question of the proper adjudication of an RCA application.
The MYPDM has been developed for the regulation of Eskom’s required revenues. It forms the basis on which NERSA will evaluate the price adjustment applications received from Eskom. The MYPDM does not preclude NERSA from applying reasonable judgment on Eskom’s revenue after due consideration of what may be in the best interest of the overall South African economy and the public. It allows NERSA latitude to exercise “reasonable judgment” after due consideration of what may be in the public interest. In June 2015 NERSA decided to decline the application on the basis that the MYPDM3 did not provide for a ‘selective reopening’, but stated that Eskom could resort to the risk management control and pass-through mechanism which is described as the “Regulatory Clearing Account” (RCA).
The public participation process is an important aspect of the overall system. On this aspect it is found that “the public participation process leading up to the decision was extensive and interactive... the decision making by NERSA was well motivated and detailed.”
Several important basic principles are stated in this judgment.
The applicable statutory framework and procedures impose certain obligations on licensees, but they also recognise that these obligations may not always be met and that corrective or remedial measures on the part of NERSA might ensue. What they are to be is entirely within NERSA’s compass.
The imposition of sanctions for non-compliance by a licensee with its licence obligations or the condonation thereof are fully within NERSA’s remit. The contention that the failure by Eskom to supply quarterly reports vitiates the entire RCA process is inconsistent with the regulatory and licencing structure provided for by the legislative framework in question. To argue otherwise would render nugatory the entire statutory scheme. The original applicants misconstrued the role of NERSA as Regulator.
This is a case in which there must be a degree of judicial deference to a specialised administrative body engaged in an administrative action. A Court should be careful not to attribute to itself superior wisdom in relation to matters entrusted to other branches of government. It should thus give due weight to findings of fact and policy decisions made by those with special expertise and experience in the field.
Eskom is a strategic national asset. What is required from it is optimum efficiency and accountability. NERSA and its sole shareholder, the government, are tasked to ensure that result. Those are matters that have to be addressed prospectively by NERSA and with government oversight. They are matters beyond adjudication.
State owned enterprises must withstand the impulse to immediately resist constitutionally permissible judicial scrutiny. This includes resistance to making information available that rightly belongs in the public domain. They are, through the State, owned by the nation.
 Case numbers 99984/2015, 4545/2017, 3078/2017, 19819/2017, 24 May 2017.
 ZASCA 87 (1288/2016 & 1309/2016) (6 June 2017).
In terms of Schedule 2 of the Public Finance Management Act (‘the PFMA’) and section 239 of the Constitution.
 Sections 152 and 153 of the Constitution.
 Par 5 Afriforum Case and the authority cited there.
 In the period March 2016 to November 2016, total municipal debt owed to Eskom increased from R6 billion to R10.2 billion. As at the end of November 2016, twenty defaulting municipalities owed Eskom approximately R7.476 billion. AfriForum Case par 15.
 AfriForum Case par 23.
 Ibid par 25.
 AfriForum Case par 64.
 Ibid par 75.
 Ibid par 153.
 Ibid paras 78 -79.
 Ibid 109.
 Ibid par 169.
 Ibid par 21.
 NERSA Case par 2.
 Ibid par 18.
 Ibid par 21.
 Ibid par 54.
 Ibid par 102.
 Ibid 111.
 Ibid 119.
 Ibid 120.