Nersa’s methodology for increasing electricity prices is ‘unlawful’, business chambers argue

9 Jun 2022

Legally, SA’s energy regulator, Nersa, is obliged to approve annual electricity increases, but the method that the regulator uses to do this ‘does not comply with legislation’, an advocate for two business chambers argues.

Two business chambers have asked the Gqeberha High Court to set aside the methodology followed by the National Energy Regulator of SA (Nersa) in fixing annual electricity price increases.

The application has been brought by the Nelson Mandela Bay Business Chamber and the Pietermaritzburg and Midlands Chamber of Business against Eskom, Nersa and the City of Johannesburg.

Advocate Matthew Chaskalson SC, for Eskom, said his client was more of a “surrogate applicant” as it supported the application by the two business chambers.

Advocate Andrew Breitenbach SC said their argument is that Nersa does not consider the cost of supplying electricity or the efficiencies or inefficiencies in the municipal supply structures. Instead, Nersa based its guidelines for tariff increases on averages and norms “regardless of actual costs”.

Breitenbach said that legally, Nersa is obliged to approve annual electricity increases, but the method that the regulator uses to do this “does not comply with legislation”.

He said that by law municipalities can include a recovery of the cost of supplying energy and a reasonable margin of return on their investment in their price increases, but costs that are lost to inefficiencies within the municipality must be subtracted. He said charges for the continued improvement of electricity supply may be added if the municipality undertakes upgrades.

The basic requirements before Nersa can take this decision is that the regulator must be provided with accurate information, including a budget, a business plan and the amount of electricity that will be supplied, as well as information on maintenance, capital expenditure and other costs.

Breitenbach said that the way Nersa decides on these increases is unlawful. The regulator, for instance, only considers information from municipalities that wish to increase tariffs above a benchmark set by it. He said the regulator does not use individual municipalities’ information but focuses on average rates to be applied across the board, and this can allow for increases that are not related to actual costs.

In providing a response to these allegations in court papers, Breitenbach said, Nersa gave “evasive answers to straightforward facts”. He said Nersa had admitted it did not take the cost of supply into account.

“They have been using this method for well over a decade,” he added.

Chaskalson said one of the core issues in the case was the distinction between tariffs for electricity and surcharges. He said that, taking the Electricity Pricing Policy into consideration, it was clear that the benchmarking and guidelines used by Nersa were unlawful.

Benchmarking

It was common cause, he said, that the price of electricity determined by municipalities does not use the cost of supply as a starting point and that their price of electricity was “loaded with hidden surpluses”.

That was the big problem with Nersa using benchmarking to determine electricity prices, as this has “no relationship to the cost of supply. There has never been a set of tariffs based on the cost of supply.”

He said the original benchmarks and averages used by Nersa were based on municipal prices that included a 20% surcharge on the cost of supply and this had increased over the years.

“The money is used to subsidise other services,” Chaskalson said.

He used the example of the City of Johannesburg, which charges businesses R2.52 per kilowatt-hour while Eskom charges the same type of business R1.39.

“If we talk about the cost of supply, it would be difficult to imagine how it cost the municipality 80.4% more,” he said. “It is inconceivable.”

The court was set to hear arguments from Nersa and the City of Johannesburg on Friday. The court case follows submissions made by the Nelson Mandela Bay Business Chamber to Nersa, to have the municipality replaced by Eskom as the electricity provider to the metro.

In a letter signed by the chamber’s CEO, Denise van Huyssteen, businesses in the notoriously unstable metro expressed their concern over what Van Huyssteen called “the large-scale failures” by the metro to comply with its electricity provider licence conditions and requested that the municipality be replaced by Eskom as a service provider.

The metro is home to a variety of heavy industries connected to vehicle manufacturing, including foundries, tyre manufacturing and vehicle assembly plants, and also pharmaceutical companies and agricultural processing plants.

In her letter, Van Huyssteen highlighted the many failures of the Nelson Mandela Bay Metro (NMBM) in supplying electricity.

“Uncontrolled electricity faults and interruptions (unrelated to Eskom load shedding) are reaching alarming proportions in many areas. Theft and vandalism of municipal infrastructure is out of control and is causing relentless stress on the maintenance of the electricity infrastructure and is compromising the quality of supply,” the letter said.

“Increasing electricity losses of well above 20% through uncontrolled theft leave not only the electricity distribution function in financial distress but losses of such magnitude also pose a threat to the financial sustainability of the municipality itself. This further threatens delivery of other crucial municipal services. Losses of such magnitude cause further strain on paying customers where tariffs are used to compensate for losses well above the acceptable standards established by the regulator.

“In a recent meeting with representatives of the metro, it became clear that meter tampering has almost become a standard practice. The metro admitted that up to 40% of the meters are being tampered with. The presence of visible illegal connections and abuse of substations serves as depressing evidence of a collapsed electricity distribution function.

“The Chamber does not believe the required leadership or political will is present to resolve this situation in the short or even medium term. There appears to be no credible strategy or plans dealing with the ever-escalating situation of decline. The chamber equally does not see structures in place to enable an effective turnaround of the current municipal service delivery failures.”

She added that organised business is now guarding substations themselves and looking after infrastructure.

“The metro is not able, and has for many years been unable to provide such structures. The gradual decline of the quality of electricity supply leads to unacceptable strain on industry and business within the NMBM … Business will gradually disappear from the metro.

“Attracting investment in such an environment is an impossible task. The quality of basic service delivery in any municipality is a fundamental requirement for any business when deciding on any investment location.

“The metro should be an enabler for the local economy to prosper. Instead, it has become a substantial threat to the viability of business.”

She said Nersa should investigate if the metro’s licence to provide electricity should not be amended to appoint Eskom as its service provider and for electricity payments to be deposited into a separate ring-fenced account.

In its 2021/22 submission to Nersa, the Association of South African Chambers (Asac) said it was frustrated by the regulator’s unwillingness or incapability to bring a positive change to the municipal electricity supply industry.

“The 2022/23 consultation paper, unfortunately, reflects Nersa’s continued unwillingness to deal with non-compliance in municipal electricity supply and perpetuates Nersa’s own non-compliance,” its submissions read. “Asac regrets Nersa’s refusal to fulfil its role as a competent regulator and to serve the interest of the South African public.”

Like the Nelson Mandela Bay Business Chamber, Asac also highlighted that municipalities were a serious threat to business in South Africa. The association highlighted issues in the Emfuleni Local Municipality (Vanderbijlpark).

“Growing losses and electricity theft, neglected and vandalised infrastructure are the main issues affecting municipalities. In our submission in relation to Emfuleni, we declared that the situation in the municipalities amounts to a national disaster. It needs to be noted that out of 278 municipalities, only 27 produced a clean audit in 2021 and the general outlook of municipal functionality did not improve at all,” the submission continued.

“Asac particularly raised the issue of municipalities abusing their position as sole distributors of electricity by using electricity income from Nersa-approved tariffs for matters unrelated to the electricity distribution function … Lack of ring-fencing often leads to excessively high tariffs for which Nersa’s flawed guidelines are the perfect cover.

“Municipalities are not only a threat to the businesses they need to serve, but also form a substantial and continued threat to our principal electricity generator, Eskom. As at 30 September 2021, dysfunctional municipalities owe Eskom R40.9-billion. This situation has an unavoidable impact on end users being part of a dysfunctional supply chain.”

The association’s submission notes that vandalism, high tariffs and the abuse and misallocation of electricity fees threaten the continued supply of power to South Africa.

“Unfortunately for the South African public, the policy which Nersa seems to be adhering most to is that of denial, as reflected by Nersa’s persistent habit of ignoring obvious matters and pretending that they do not exist.” DM/MC

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