Nersa not willing to accept municipal tariff ruling

Energy regulator Nersa announced on Sunday evening (30 June) that it will apply for leave to appeal the high court judgment delivered on 28 June compelling it to only approve municipal tariff applications based on cost-of-supply (CoS) studies, Moneyweb has learnt.

Nersa appeals court ruling

The ruling includes a list of 66 municipalities that did provide CoS studies. The balance of more than 100 municipal electricity distributors licensed by Nersa will accordingly not be allowed to implement tariff increases on 1 July, although their budgets are based on the increased tariffs.

This will be devastating for municipalities which, from the same date, will be subjected to an increase of 12.7% in the tariffs they must pay Eskom for their bulk electricity purchases.

The ruling came after an urgent application by AfriForum to declare the method for determining municipal tariffs Nersa set out in a notice to municipalities in January unlawful and invalid, and to compel the regulator to base approvals on CoS studies.

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This would be in line with a court order issued late in 2022 that declared the previous guideline and benchmark method used by Nersa for more than a decade unlawful. Nersa was given a year to develop a compliant methodology.

Most municipalities however failed to do CoS studies and there was no consequence management from Nersa as regulator.

In its notice to municipalities in January Nersa devised a method based on assumptions very similar to the previous, unlawful method. This was rejected in the latest court order.

The court has now given municipalities that have not provided these studies 60 days to submit compliant applications, which Nersa must consider within 30 days.

Legal process

The decision to proceed with an appeal is unusual in urgent proceedings and means Nersa must first get leave to appeal.

An appeal application usually suspends the order, which would mean that municipalities would theoretically be allowed to implement the planned tariff increases.

They are however also subject to provisions in the Municipal Finance Management Act (MFMA), which only allow the implementation of new tariffs at the beginning of each financial year on 1 July. The minister of finance may approve a departure of the provisions though.

ALSO READ: Potential challenge looms over municipal electricity tariff hikes

In the event of an appeal, Nersa is expected to persist with its argument that it has consistently required municipalities to base their applications on their CoS, whether those costs were determined in a formal CoS study or not.

In the meantime, it has become clear that CoS studies may lead to tariff increases, rather than the decreases that are widely expected.

Municipal tariffs likely too low

According to Hendrik Barnard, who specialises in cost studies and the calculation of electricity rates on behalf of municipalities, up to 70% of the 178 municipal electricity distributors may find that their tariffs are too low if they conduct a proper CoS study.

During the meeting of Nersa’s executive committee on 24 June, which was open to the public, several municipalities indicated that, based on CoS studies, their tariffs are not cost-reflective.

ALSO READ: More above-inflation increases for municipal services in SA will hit on 1 July

The Ba-Phalaborwa Local Municipality in Limpopo would need to implement a 61% increase to cover the cost of the service and a reasonable margin, which is the legislated prescript.

For Mbombela in Mpumalanga the figure is 31%, Kouga in the Eastern Cape 30%, and Mossel Bay and Matsikama in the Western Cape 19% and 18% respectively.

They all settled for increases of around 12%, realising that anything more would be unaffordable.

Nersa in each case instructed the municipalities to submit implementation plans to move towards cost-reflectivity, which would probably mean a phasing in over several years.

The Tshwane metro council’s current rates are closer to the mark and would require an increase of 12.7%, but the municipality also settled for a 12% increase after acknowledging that too much of its electricity is lost due to technical losses and theft.

Joburg cost study ‘justifies’ introduction of a fixed charge

Johannesburg’s electricity utility City Power used its cost study to justify its new fixed charge of R200 for households with prepaid electricity.

This means that someone who buys R500 worth of electricity at the beginning of the month will only receive units for R300 of that amount.

City Power has been trying for years to introduce this charge – which pays for the use of the network – to bring prepaid rates to the same level as those paid by consumers who buy on credit.

Nersa has repeatedly rejected this but, compelled to consider the results of the CoS study, had little choice but to approve the fixed charge this time around.

Quality of cost-of-supply data

There are, however, questions about the quality of the CoS studies that are being conducted.

The Nelson Mandela Bay Business Chamber said in a submission to Nersa about the metro’s rate increase that it considers the metro’s latest cost study, conducted in 2022, to be “fundamentally flawed because it contains numerous basic calculation errors, including the calculation of the Nelson Mandela Bay Metro’s revenue” from electricity rates.

According to the business chamber, Nersa cannot determine the council’s rates based on this CoS study.

Nhanhla Gumede, Nersa’s full-time regulatory member for electricity, also expressed concern about some of the figures provided by municipalities, including in cost studies, during the meeting on 24 June where municipal rate applications were considered.

Morné Mostert, head of local government affairs at AfriForum, said it is imperative that communities, civil society organisations and organised business scrutinise municipal CoS studies to ensure that municipalities only recover their true and efficient cost.

This article was republished from Moneyweb. Read the original here.