Potential challenge looms over municipal electricity tariff hikes

Energy regulator Nersa will have to go back to court and ask for an extension of the 12 months it was given to develop a new methodology for municipal tariff increases to lawfully approve them in time for implementation on 1 July 2024.

This is according to MC Botha, an attorney at MC Botha Incorporated with specialised knowledge of electricity regulation and tariffs.

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Nersa’s electricity sub-committee is expected to “consider different options” at a special meeting this week.

If it decides to proceed with approving municipalities’ tariff applications for 2024/25 without any clear legal basis, it will be vulnerable to stakeholders taking the decisions on review and at risk of them being set aside.

That could leave municipalities without any increase, while they are subjected to Eskom’s 12.72% increase on their bulk purchases as well as rising financial pressures on other costs.

This, says Ratings Afrika analyst Leon Claassen, will leave local authorities, which already collectively owe Eskom more than R70 billion, in an even worse financial situation, with Eskom most probably seeing a further deterioration in municipal debtors.

Methodology issues

The current mess comes after the High Court in Pretoria ruled in October 2022 that the method Nersa has been using for more than a decade to determine municipal electricity tariffs was unlawful.

This method consisted of a guideline Nersa published every year to indicate to municipalities the percentage by which they may increase their tariffs. In addition, it provided tariff benchmarks for every user group, for example, residential, commercial, and industrial – further refined according to the relevant connection.

The result was that the base tariff was never recalculated according to cost and efficiency. Increases were merely piled on, irrespective of changes in the cost base.

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This was not in line with the requirements of the Electricity Regulation Act, which provides that a licensee like Eskom and municipal distributors are entitled to recover from consumers their efficient cost plus a reasonable margin.

Municipal tariffs are mostly higher than those of Eskom, where it sells directly to the end user, and there was an expectation that a reset of the municipal tariffs to reflect efficient costs would lead to a tariff reduction.

Joining cases

The business chambers of Nelson Mandela Bay and Pietermaritzburg brought the court application that set aside this methodology. However, these are not the only councils at loggerheads with Nersa about the matter.

The City of Cape Town wanted increases larger than the guideline in 2022/23 and 2023/24, arguing that its tariffs were not cost-reflective, but Nersa refused.

In 2022/23, the city adhered to Nersa’s decision while taking it on review, but in 2022/23, it proceeded to implement the higher percentage increase, thereby ignoring Nersa.

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Councillor Beverley van Reenen, the city’s mayoral committee member for energy, said the city has asked for the two cases to be joined and is awaiting a trial date.

“Nersa’s recommendation for 2023/24 would have resulted in the city’s energy service running a shortfall of more than R500 million, placing service delivery and the ending load-shedding programme at severe risk,” she said.

Cost studies requested, but few comply

In November, Nersa wrote to municipalities to inform them that it would not publish guidelines and tariff benchmarks this year, as it had done before. Instead, municipalities must base their applications on cost studies.

The regulator has been asking municipalities for years to do such studies, but Nhlanhla Gumede, Nersa’s full-time regulator member for electricity, admitted that very few have done so.

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Municipalities are further required by law to ring-fence their electricity business, but very few do.

Roleplayers also have serious doubts about the quality of the information that many municipalities give Nersa as well as the regulator’s capacity to evaluate it. They ask why the regulator fails to take steps against its licensees for this failure.

Is Nersa trying to bring methodology in through the back door?

In a January follow-up letter, Nersa sent municipalities a form to use for their tariff applications. The form provides several assumptions regarding cost increases and shows many similarities to the method declared unlawful. This has raised concern that Nersa is trying to bring it in through the back door.

This could be seen as contempt of court, says Morné Mostert, manager of municipal matters at AfriForum. The court specifically stated that it was not allowed to use the guideline and benchmark methodology from 2024/25 and that doing so would put it in contempt of court.

He says AfriForum will challenge any tariff increase that does not result from a lawful process.

‘Somebody must be held to account’

Deon Conradie, a part-time lecturer in tariffs at Wits Business School, agrees that Nersa’s only option is to return to court to ask for more time to develop a new methodology.

“Nersa did not attend to the court order. This has now led to a crisis, and somebody must be held to account,” he says.

The Association of South African Chambers (Asac), of which the business chambers of Nelson Mandela Bay and Pietermaritzburg are members, is also closely following the process.

“Nersa will be failing in its duties as a regulator and will arguably be in contempt of the court order, depending on how it goes about setting such unlawful tariffs,” says Asac chair Melanie Veness.

This article was republished from Moneyweb. Read the original here