The High Court in Pretoria will this week hear a claim from several intensive energy users in Madibeng Municipality in the north-west which could have far-reaching implications for the determination of municipal tariffs across the country.

They allege that Madibeng illegally makes huge profits from electricity sales and uses those profits to subsidize other municipal services.

They are asking the court to review and overturn energy regulator Nersa’s approval of Madibeng’s tariffs for 2013/14, 2014/15 and all subsequent years; on the grounds that Nersa’s decision was unconstitutional, illegal, irrational and that Nersa acted beyond his mandate (ultra vires) in making the decision.

Potentially setting a precedent

If the application is successful, electricity users elsewhere can also challenge the rates their municipalities charge for electricity sales.

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Both Nersa and Madibeng Municipality oppose the application.

Similar ongoing legal challenges

This comes in the context of another pending application in which the Nelson Mandela Bay Business Chamber (NMBBC) and the Pietermaritzburg and Midlands Chamber of Business (PMCB) are challenging the methodology Nersa relies on to determine municipal rates.

No date has been set for the hearing of this application.

In the meantime, Nersa is finalizing a discussion paper on the guideline it will set for municipal tariffs that will apply from July 1.

Contestation

Nersa’s practice is to annually publish a guideline on the percentage increase in municipal tariffs over the previous year, as well as benchmark tariffs for each consumer group.

Each municipality still has to charge its own tariffs and is only allowed to charge the tariff approved by Nersa.

Madibeng’s disputed tariffs were also set in accordance with this practice.

Madibeng’s plaintiffs, however, argue that this practice is not in line with the Electricity Regulation Act (ERA), which requires electricity tariffs to reflect costs. An efficient concessionaire, in this case the municipality, is entitled to recover its cost of supply from the tariffs as well as a reasonable margin.

According to heavy users, Nersa’s decisions were not based on cost and it is impossible to calculate a reasonable return without knowing the effective cost.

They argue that Nersa actually allows the municipality to impose a surcharge without being authorized to do so.

A municipal surcharge can only be imposed in accordance with the Law on Municipal Fiscal Competences and Functions, which does not allow Nersa to approve such surcharges.

“Using Eskom data”

The applicants are asking the court to set aside the decisions and return them to Nersa. They propose that in the absence of a proper study to determine the cost of supply to Madibeng, Nersa use the cost of supply data on which Eskom bases its electricity distribution tariffs.

They also allege that Nersa’s rate determinations were procedurally unfair because the regulator does not require public input regarding the application of municipal rates.

Applications from municipalities that meet the guideline and meet the benchmark on three different tariffs are simply approved without any public input.

They further argue that Nersa failed to apply a conservatism test which took into account that the municipality’s electricity losses were exorbitant – up to 41.5% against a benchmark of 10% in 2011/12.

Nersa’s response

Nersa in his arguments disputes that the decisions were made illegally.

Nersa accuses the petitioners of asking the court to challenge Nersa and points out that this could endanger the separation of powers enshrined in the Constitution.

Nersa claims that the petitioners misunderstand the legal regime and accuses them of taking the law into their own hands by underpaying electricity bills for years after reaching an agreement to do so with Madibeng.

The plaintiffs obtained an earlier ban to prevent Madibeng from disconnecting their power supply pending the finalization of this petition.

By underpaying, Nersa says they did not consider Nersa-approved rates.

Nersa argues that past tariff determinations are no longer in effect and cannot be reviewed.

He alleges that the municipality provided sufficient information for the decision to be based on its cost of supply, and claims that although it does not have sufficient time during the rate determination process to verify the information provided by the municipality, it has “checked and balances” in place.

Nersa further states that it has taken into account Madibeng’s high electricity losses.

It further clarifies that municipalities are allowed to redirect part of their electricity revenues to other services.

They are only meant to delineate income above the Nersa-approved guideline.

The Nersa electricity sub-committee is due to approve the consultation document dealing with the municipal directive for the coming financial year on March 22, after which it will be released for public consultation.