by Chris Yelland, managing director, EE Business Intelligence

The South African Local Government Association (SALGA) has submitted an application to the Pretoria High Court for a declaratory order that would give South African municipalities exclusive rights to administer, distribute and sell electricity throughout South Africa.

There are eight metropolitan municipalities, 44 district municipalities and 205 local municipalities in South Africa, the boundaries of which extend wall-to wall across South Africa. This means that municipal areas cover the entire landmass of South Africa.

If successful, the SALGA court action would require Eskom to obtain permission from and to enter into service delivery agreements (SDAs) with each of the municipalities in which the national electricity utility currently owns and operates its electricity transmission and distribution networks. Eskom says it will vigorously defend its rights in terms of the Electricity Regulation Act (ERA).

As South Africa’s national electricity utility, Eskom has had transmission and distribution licences from the National Energy Regulator of South Africa (Nersa) ever since the Regulator’s inception. Eskom supplies electricity directly to about 6,9-million customers in South Africa. These include about 6,7-million residential customers, 53 000 commercial customers, 3560 mining and industrial customers, 78 500 agricultural customers and 470 rail customers across the country.

Other organisations also hold distribution licences from Nersa, and are named as respondents alongside Eskom in the SALGA application to the Pretoria High Court. These include Sasol, AECI, South African National Parks, Mpumalanga Economic Growth Agency, West Rand Power Distributors, Vleesbaai Dienste, Damplaas Kragbron and Ithala SOC.

It is also known that a number of mines in remote areas of South Africa are supplied with power direct from Eskom for their own use, and that some of these mines also distribute electricity to associated local employee and mining community residential areas.

The ministers of Mineral Resources & Energy, Public Enterprises and Cooperative Governance & Traditional Affairs, and the Regulator, Nersa, are also named as respondents in the SALGA application.

SALGA’s court application seems to ignore the fact that many municipalities across South Africa are currently failing in their service delivery obligations. At grass-roots level, there is deep dissatisfaction by residents with service levels and quality of supply in these municipal areas, as evidenced by widespread and ongoing protests and civil unrest.

Many municipalities are in a state of dire financial distress, with associated failures in municipal administration, billing, revenue collection and asset protection. Domestic and business customers receiving power from municipal electricity distributors complain of exorbitant mark-ups on electricity procured from Eskom, and extensive and ongoing power supply outages as a result of old and poorly maintained municipal electricity distribution infrastructure.

The weak financial and administrative state of many municipalities across South Africa is such that not only are they unable to collect revenue adequately from their customers, but they are also unable or unwilling to pay for the electricity they procure from Eskom. Currently, municipal arrear debt to Eskom by municipalities exceeds R40-billion, and this is rising unabated, at a rate of about R8-billion a year.

As a result, Eskom has been forced to engage in what is euphemistically known as “load reduction”. This involves cutting electricity supply to offending municipal areas during certain hours of the day, both as a credit control mechanism, and to avoid overloading of Eskom’s power system by customers who do not pay for the electricity they use.

All of this is proving massively disruptive to the operations of businesses receiving power from municipal electricity distributors, and results in loss of revenue, productivity and jobs, and an inability to grow and adequately serve South Africa’s needs for economic recovery and growth following the Covid-19 pandemic.

It appears quite clear that SALGA’s application is motivated primarily by the ambitions of local government structures to raise the price of electricity across South Africa to the levels charged in municipal electricity tariffs. Furthermore, municipalities want to be able to apply levies and surcharges on the sale of electricity across South Africa, including on direct electricity sales by Eskom.

SALGA acknowledges that commercial and industrial customers supplied directly by Eskom get electricity at significantly lower prices than electricity provided by municipalities. SALGA complains this undercutting of municipal tariffs by Eskom is discriminatory.

“Eskom's customers often pay less for electricity than their counterparts who receive electricity from municipalities. The total revenue forgone by municipalities in 2019, for example due to Eskom's supply within the municipalities [area of] jurisdiction, is R162,36-billion”, says SALGA.

“What this means on a business level is that a business in an Eskom supplied area will pay less for electricity than one that is in an area supplied by a municipality. Effectively the former business will operate at an unfair advantage over one that is supplied by the municipality”, continues SALGA.

SALGA further complains that municipalities lose out by not being able to apply levies and surcharges on sales of electricity by Eskom to its own customers, as municipalities do when supplying electricity to their own customers. “In 2019, municipalities lost an opportunity to generate almost R6-billion in surcharges because of Eskom's direct supply”, it says.

SALGA also bemoans the fact that municipalities cannot cut off electricity as a credit control measure against customers in Eskom areas of supply who may be in arrears on their municipal rates, water and sanitation accounts. This, says SALGA, causes lower revenue collection levels by municipalities for these other municipal services, and results in a loss of overall municipal revenue.

It would seem, if one is to believe SALGA, that the answer to all this is to require Eskom and all other licenced electricity distributors to fall under the executive control of the relevant municipality in which electricity customers reside.

This would give municipalities the right to require an SDA from all electricity distributors, and to charge Eskom and other licences electricity distributors for the right to operate in municipal areas (i.e. throughout South Africa). It would also enable municipalities to apply levies and surcharges on the sale of all electricity in South Africa to fund and cross-subsidise all manner of municipal costs, activities and services.

SALGA indicates that municipal and local government structures have been trying to get Eskom to agree to this since 2013. However, SALGA says the national electricity utility has “blown hot and cold on the issue of SDAs with municipalities” for years, and has been recalcitrant by failing to conclude and enter into SDAs. “Regrettably, all these engagements were futile because of disagreements between SALGA and Eskom officials”, says SALGA.

While Eskom, Sasol, AECI and other licenced electricity distributors have indicated their intention to oppose SALGA’s application, it appears that, to date, none have actually submitted their opposing papers to the court, which according to SALGA’s notice of motion, should have been done by mid-October 2021.

Furthermore, the spokespersons of the ministers of Minerals & Energy, Public Enterprises and Cooperative Governance & Traditional Affairs, and of Nersa, all remain “shtum” when asked whether, as named respondents, they will be opposing SALGA’s application.

This matter is clearly such a hot potato, with massive financial impacts on the South African economy, and on electricity customers both large and small currently supplied directly by Eskom, that none of the relevant ministries and Regulator are prepared to grasp it.

From the extended silence, it seems pretty clear that machinations are now underway behind the scenes, and that no-one is willing to stick their necks out publicly with a statement on the issue, least of all to actually make a decision or allow the court to rule on the matter with a declaratory order.

Perhaps the political solution will be to kick the can down the road for another decade or so.