Court to put spotlight on Madibeng’s ‘huge profits’ from electricity sales

The High Court in Pretoria will this week hear an application by several intensive energy users in the North West municipality of Madibeng that may have far-reaching implications for municipal tariff determination countrywide.

They allege that Madibeng is unlawfully making huge profits on electricity sales and using these profits to cross-subsidise other municipal services.

They are asking the court to review and set aside energy regulator Nersa’s approval of Madibeng’s tariffs for 2013/14, 2014/15 and all subsequent years; on the basis that Nersa’s decision was unconstitutional, unlawful, irrational and that Nersa acted beyond its mandate (ultra vires) when taking the decision.

Potentially precedent-setting

If the application succeeds, electricity users elsewhere may similarly challenge the tariffs their municipalities charge for electricity sales.

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Nersa and the Madibeng municipality are both opposing the application.

Similar pending legal challenges

This comes against the backdrop 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 tariffs.

No date has been set for this application to be heard.

In the meantime, Nersa is finalising a discussion document about the guideline it will set for municipal tariffs that will apply from July 1.

Dispute

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

Each municipality still has to apply for its own tariffs and is only allowed to charge the tariff Nersa approves.

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

The Madibeng applicants however argue that this practice does not comply with the Electricity Regulation Act (ERA), which provides for electricity tariffs to be cost-reflective. An efficient licensee, in this case the municipality, is entitled to recover from tariffs its cost of supply as well as a reasonable margin.

According to the intensive users Nersa’s decisions were not cost-based and it is impossible to calculate a reasonable return without knowing what the efficient cost is.

They argue that Nersa is in fact allowing the municipality to impose a surcharge without being authorised to do so.

A municipal surcharge may only be imposed in compliance with the Municipal Fiscal Powers and Functions Act, which does not authorise Nersa to approve such surcharges.

‘Use Eskom data’

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

They also allege that Nersa’s tariff determinations were procedurally unfair, because the regulator does not require any public participation regarding the municipal tariff application.

Applications from municipalities that are within the guideline, and in line with the benchmark on three different tariffs, are simply approved without any public participation.

They further argue that Nersa failed to apply a prudency test that took into account that the municipality’s electricity losses were sky-high – as much as 41.5% against a benchmark of 10% in 2011/12.

Nersa’s response

Nersa in its heads of argument disputes that the decisions were taken unlawfully.

Nersa accuses the applicants of asking the court to second-guess Nersa and points out that this may put the separation of powers enshrined in the Constitution at risk.

Nersa says the applicants are misunderstanding the legal regime, and accuses them of taking the law into their own hands by underpaying the electricity bills for years after reaching an agreement to that effect with Madibeng.

The applicants obtained an interdict earlier to prevent Madibeng from disconnecting their power supply pending the finalisation of this application.

By underpaying, Nersa says they disregarded the Nersa-approved tariffs.

Nersa argues that the earlier tariff determinations are no longer in force and cannot be reviewed.

It alleges the municipality did provide enough information for the decision to be based on its cost of supply, and says that while it does not have enough time during the process of tariff determination to verify the information provided by the municipality, it has “checks and balances” in place.

Nersa further states that it did take Madibeng’s high electricity losses into account.

It further states that municipalities are allowed to redirect some of their electricity income to other services.

They are only expected to ringfence income that is above the Nersa-approved guideline.

Nersa’s electricity sub-committee is scheduled to approve the consultations document dealing with the municipal guideline for the coming financial year on March 22, after which it will be published for public comment.