Nersa methodology for municipal electricity tariffs ‘unlawful, invalid’

Energy regulator Nersa has been sent back to the drawing board after the High Court in Pretoria declared the methodology it has been using for at least a decade to determine municipal electricity tariffs unlawful and invalid.

Moneyweb earlier reported that the business chambers of Nelson Mandela Bay and Pietermaritzburg approached the court for a declaratory order in this regard. Eskom supported the application.

The court on Thursday ruled in favour of the applicants and ordered Nersa to pay their costs as well.

According to tariff expert and instructing attorney for the chambers MC Botha, the ruling will bring an end to the practice of municipalities using electricity revenue to subsidise other services. It will force Nersa to scrutinise municipal tariffs and only allow efficiently incurred cost and ensure that cross-subsidisation between user groups is fair and transparent.

The court has given Nersa 12 months to rectify the situation, which means tariffs applicable from 2024/25 will be based on the cost of supply, as has been the case for Eskom all along.

Methodology weakness

For at least the past 10 years Nersa has determined municipal tariffs on the basis of what is referred to as a guideline and benchmark methodology.

Every year it published a guideline of the percentage by which municipalities would be advised to increase their tariffs. In addition, it published benchmarks for tariffs applicable to different user groups such as households, businesses and industry.

This would then be applied to the previous year’s tariffs without refence to the actual cost of supply.

As long as municipalities kept their increases within the guideline and benchmarks, Nersa generally approved the tariff applications without public participation.

This, the court ruled, does not comply with provisions of the Electricity Regulation Act that a licensee (municipalities) must be allowed to recover from tariffs the cost of its efficient operations as well as a reasonable margin.

In terms of this methodology Nersa did not consider what a reasonable return would be and it did not consider the cost of supply, including the efficiency of every individual municipality.

It further failed to determine the cost of supply to each user group, as it is required to do before it can consider whether any cross-subsidisation is reasonable.

Peet du Plessis, former chair of the Chartered Institute of Government Finance Audit and Risk Officers, says the court rightfully declared the benchmarking tariff guideline unlawful because it lacks the necessary input as to the actual costs of individual municipalities in rendering the service.

“The judgment is fair in the analysis of the arbitrary approach by Nersa to have a one-size-fits-all approach without taking in[to] consideration the conditions of supply in each municipality,” he says.

“The cost-of-supply studies by municipalities is a must and should be implemented as soon as possible.”

The much-talked-about new methodology 

The ruling come shortly after Nersa missed its own deadline to draft a new methodology to determine the tariffs of all licensees, including Eskom. At a recent meeting of the energy regulator it was deferred to early next year.

The proposed new methodology is based on three principles, namely activity-based costing, type-of-use tariffs and marginal pricing, which according to Eskom are not regulatory principles at all and are wholly inappropriate.

Eskom stated during public hearings that this approach has never been used anywhere else in the world and the Energy Intensive User Group cautioned that it may result in a sharp increase in residential tariffs.

Read: Nersa’s plan would see households pay much more, says Eskom

The regulator has also regularly lost court challenges by Eskom regarding several tariff determinations.

Nersa spokesperson Charles Hlebela on Thursday said the regulator is currently studying the judgment and will advise on the way forward.

In response to the ruling Eskom said it is essential for electricity prices to municipal customers to be reflective of their actual electricity supply costs.

Hasha Tlhotlhalemaje, Eskom GM for regulation, says Nersa is encouraged to base its price adjustments on the cost-of-supply studies. “This is a matter of implementing its frameworks.”

She says sufficient time has been allowed for such an implementation. “This will be a parallel process to Eskom tariffs also migrating towards cost reflectivity as Nersa makes decisions.”