Eskom has announced a staggering loss of R23.9 billion for the financial year ended March 2023. (Waldo Swiegers/Getty Images)
Eskom has argued in papers filed in reply to the Democratic Alliance’s court challenge on looming electricity tariff increases that the challenge is built on a flawed understanding of how increases are calculated, and it would be catastrophic for the company and even the country if the hikes were not implemented come April.
The DA filed a two-part application in the Pretoria high court last month.
In the first part, it seeks an interdict barring Eskom from implementing the price increase on 1 April pending the outcome of the second, in which it asks the court to declare not only the price hike but the state’s response to the power crisis, including load-shedding, as unconstitutional.
In a founding affidavit, DA leader John Steenhuisen said Nersa had abandoned its earlier policy of compelling Eskom to subsidise electricity by charging below-cost tariffs and the effect of a cumulative increase of more than 30% over the two years would be to rob poorer consumers of the right to access the energy source.
The price hikes would apply to mining houses and indigent households alike, he stressed.
“Nersa’s decision means that on 1 April 2023, people will no longer have access to electricity, when on 31 March 2023 those people had that access.”
In its answering affidavit, signed by Eskom chief financial officer Calib Cassim, the company said: “The DA’s application proceeds from the incorrect premise that Nersa has abandoned a lawful policy to require Eskom to charge ‘below-cost tariffs.”
The reality is, it stressed, that Nersa is legally obliged to fulfil its functions in terms of the Electricity Regulatory Act, which stipulates on tariff principles in section 15(1)(a) these “must enable an efficient licence to recover the full cost of its licensed activities, including a reasonable margin or return”.
The Electricity Pricing Policy (EPP)adopted in 2008 cannot and did not dislodge or override section 15. “On the contrary, it confirms that overall tariffs must be cost-reflective,” the affidavit said.
The question of the extent to which the taxpayer should subsidise electricity use was a separate one which the government, and not Nersa, had to answer. It did, for example, by introducing relief for the poor through the provision of 50kWh of free basic electricity per month.
Eskom said the argument that the tariff increase of 18.65% set to take effect from April would spell the end of subsidised power for the poor was further flawed in that the actual rates that consumers would pay, including the subsided rates that would apply to the poor, have not yet been calculated.
The DA had also failed to take into account that a ruling by the high court in November compels municipalities to excise unlawful, sometimes exorbitant, mark-ups charged hitherto, meaning that for municipal clients, tariffs would not increase commensurately with the Eskom tariff increase.
“This is because the municipal tariffs would have to strip out all elements of the current tariffs that are in excess of legitimate cost recovery-based tariffs,” Eskom said.
“Most of the poor consumers mentioned in the founding affidavits are municipal electricity consumers.”
Therefore, Eskom said, the premise that Nersa’s tariff regime for the next three years will impact the poor particularly hard, was plainly wrong. So was the assumption in its papers that should the court grant an interdict against the implementation of the tariff increases, Eskom could simply continue to charge the current rates.
This could not happen, the utility said, because Nersa’s revenue decisions are a necessary precondition for the determination of the tariffs that Eskom may impose in any particular year.
“If the impugned revenue decision is interdicted and cannot be implemented, Eskom will not be entitled to charge tariffs for electricity for the 2023-2024 financial year.”
“This will be an unmanaged disaster and will fundamentally threaten the stability of electricity supply, not to mention the economy as a whole.”
Eskom argued that it had been unable to perform adequate maintenance of its plants or proceed at speed to build new ones, leading to sustained load-shedding, precisely because electricity prices have been kept at artificially low levels, despite the EPP calling for prices to become cost-effective within five years. Historically low prices and the failure to bring these to a cost-reflective level was also the main reason for Eskom’s staggering debt burden of R422 billion.
“Indeed, the premise of the DA’s application is that things ought to remain this way.”
If the DA had a problem with the user-pay model enshrined in the law, Eskom submitted, it should lobby to change the law rather than to ask the court and Nersa to approach electricity tariffs “on an unlawful basis”.
The grounds for review set out by the official opposition party are that the decision was socially regressive, that the administrative process leading to it was flawed and that it was irrational because Nersa could only authorise increases to help the utility recover revenue if it was financially sustainable.
Differently put, the DA said, since tariff increases will not avert Eskom’s demise, and the government has no other plan to save the entity, there was no point in extracting additional revenue from consumers.
“It is not within Nersa’s mandate, or within Nersa’s powers, to refuse to adopt a cost-based tariff on the purported premise that it would be throwing good money after bad,” Eskom argued in response.
However, it said, Nersa’s reluctance to carry political responsibility for higher tariff increases has infected the regulatory clearing account process to the extent that it, firstly, delayed determining the due balances and, secondly, under-determined the balances. Since these balances do not accrue interest, Eskom said, it has effectively been forced to give vast interest-free loans to consumers.
This again applied to the April increase which should amount to R69 billion in revenue for one financial year, but of which all but R6.7 billion ought to have been paid between the 2019 to 2021 financial years. The resulting revenue shortfall, Eskom warned, risked turning the company’s liquidity issues “into a national fiscal crisis” because it would be harder not only to raise loans but to service current debt.
“In this context, tariffs which do not enable Eskom to recover its costs pose a material risk of potentially catastrophic consequences, not only for Eskom but also to the South African national economy.”
Since Eskom’s debt is interlinked, a default on one facility can trigger defaults on other facilities, with outstanding capital and interest amounts due becoming potentially payable immediately. The same applied to the national debt, in part because of the extent to which Eskom has relied on government guarantees.
“The manner in which South African state debt is interlinked, so that a failure to meet any demand made on South Africa, by any creditor of Eskom with the benefit of the South African state’s Eskom guarantees would also potentially trigger acceleration of the full liability of South Africa’s own debt which can be accelerated if any such demand is not met when made, potentially exposing over R4 trillion of South African debt of which R412 billion is international debt.”
And this, it said, undermined the DA’s claim that the tariff increase was unconstitutional.
“Thus, logically, it cannot be true that it could be unconstitutional if the average tariff is equal to the prudent and efficient cost of rendering the product or service — because keeping the average tariff lower than that, is self-evidently harmful and inappropriate.”
‘Load-shedding is unconstitutional’
Eskom, President Cyril Ramaphosa and the ministers of energy and public enterprises are due to file court papers in response to a separate court challenge in which 19 interest groups seek to have load-shedding declared unconstitutional and to force the state to field credible plans to mitigate the crisis.
The parties also seek to have the tariff regime for the coming two financial years set aside. The litigants, who include the United Democratic Movement and other opposition parties, have said that the declaration of the state of disaster will not affect their case.
In the meanwhile, the Organisation for Undoing Tax Abuse (OUTA) has filed papers asking the high court to review and set aside the declaration of the state of disaster. It is asking the court for an interdict barring the government from issuing or implementing any regulations in that regard, pending the hearing of the application.
OUTA argues in its founding affidavit that the declaration was unlawful because the Disaster Management Act expressly did not apply to occurrences that can be dealt with effectively in terms of other national legislation.
This was the case with the electricity crisis as section 34 of the Electricity Regulation Act, 4 of 2006 (“the ERA”) enabled the minister of mineral resources and energy to enter into agreements for new generation capacity to ensure the continued uninterrupted supply of electricity.
Sections 17 and 18 of the National Energy Act also allowed emergency steps to be taken to ensure the security of energy supply, while the Public Finance Management Act made provision for funding mechanisms to contend with emergencies, including allocating money from the national revenue fund.
OUTA said the president and the minister of cooperative governance had hence “acted beyond their powers in classifying a national disaster and declaring a national state of disaster in circumstances where there is adequate existing legislation and contingency measures in place to deal with the electricity crisis”.
It added that there was no evidence that a state of disaster would remedy the power crisis.
“There is no indication whatsoever that the declaration of a state of national disaster will make any difference to the situation, other than to open up the procurement process and method of delivery to a potential new wave of corruption similar to what was seen during the Covid-19 national state of disaster.”
Ramaphosa’s assurance that the auditor general would continuously monitor expenditure on measures taken in terms of the state of disaster to guard against the abuse of funds was of no comfort, OUTA said.
“As was seen during the Covid-19 disaster where the AG was also tasked with real-time auditing, the AG could not prevent corruption, irregularity, and illegality as it occurred.”
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