Brace for above inflation electricity hike and municipalities’ power grab

Friday is the cut-off to submit written comments to the National Energy Regulator of South Africa (Nersa) before the price of electricity is hiked more than 20%.

Last year, Eskom applied to Nersa for an electricity price increase of 20.5% set to commence at the beginning of April 2022. The cash-strapped power utility made the application as part of its fifth multi-year price determination revenue application for the 2023 to 2025 financial years, which Nersa rejected in September last year. 

In October, Eskom approached the high court to order the energy regulator to consider its application, which the power utility has maintained is part of its efforts to ensure the cost of electricity reflects the cost of providing it. 

“This has been a journey that Eskom and Nersa have been on for many years,” the utility said in its application.

“Thus the average price of electricity still does not cover the full efficient costs and cost of capital that are incurred. The implication is that all electricity consumers have been receiving a subsidy and will continue to do so during this application period.”

Nersa opposed Eskom’s court bid, but in December the high court ordered the regulator to consider the utility’s revenue application for the 2022/23 financial year. 

The court order, Nersa noted in a consultation paper, provides the regulator with an opportunity to exercise its mandate in terms of tariff determination, considering the impact of its decision on the economy and the opportunity to revisit its regulatory framework.

The remaining two years’ application is still the subject of a court review application. The proposed price increases for the three years are 20.5%, 15% and 10% respectively.

According to Eskom’s revenue application, of the 20.5% price hike, 12.81% will go to the procurement of energy from independent power producers, 1.09% will go towards paying the carbon tax and approximately 7% to “elements under Eskom direct control”.

Nersa’s consultation paper, published last month, puts Eskom’s tariff increase at 54.35% based on sales. But the utility has since accused the regulator of misrepresenting its revenue application “to include various matters that are still under consideration by both the courts and by Nersa itself”.

In its paper, Nersa asks stakeholders to take into account the fact that Eskom has conceded that there has been fraud and corruption. “Consequently, the allowed revenues must not be spent imprudently — in 2021 alone, more than R3-billion in procurement malfeasance has been exposed in the press.”

On Thursday, Cape Town mayor Geordin Hill-Lewis said the metro rejects the proposed price hike, calling it “unfair, unaffordable and unjustified”. 

“Our residents are faltering under the burden of the rising costs of energy, fuel, food and basic consumer goods … Despite paying more for power, South Africans have experienced an unreliable electricity supply – 2020 and 2021 were two of the worst load-shedding years on record,” Hill-Lewis said in a statement, revealing he had written to Eskom chief executive André de Ruyter about the matter.

Chris Yelland, an energy expert, said the reality is that consumers are going to be faced with a price increase on 1 April that is significantly higher than inflation. 

“Whatever the final decision is, it will put pressure on the consumer, industry and business. Eskom will argue that if it does not get the price increase the government will just have to give them a higher bailout, which will basically come from the taxpayer. So, either the customer will pay or the taxpayer will pay. We are caught between the devil and the deep blue sea,” Yelland said. 

Just as Nersa has been told to consider Eskom’s tariff hike, the high court will soon mull whether municipalities should be granted exclusive rights to distribute electricity. 

If the court application is successful, municipalities would be empowered to apply surcharges on electricity in areas that were previously buying power directly from Eskom at a lower price.

Last September, the South African Local Government Association (Salga) filed an application at the Pretoria high court for an order declaring that municipalities have the exclusive authority to distribute electricity within their jurisdictions. Such an order would cut Eskom out as a direct supplier to users.

In an affidavit, Salga chief executive Xolile George noted that during apartheid muncipalities bought electricity from Eskom in bulk and resold it to residents. Where municipalities did not exist — such as in rural areas and townships — Eskom supplied electricity directly to residents.

But when the distinction between non-municipal and municipal areas fell away in 1996, in some jurisdictions Eskom and the municipalities ended up distributing electricity simultaneously. In some of those areas, George said, Eskom is using municipal infrastructure to distribute electricity without paying for it.

“Unfortunately for municipalities, there is a fundamental problem with the current dispensation,” George contended, adding that the system results in municipalities losing out on their largest source of income.

When Eskom distributes electricity within a municipality’s boundary, George said, “It does not pass a single cent back to that municipality. On the other hand, when a municipality distributes electricity, it buys the same in bulk from Eskom, adds a mark-up (subject to Nersa’s tariffs) and sells the electricity to residents.”

According to George, in 2019, municipalities lost an opportunity to generate almost R6-billion in surcharges because of Eskom’s direct supply.

Eskom’s distribution of electricity also means that customers serviced by the utility end up paying less than those who buy electricity from the municipality. George gives the example of Sandton and Alexandra, where residents in the former suburb buy electricity from Eskom and residents in the latter suburb buy power from the city.

“The upshot is that Sandton’s residents do not pay surcharges and therefore the provision of other municipal services is essentially subsidised by Alexandra’s residents who pay surcharges on electricity purchased from the city.”

When Sandon residents fail to pay their rates and taxes, their electricity cannot be cut off to encourage them to pay for services, George noted. However, Alexandra residents can be cut off.

As a solution to the problems that arise from the current electricity distribution system, Salga has proposed that Eskom should enter into service delivery agreements with municipalities. These agreements would mean that Eskom would be relegated to the role of service provider and the municipalities would be allowed to apply surcharges on electricity in all jurisdictions.

Yelland said, should Salga’s proposition be successful, it will have serious implications on the economy. 

“What it [Salga’s proposition] means is that the price of electricity is going to go up for many customers who currently get electricity from Eskom such as all these big factories and mines,” explained Yelland. 

“That will have a very serious impact on the economy, making a lot of businesses unprofitable which means they’ll end up paying less tax and some of them will close down and that will affect employment”.  

Earlier this week, business organisation Sakeliga announced it would apply as a friend of the court in the matter with the view of opposing Salga’s application.

Sakeliga contends that the monopoly on electricity supply that Salga wishes to bring about for municipalities “could be severely detrimental to end-users in decayed municipalities where the municipalities currently simply are not paying Eskom”.

If Salga is successful, Sakeliga said, end-users would be prohibited from purchasing electricity directly from Eskom and private suppliers, disrupting those relatively stable electricity supply schemes where municipalities are not a middleman.

“Municipal decay and failure to pay creditors such as Eskom … starkly indicates that end-users in problem municipalities should indeed not be obliged to buy services directly from municipalities that are bottomless pits of irregular and even criminal expenditure,” Sakeliga said in a statement.

Yelland explained that Salga’s application has not yet gone to court and that there is a long way to go before it gets resolved, possibly even reaching the constitutional court. 

“It is a constitutional matter because it involves the constitutional rights of municipalities to distribute electricity. I don’t think there will be a decision on this matter any time soon, maybe never,” said Yelland. “This dispute has been going on for 10 to 15 years already and there isn’t an immediate impact [on the price hike] that we can expect from this matter”.

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Sarah Smit
Sarah Smit
Sarah Smit is a general news reporter at the Mail & Guardian. She covers topics relating to labour, corruption and the law.
Anathi Madubela
Anathi Madubela is a business journalist with a keen interest in the retail sector.

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