NERSA Approved Price-Fixing Methodology for Municipal Electricity Charges Unlawful

2022, Articles, Municipal Law, News

Article by Chantelle Gladwin-Wood (Partner) and Caitlin Theart (Class Action Administrator)
20 December 2022

INTRODUCTION

The case of Nelson Mandela Bay Business Chambers NPC and others V National Energy Regulator (NERSA) and others considered one very important question: Is NERSA’S municipal electricity tariff price-fixing methodology (the method they use in the calculation of municipal electricity tariffs) lawful?

BASIC FACTS

Certain customers argued that the method that NERSA uses to approve the municipal tariffs submitted to it by municipalities each year for electricity charges (which are passed on to the municipal customers, as end users), was unlawful.

IS NERSA’s DECISION TO APPROVE A MUNICIPAL TARIFF SUBMITTED TO IT BY A MUNICIPALITY, EVEN IF REVIEWABLE IN TERMS OF THE PROMOTION OF ADMINISTRATION OF JUSTICE ACT (PAJA)?

In short, the court said no. The court found that NERSA’S methodology is merely a guideline, and that this in turn means that it does not have a direct external effect on the parties in question. It therefore cannot be accepted as “the final decision”, therefore it can change and will not always be the foundation/basis of any decision. As a result, the court found that such a decision cannot constitute any administrative action within the meaning of PAJA and therefore may never be reviewed in terms of PAJA.

LEGALITY REVIEW

However, the court found that a policy, or guideline, including the “methodology” utilized by NERSA to approve municipal electrical tariffs, can be reviewed under our common law (administrative law) for legality. On the basis the court looked into the methodology and made a finding on its lawfulness.

THE MAIN POINT OF THE APPLICATION – IS THE TARIFF APPROVAL METHODOLOGY LAWFUL?

The basic challenge put up was that when NERSA approves tariffs it looks at the average costs put forward across all municipalities, right across RSA, and that this is unlawful because the costs vary so much from one jurisdiction to the next, that NERSA must only look to the costs involved in that municipality when deciding whether to approve a tariff for that municipality.

In short, NERSA shouldn’t’ make municipality A pay more for electricity because it happens to be more expensive in municipality B for that municipality to supply electricity to customers in its jurisdiction (as there could be many reasons for it being more expensive).

The argument goes that this method of looking at average costs (instead of the unique costs in each municipal jurisdiction) violates the principle of tariffs being cost reflective.

NERSA AND ITS OLD SCHOOL METHODS

Although NERSA is trying to get its licensees (including ESKOM and municipalities) to “migrate” to the “cost of supply” (COS) method of calculating tariffs (which is a legislated aim), at the time of the court case NERSA was still using the old school (and potentially unlawful) methodology of “benchmarking” (using an average across all municipalities).

THE LEGISLATIVE MATRIX OF ELECTRICITY PRICING

The legislative matrix on how electricity ought to be priced is very complex, and we won’t go into it here. But in brief, the court looked at the information that NERSA asked municipalities for when deciding on whether their tariffs were appropriate or not. The court found that NERSA doesn’t even look at that municipality’s cost of supply. It looked only at national averages.  The court held that our laws require municipalities to have separate audited accounts for a reason – precisely so that NERSA can have a look at them (unique to each municipality) when deciding whether the proposed tariff by each municipality is lawful because, they all tariffs are meant to be cost reflective of the costs of supply in that municipality. Therefore, the court held that NERSA’s “methodology” of approving tariffs by using an average cost of all municipalities in supplying electricity across RSA (“benchmarking”), is unlawful.

THE ISSUE OF CROSS-SUBSIDIZATION

The issue of cross-subsidization is then discussed. It is not clear precisely why this came in, but we suppose it was because someone said, “the ERA allows us to cross-subsidize, and NERSA looking at the cost of supply across all municipalities in RSA somehow equates to lawful cross-subsidization”. The court rejected this – cross subsidization can happen across different categories of consumers, but it must not discriminate unfairly across those categories. NERSA could not show that it had given any consideration to this argument when assessing tariff applications, and so it was promptly decided by the court that NERSA had not properly considered whether this would be discriminatory to the customers affected by cross subsidizing across the whole of RSA. This point is a bit fuzzy in the judgment and others might have a different interpretation. This is simply ours.

MUNICIPALITY’S POWER TO LEVY SURCHARGES

Lastly it was noted that due to a municipality’s power to levy surcharges for electricity, this allowed municipalities to ultimately charge consumers more than what NERSA approves (i.e., it tacks on the surcharges in terms of a different piece of legislation – municipal tariffs – over and above what it is allowed to charge in terms of the ERA and as approved by NERSA). This too makes NERSA’s method of approval unlawful – because it does not first remove the surcharges from the tariffs approved when looking at the amounts requested to be approved each year – it basically rubber stamps higher charges to customers than allowed in law (again, this is just a simplification of one interpretation of the judgment – others might differ).

CONCLUSION

In the end, the court made a final decision and declared NERSA’S methodology of approving municipal tariffs unlawful. NERSA was given a period of twenty-four months to attend to the correction of a lawful methodology. This means that the declaration of invalidity was suspended for a period of twelve months. After twelve months, all municipalities and NERSA are required to submit and calculate municipal electricity tariff applications on a cost reflective basis, unique to each municipality.