After finding that the National Energy Regulator of SA (Nersa) had unlawfully fixed electricity prices for the City of Johannesburg, which at the time increased prices by 13.07%, without a cost of supply study being done, the Johannesburg High Court last week set aside City Power’s electricity tariffs for the 2019/2020 financial year.  

At the time, City Power had applied for an increase of 12.2%, but Nersa’s guideline was published at 13.07% and City Power’s application was then amended to the higher tariff.

When the guideline was published at the higher level (13.07%), City Power amended its application to get the bigger increase without any effort to justify the additional burden on consumers.

But the court said that this order will not have a retrospective effect, as it could have a disastrous impact on municipal finances, except in the case of the applicants, a group of companies, who will “resolve by mutual agreement their dispute regarding the applicable electricity tariffs payable for the 2019/2020 tariff year” and if this can’t be resolved it must be referred to Nersa for a decision.

A cost of supply study, by law, should be carried out every five years by every municipality and without it, Nersa cannot assess the cost of supply of different customer categories within the municipality. Nersa’s legal team argued that in the absence of a cost of supply study, the guideline and benchmarking method will be used when setting municipality tariffs.

In ruling against Nersa, Judge Elizabeth Kubushi pointed out that the regulator was compelled by law to ensure cost-reflective tariffs reflect all cost components, which could not be done without a cost of supply study.

In October, Kubushi also declared Nersa’s guideline and benchmarking method to be unlawful after an application brought by the Nelson Mandela Bay Business Chamber and the Pietermaritzburg and Midlands Chamber. Nersa was given a year to update its methodology. 

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At the time, Hasha Tlhotlhalemaje, the general manager for regulation at Eskom, said the power utility welcomed this decision.

“It is essential for electricity prices to municipal customers to be reflective of their actual electricity supply costs. Nersa is encouraged to base their price adjustments on the cost of supply studies. This is a matter of implementing its frameworks. It is felt that 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.”

Discussing the impact of not having a cost of supply study, Kubushi said in the latest judgment: “Nersa could also not assess whether there was discrimination that occurred between the customer categories and if discrimination did occur, whether such discrimination was undue or not.

“Nersa could, also, not assess whether there was any cross-subsidisation that occurred between the customer categories, and, if such cross-subsidisation did occur, whether or not it was deliberate and transparent. As such, the impugned decision is unlawful, unconstitutional and invalid,” she ruled. 

“Almost three municipal financial years had elapsed before this matter could be heard by this court,” Kubushi said.

The application was brought by the Casting, Forging and Machining Cluster of South Africa and its member companies. The Casting, Forging and Machining Cluster is a non-profit, industry-led collective of manufacturers in the core metals industry. Its members are high energy users including foundries, forgers and machine shops.

It was argued before the court that the increases approved by Nersa would have made businesses in this cluster unsustainable, with consequential disastrous effects for the local and broader economy.

Kubushi added that, according to court papers, the application was also brought on behalf of the public, “who had an interest in seeing the rule of law upheld”.

The decision to increase electricity tariffs by 12% in 2019/2020 was attacked on the following grounds in court:

• The guideline and benchmarking approach followed by Nersa caused it to act in an “irrational manner”, using irrelevant considerations and  the wrong benchmarks to measure City Power tariffs.
• Nersa did not consider the cost of supply of particular customer categories, and this rendered the determination of the tariffs illegal and inconsistent.
• Nersa acted unconstitutionally and unlawfully by approving the City Power tariffs without having regard to any cost of supply study, and without being able to assess whether the set tariffs were reflective of City Power’s overall cost of supply.

Isaac Mangena from City Power said they had noted the judgment by the Johannesburg High Court which found the Nersa tariffs charged in the 2019/20 financial year were irregular, unlawful and invalid.

“As an entity, we continue to engage with Nersa and the South African Local Government Association on a regular basis, and we will discuss the judgment and its implications. 

“City Power models its tariffs in the best interest of our customers. Our tariffs are determined by the cost of our bulk purchases and the cost to operate and maintain our distribution network.

“As things stand, most of our customers are contributing less to the network cost than [what] City Power pays. 

“As an entity, we always aim to be consultative in our approach through, among others, the integrated development plan process and other stakeholder engagements, and we follow the regulator-approved methodology by Nersa in determining our tariffs,” he added.

Charles Hlebela from Nersa said they were studying the ruling. DM/MC