South Africa

POWER DISTRIBUTION OP-ED

Municipalities seek exclusive right to distribute electricity throughout South Africa – even on Eskom’s domain

(Photo: EPA-EFE / KIM LUDBROOK)

The South African Local Government Association (Salga) has submitted an application to the Pretoria High Court for a declaratory order that would give municipalities exclusive rights to administer, distribute and sell electricity throughout South Africa.

There are eight metropolitan municipalities, 44 district municipalities and 205 local municipalities in South Africa, the boundaries of which extend wall to wall across South Africa. This means that municipal areas cover the entire landmass of South Africa. 

If successful, the Salga court action would require Eskom to obtain permission from and to enter into service delivery agreements (SDAs) with each of the municipalities in which the national electricity utility currently owns and operates its electricity transmission and distribution networks. Eskom says it will vigorously defend its rights in terms of the Electricity Regulation Act. 

As South Africa’s national electricity utility, Eskom has had transmission and distribution licences from the National Energy Regulator of South Africa (Nersa) ever since the regulator’s inception. Eskom supplies electricity directly to about 6.9 million customers in South Africa. These include about 6.7 million residential customers, 53,000 commercial customers, 3,560 mining and industrial customers, 78,500 agricultural customers and 470 rail customers across the country. 

Other organisations also hold distribution licences from Nersa, and are named as respondents, alongside Eskom, in the Salga application to the Pretoria High Court. These include Sasol, AECI, South African National Parks, Mpumalanga Economic Growth Agency, West Rand Power Distributors, Vleesbaai Dienste, Damplaas Kragbron and Ithala SOC.

It is also known that a number of mines in remote areas of South Africa are supplied with power directly from Eskom for their own use, and that some of these mines also distribute electricity to associated local employee and mining community residential areas. 

The ministers of Mineral Resources and Energy, Public Enterprises and Cooperative Governance and Traditional Affairs, and the regulator, Nersa, are also named as respondents in the Salga application.

Salga’s court application seems to ignore the fact that many municipalities across South Africa are in fact failing in their service delivery obligations. At grassroots level, there is deep dissatisfaction by residents with service levels and quality of supply in these municipal areas, as evidenced by widespread and ongoing protests and civil unrest.

Many municipalities are in a state of dire financial distress, with associated failures in municipal administration, billing, revenue collection and asset protection. Domestic and business customers receiving power from municipal electricity distributors complain of exorbitant mark-ups on electricity procured from Eskom, and extensive and ongoing power supply outages as a result of old and poorly maintained municipal electricity distribution infrastructure. 

The weak financial and administrative state of many municipalities across South Africa is such that not only are they unable to collect revenue adequately from their customers, but they are also unable or unwilling to pay for the electricity they procure from Eskom. Currently, municipal arrear debt to Eskom by municipalities exceeds R40-billion, and this is rising unabated at a rate of about R8-billion a year.

As a result, Eskom has been forced to engage in what is euphemistically known as “load reduction”. This involves cutting electricity supply to offending municipal areas during certain hours of the day, both as a credit control mechanism and to avoid overloading of Eskom’s power system by customers who do not pay for the electricity they use. 

All of this is proving massively disruptive to the operations of businesses receiving power from municipal electricity distributors, and results in loss of revenue, productivity and jobs, and an inability to grow and adequately serve South Africa’s needs for economic recovery and growth following the Covid-19 pandemic.

It appears quite clear that Salga’s application is motivated primarily by the ambitions of local government structures to raise the price of electricity across South Africa to the levels charged in municipal electricity tariffs. Furthermore, municipalities want to be able to apply levies and surcharges on the sale of electricity across South Africa, including on direct electricity sales by Eskom.

Salga acknowledges that commercial and industrial customers supplied directly by Eskom get electricity at significantly lower prices than electricity provided by municipalities. Salga complains that this undercutting of municipal tariffs by Eskom is discriminatory.

“Eskom’s customers often pay less for electricity than their counterparts who receive electricity from municipalities. The total revenue forgone by municipalities in 2019, for example, due to Eskom’s supply within the municipalities [area of] jurisdiction, is R162.36-billion,” says Salga.

“What this means on a business level is that a business in an Eskom-supplied area will pay less for electricity than one that is in an area supplied by a municipality. Effectively, the former business will operate at an unfair advantage over one that is supplied by the municipality,” continues Salga.

Salga further complains that municipalities lose out by not being able to apply levies and surcharges on sales of electricity by Eskom to its own customers, as municipalities do when supplying electricity to their own customers. “In 2019, municipalities lost an opportunity to generate almost R6-billion in surcharges because of Eskom’s direct supply,” it says.

Salga also bemoans the fact that municipalities cannot cut off electricity as a credit control measure against customers in Eskom areas of supply who may be in arrears on their municipal rates, water and sanitation accounts. This, says Salga, causes lower revenue collection levels by municipalities for these other municipal services, and results in a loss of overall municipal revenue.

It would seem, if one is to believe Salga, that the answer to all of this is to require Eskom and all other licenced electricity distributors to fall under the executive control of the relevant municipality in which electricity customers reside. 

This would give municipalities the right to require an SDA from all electricity distributors, and to charge Eskom and other licensed electricity distributors for the right to operate in municipal areas (i.e. throughout South Africa). It would also enable municipalities to apply levies and surcharges on the sale of all electricity in South Africa to fund and cross-subsidise all manner of municipal costs, activities and services. 

Salga indicates that municipal and local government structures have been trying to get Eskom to agree to this since 2013. However, Salga says the national electricity utility has “blown hot and cold on the issue of SDAs with municipalities” for years, and has been recalcitrant by failing to conclude and enter into SDAs. “Regrettably, all these engagements were futile because of disagreements between Salga and Eskom officials,” says Salga.

While Eskom, Sasol, AECI and other licensed electricity distributors have indicated their intention to oppose Salga’s application, it appears that, to date, none has actually submitted their opposing papers to the court, which according to Salga’s notice of motion should have been done by mid-October 2021.

Furthermore, the spokespersons for the ministers of Minerals and Energy, Public Enterprises and Cooperative Governance and Traditional Affairs, and of the regulator, Nersa, all remain “shtum” when asked whether, as named respondents, they will be opposing Salga’s application.

This matter is clearly such a hot potato, with massive financial impacts on the South African economy and on electricity customers both large and small currently supplied directly by Eskom, that none of the relevant ministries and regulator is prepared to grasp it.

From the extended silence, it seems pretty clear that machinations are now under way behind the scenes, and that no one is willing to stick their necks out publicly with a statement on the issue, least of all to actually make a decision or allow the court to rule on the matter with a declaratory order. 

Perhaps the political solution will be to kick the can down the road for another decade or so.

Chris Yelland is managing director of EE Business Intelligence.

Copyright 2021 – EE Business Intelligence (Pty) Ltd. All rights reserved. This article may not be published without the written permission of EE Business Intelligence.

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All Comments 8

  • I’m selling properties where municipalities are providing power, and buying where they don’t. CoCT’s kWh charge is 100% (!!) more expensive than the Eskom rate charged at the south Cape dorpie I’m moving to.
    Moving toward Off-grid must also be no-bill, I don’t want to pay a basic electricity charge of R240/m as charged by many municipalities.

    • Pet Bug:

      council bylaws allow them to charge availability fees even if you are “off grid”. Use this to your advantage as it will save you a small fortune:

      Instead of pure off-grid, downscale grid to the smallest cheapest connection, typically 20A single phase.
      All that you have in your house that sees that 20A connection is a battery charger on the same battery bank that your solar system sees. Very simple installation. All your loads stay on DB that is now supplied by hybrid inverters off solar and battery instead of grid.
      You can very easily control when that 20A council connection is allowed to go active and incur kWh fees. Typical : it’s 4pm and the solar batteries are way below some rule you set eg 40%
      That connection will RADICALLY reduce both the size of solar and size of battery you need for your offgrid system. (you no longer need to size for all possible weather days because you could draw on the grid when you have to). A perfectly sized solar and battery system for truly offgrid would cost more than 2.5 times as much as one with a small grid connection. talking R150,000 saving.

  • SALGA must be careful what they wish for. The distribution business is a huge headache and money pit for Eskom. (Exhibit 1: Soweto) They wish to inherit this and without the requisite skills to manage it?
    The only way this can be made to work is if the utilities revenues are ring-fenced and only after properly run local government utilities generate surpluses, can these be paid over. NERSA should only license distribution to such prudently run electricity distributors. All others should default to Eskom.

  • The sole reason Eskom Distribution clients pay less than council clients 100m away is councils add 65% margin to what they pay Eskom. That 65% is spent on some good stuff, but also on stupidly bloated salaries especially of the damned political system where Jhb for example has 270 political appointees as councillors. My small town mayor is paid R2 million a year.

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