The courts have repeatedly affirmed that Nersa may only approve tariffs based on detailed cost-of-supply studies. In June this year, Nersa’s approval of municipal tariff increases for 2024/25 was reviewed and set aside in those cases where the decisions were not based on cost-of-supply studies, with over 100 municipalities affected.
This is in line with two previous High Court rulings. In 2021, the court ordered Nersa to replace its unlawful blanket ‘tariff guideline’ method for municipalities with the lawful method of approving individual cost-of-supply studies for each municipality.
Under Section 15 (1) of Energy Regulation Act, tariffs must be set to recover the costs of an efficient electricity service plus a reasonable margin to maintain and invest in infrastructure. The City of Cape Town is one of a handful municipalities that bases its tariff applications to Nersa on detailed cost-of-supply studies, however the regulator failed to take these into account for 22/23 and 23/24.
In 22/23 and 23/24, Nersa granted significantly higher increases to Eskom than it did for municipalities – 9,6% for Eskom vs 7,4% for municipalities 22/23, and 18,5% vs. 15,1% for 23/24. In so doing, Nersa instructed all municipalities to implement one uniform increase while unlawfully and irrationally failing to consider Cape Town’s detailed cost-of-supply studies.
The City’s review application points out that its energy service would have run an estimated R500 million shortfall in 2023/24 alone had the City followed Nersa’s unlawful tariff method, placing service delivery and infrastructure investment at severe risk. The City managed to absorb some of Eskom’s overall 18,5% increase for 23/24 at a cost of R50 million, passing over 17,6% to customers.
‘Buying power from Eskom accounts for around 75% of our costs to run an electricity service, and there is no way we can absorb massive double-digit increases year-on-year while still hoping to offer a working electricity service to Capetonians. Cape Town is one of a handful of municipalities that bases our own tariff asks to Nersa on detailed cost-of-supply studies. The courts have repeatedly affirmed that tariff asks must be underpinned by detailed studies and data, and has ordered Nersa, Eskom and non-compliant municipalities to follow suit,’ said the City’s Mayoral Committee Member for Energy, Alderman Xanthea Limberg.
Cape Town is investing a mammoth R4bn over three years to upgrade the electricity grid to cope with a dynamic, decentralised energy future. The City also has SA’s most advanced plans to buy more affordable power on the open market and reduce reliance on expensive Eskom electricity and double-digit price hikes.
To shield lower income households from Eskom increases in recent years, Cape Town has been offering South Africa’s widest qualifying criteria for Lifeline electricity, including:
- Property value qualifying threshold: R500 000
- Monthly household income threshold: R7 500 (if property value >R500k)
- Pensioner and grant recipient criteria: <R22 500 monthly income, regardless of property value
Cape Town is also the only metro to reduce the cost of lifeline electricity in the last two years. In 24/25, Lifeline customers using 600 units in a month, will pay R113,94 less compared to two years ago in 2022/23 in line with the City’s pro-poor lifeline tariff restructuring.
According to Stats South Africa’s Non-Financial Census data for municipalities, released in March 2024, Cape Town has SA’s highest proportion of residents benefitting from free basic water and electricity. The City is 10 percentage points ahead of the next metro for free electricity reach, and 25 percentage points ahead for free water and sanitation.
Nersa decisions too late for municipal budgeting cycle
The City’s application further states that NERSA finalises its tariff decisions far too late in the municipal budgeting cycle, making a mockery of municipal planning and budgeting processes which the City must undertake in line with local government’s constitutional mandate and municipal finance legislation.
NERSA formally informed the City of its decision on the City’s 2023/2024 tariff application on 30 June, the last day of the financial year at which time it became practically impossible for the City to seek relief from courts before the start of that municipal financial year on 1 July.
It must also be noted that the City’s medium-term budget had already undergone, inter alia, extensive modelling, public participation, National Treasury checks, and had been approved by Council by this time.
Although legislation provides for adjustment budgets in different cases, the Municipal Finance Management Act does not provide for amendment of tariffs once approved.
This was also the case in 2022, where formal notification of Nersa’s decision was received too late (5 July 2022) for the City to amend its budget and its electricity tariff resolutions for the 2022/2023 municipal financial year, which started on 1 July 2022.
The North Gauteng High Court is hearing the City’s review application for these financial years over 3 days from 4 – 5 December 2024.
Cape Town files opposition to proposed 44% Eskom hike
Meanwhile, in a written submission to Nersa’s recent public hearings on Eskom’s request for a 44% hike to municipalities in 25/26, the City raises three major objections to the application:
- Eskom’s financial data is dubious and incomplete: Eskom projects a massive 10% drop in sales volumes, but the absence of load-shedding has stabilised sales. There is also no breakdown to justify Eskom’s operating costs increase to R40,8bn, which the State-owned Enterprise simply bills as ‘a more realistic’ reflection of costs.
- Consumers are being punished for IPP and coal contract inefficiencies: Eskom projects a large increase in energy production costs, but says despite the cost increases, output from Independent Power Producers (IPPs) is not close to meeting needs, requiring the purchase of coal at higher rates to compensate. If IPPs can’t provide the energy, why are they being paid? And why does Eskom’s IPP contracts not include penalties for non-performance? It is unlawful to punish consumers for these inefficient and biased IPP and coal contracts.
- Eskom is seeking to maximise profit from generating assets: As a State-owned company, Eskom must prioritise public interest over profit maximisation, but yet it has tripled the forecasted return it intends to make on its electricity generation assets. This is completely unacceptable in a time of economic hardship for households and businesses.
The City further rejects the claim in Eskom’s application that the short-term pain of this 44% hike can be ridden out by households and the economy, cautioning that inflation would go into over-drive, with households and businesses suffering immeasurably.
Citing Section 15 (1) of Energy Regulation Act, the City states that the law does not permit Eskom to recover the costs of inefficient operations from consumers. Further, that Eskom has alternative ways to improve their efficiency rather than punishing households and the economy with a massive electricity hike, including internal cost-saving and revenue diversification.
