Background

One of the major concerns is that the public has had little to no opportunity to comment on or challenge these tariff hikes, particularly when municipalities apply to the National Energy Regulator of South Africa (NERSA) for permission to increase electricity tariffs.  NERSA is specifically mandated to oversee the regulation of the electricity, piped-gas, and petroleum pipeline industries, including protecting the public against excessive prices. The lack of transparency and meaningful public participation in the approval of electricity tariffs has been a persistent issue, leaving citizens feeling excluded from decisions that directly impact their cost of living.

This issue came to the forefront in the recent case of Afriforum v NERSA, where AfriForum, a civil organisation, challenged NERSA's approach to approving municipal tariffs on several grounds. Firstly,  AfriForum argued that NERSA's consistent tardiness in determining and publishing the tariffs for bulk sales of electricity by Eskom to its customers, such as municipalities, and its late response to municipalities' applications to NERSA for approval of their municipal tariffs, have adversely affected the public’s right to participate in the budgetary process of municipalities. In particular, AfriForum questioned the implementation of NERSA's notice-and-comment procedure for public consultation on applications for approval of municipal electricity tariffs. It contended that the time available for public comment is limited that public participation is not undertaken in some instances. The Mogale City’s electricity tariff application was cited as a case in point, in which NERSA published it for comment and approved it without public participation.

As the sale of electricity to end users is one of the main sources of municipal revenue, AfriForum argued that timely approval by NERSA is critical, as municipalities may only charge an approved tariff. This, according to AfriForum, points to a timeframe in which NERSA must act to enable municipalities to adopt lawful budgets, which must be done before 1 July each year. To this end, AfriForum requested that the Court issue an interdict detailing the times when NERSA must respond to both Eskom's and municipalities' tariff applications to enable public participation. 

In response, NERSA argued that it does set deadlines for municipalities by which applications for municipal electricity tariffs must be submitted. It argued that the bulk of municipalities do not adhere to these deadlines, which in turn delays their decisions. Due to circumstances forced upon it by tardy municipalities, NERSA argued that it is compelled to deviate from the prescribed public participation requirements set out in section 4 of the Promotion of Administrative Justice Act (PAJA). Finally, NERSA contended that the costs of supply studies (i.e., a study outlining the expenses municipalities incur when delivering electricity), which accompany tariff applications, are confidential and need not be published or subjected to public comment. 

Decision

The High Court rejected NERSA's arguments, noting that administrative delays have muddied the approval of electricity tariffs, both the bulk electricity supply tariffs that Eskom may charge and those that municipalities may charge. The Court, while reflecting on the regulatory framework, noted that the approval of electricity tariffs runs in tandem with the municipal budget process, both of which require public participation. As municipal electricity tariffs are an essential component of the municipal budget, the Court sided with AfriForum, ruling that electricity tariffs must be approved timeously by NERSA to enable municipalities to adopt their budgets before 1 July of every year. Indeed, NERSA’s approval is critical, as no municipality may charge electricity tariffs other than those determined or approved by NERSA (s 15(2) of the Electricity Regulation Act).

Reflecting on the approval process for electricity tariffs, the Court reminded NERSA that the increase in tariffs should no longer follow a benchmarking method that merely adjusts the tariffs by a markup. Rather, municipalities must support their tariff increase applications with a cost of supply study, as previously ruled in Nelson Mandela Bay Business Chambers v NERSA. Importantly, the Court determined that the cost of supply studies should be made public, contrary to NERSA's position on maintaining their confidentiality. The cost of supply studies, as the Court held, ‘serve a dual function.’

“The first is to ensure that municipalities efficiently distribute electricity.  If municipalities are  charging more  than  the  cost  of  supply  study  indicates  is  necessary,  they  are  not providing services efficiently. Municipalities' licenses are subject to them being efficient licensees. A cost of supply study allows NERSA to test the efficiency of  the  municipality's  electricity  distribution.  The  second  is  to  ensure  a standardised and transparent process that end-users can engage with. These twin principles of efficiency and transparency underpin the requirement of a cost of supply study.” [para 39]

The Court noted with concern that NERSA had unilaterally classified the cost of supply studies as confidential, particularly given that none of the municipalities had adopted this stance. In its capacity as a public oversight body, the Court criticised NERSA for acting inconsistently with its mandate by withholding information of direct public interest.

While NERSA is a specialist public entity deserving of judicial deference, the Court stressed that it is also obligated to act in accordance with the law, specifically the PAJA Regulations. These Regulations outline how NERSA must communicate its decisions to the public. Notably, Regulation 18 of the PAJA prescribes a 30-day period for public comments. It also requires that the notice for comments be published in the Government Gazette and in two newspapers, using more than one official language. In this matter, the Court found that NERSA deliberately decided not to comply with PAJA, it only communicated its decisions on its website, failing to facilitate meaningful public participation.  As such, the Court declared NERSA’s notice and comment procedure invalid in terms of section 172(1)(a) of the Constitution. The Court only invalidated NERSA's procedure, leaving the approved tariffs intact because numerous municipalities are already applying them. If the tariffs had been revoked, it would have adversely affected municipal budgets, since many municipalities depend on electricity sales to finance their expenditures.

Going forward, the Court ordered and directed that NERSA, when considering tariff approval applications, to timeously provide municipalities with information and assistance to enable them to prepare their budgets in accordance with the processes set out in Chapter 4 of the Municipal Finance Management Act. It directed that NERSA notify municipalities in writing of the bulk wholesale tariffs by 31 January each year, which will be the rates at which municipalities purchase electricity in bulk from Eskom or any licensed generator. Municipalities, in turn, were ordered to submit their electricity tariff applications by no later than 30 March of each year, failing which they risk no tariff increase being approved. The Court also ordered NERSA to comply with the requirements of PAJA, allowing for meaningful public participation. In this regard, NERSA was directed to publish every municipality's cost of supply study along with its tariff application. The Court also directed municipalities to assist NERSA by taking all reasonable steps to ensure that the public participation process used by NERSA is brought to the attention of the public within their jurisdiction. Finally, NERSA was also ordered to finalise the approval process timeously before 5 May each year and publish all the decisions it reached in respect of applications received.

Significance of the judgment

The High Court’s judgment marks a pivotal moment in the regulation of municipal electricity tariffs in South Africa. First and foremost, it reinforces that NERSA must align its approval processes with the statutory deadlines imposed on municipalities, specifically the requirement to adopt budgets by 1 July each year. This means that NERSA's procedures cannot operate in isolation. They must be aligned with municipal budgeting timelines to facilitate public participation. Both NERSA and municipalities are now compelled to submit tariff applications timeously, recognising that delays in one process will disrupt the other, and ultimately undermine the lawful adoption of municipal budgets.

Secondly, the judgment delivers a decisive victory for transparency in the determination of electricity tariffs. The era in which municipalities, Eskom, and NERSA could set electricity tariff increases behind closed doors is over. The Court has made it clear that cost of supply studies and tariff applications are public documents, and the entire process must be open to public scrutiny. Municipalities are now required to justify their requests for tariff increases through published cost of supply studies, which must be accessible for public comment. Crucially, NERSA is obliged to consider all public input before making its final decisions on tariff increases, ensuring that the voices of end users are meaningfully incorporated into the approval process.

By mandating openness and adherence to statutory deadlines, the judgment not only strengthens procedural fairness but also empowers communities to engage with and influence decisions that directly affect their electricity costs. This sets a new standard for accountable governance in the electricity sector, prioritising efficiency and public participation.

By Curtly Stevens