The Pretoria High Court has declared that the that the Guideline and Benchmarking Method (GBM) used by National Energy Regulator of South Africa (NERSA) when approving Municipal electricity tariffs is unlawful and invalid. The Court application was brought by the Nelson Mandela Bay Business Chambers NPC and the Pietermaritzburg & Midlands Chambers of Business NPC (Business Chambers).Business Chambers sought an order against NERSA, the SA Local Government Association (SALGA), Eskom Holdings and also cited about 137 municipalities located within South Africa.

The aim of the application was to challenge the lawfulness of the method applied by NERSA in approving Municipal tariffs. As institutions that safeguard its members concerns, the Business Chambers’ argued that the method imposed by NERSA in approving Municipal tariffs have an adverse effect on them and also the ordinary ratepayer.

According to Business Chambers, the GBM NERSA applies to approve municipal tariffs:

• do not reflect the costs a municipality incurs in serving its customers (businesses and consumers);
•  is not a true reflection of the revenue allowed to recover the municipality’s efficient costs; and
• base its benchmarks on unreliable information received from the municipalities.

As a result, Business Chambers contended that the cost of electricity is much higher than it would be if the correct methodology was applied by NERSA, being the Cost of Supply (discussed below). In addition to this, it was argued that the GBM applied by NERSA is unlawful and inconsistent with Section 15 of the Electricity Regulation Act No. 4 of 2006 (ERA).

Section 15 (1)(a) of the ERA states that electricity tariffs must be set and approved so as to enable a licensee operating efficiently to recover the full cost of that license’s electricity supply including a reasonable margin.

In 2021 NERSA had published a consultation paper in respect of the Municipal Tariff Guideline increases.The paper proposed two alternative regulation approaches. One was that Municipalities would be required to set their tariff based on cost of supply (COS) and the second, a hybrid approach which requires the municipalities to indicate their revenue forecast for a particular financial year and translate same into tariffs, also known as the Guideline and Benchmarking Method (GBM).

The COS methodology requires Electricity distributors to undertake COS studies at least every five years, when significant licensee structures changes occur, such as customer base; relationships between cost components and sales volumes.

The GBM allows NERSA to set the wholesale price at which Eskom sells electricity to Municipalities and the tariff at which Eskom’s distributing division sells electricity to Eskom customers.After a consultation process, NERSA can issue to municipalities a municipal tariff document containing NERSA’s decision on the guideline increase.

If the municipalities’ proposed tariffs comply with the GBM, NERSA will approve the tariffs without:

•  Assessing the municipalities COS;
• determining what is a reasonable margin; and/or
• the rate of return for the municipality.

The Business Chambers made submissions to NERSA that the COS approach be the default methodology as opposed to the GBM which they said should be unlawful and was contrary to the terms of section 15 of the ERA. Business Chambers argued that the COS method is consistent with Section 15 of the ERA.

The Court held that the Guideline and Benchmarking Method used by NERSA when approving Municipal electricity tariffs is unlawful and invalid. This declaration is applicable to the 2021/2022 and extended to the 2022/2023 financial year.

The declaration of invalidity is suspended for a period of 12 months to allow NERSA the opportunity to correct the defect. NERSA is therefore prohibited from applying the Guideline and Benchmarking Method when considering and approving Municipal electricity tariffs with effect from 2024/2025 municipal financial year.

The likely effect that this may have on municipalities is that NERSA may have to apply the Costs of Supply Methodology to set tariffs. This judgment signifies the end for Municipalities charging ratepayers for costs not related to electricity supply in terms of section 15 of the ERA.