ELECTRICITY FOR ALL IN SOUTH AFRICA LEGAL ASPECTS AND IMPLICATIONS

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1 ELECTRICITY FOR ALL IN SOUTH AFRICA LEGAL ASPECTS AND IMPLICATIONS Introduction To speak about the legal aspect and implications of any subject dealing with the complex relationship between government, government institutions and the citizens of a country can be a tedious affair. The subject by necessity requires reference to legislative provisions and this in itself can make a presentation of this nature a boring experience. I will not quote the various legal provisions as they appear in the relevant Acts of Parliament but will attempt to refer to these provisions in simplified terms so that the issues at hand can be understood. I will not attempt to make judgement on the various legal issues presently under debate between all the interested parties. That is the function of the courts. Legal practitioners often make out a case of opposing views on the interpretation of legal provisions and it is often said that advocates and attorneys support the views that will best express the vision of the clients that they serve. My presentation will concentrate on placing these issues before you and indicating what is being done in an effort to resolve them. A case in point is the current legal action by the Cape Town Metropolitan Municipality against mainly the National Electricity Regulator with both the government and Eskom looking from the sidelines what the outcome of this dispute will be. There are two major legal questions regarding the restructuring of the electricity distribution industry that requires our attention : The Constitutional aspects dealing with the rights and responsibilities of the various bodies involved in the industry consisting of the Government, the 1

2 Provincial Governments, Local Authorities, Eskom, the National Electricity Regulator and electricity consumers; and The restructuring process itself taking place within the confines of existing legislation and legislation presently under consideration to enable the restructuring to be finalised. An attempt will be made at the end of this presentation to determine whether these legal actions and the differences of interpretation on the legislation, impacts on the ability to reach the goal of Electricity for All Rights and Obligations of the Role Players in the Industry On 6 February 2001 the Cape Town Metropolitan Municipal Council decided to supply a free basic amount of 20kWh of electricity per month to all its domestic customers with effect from the 1 July 2001, this being the start of the new financial year for all municipalities in South Africa. An application for increases in its electricity tariff was submitted in due course to the NER dealing with an increase of 6% for all consumers and which can be termed as the annual inflation rate increase. In addition Cape Town applied for the approval of an additional surcharge of 1.6% on the tariffs paid by all consumers exceeding the free supply of 20kWh per month specifically to cover the costs of the free electricity. The action to provide certain basic services free of charge to municipal consumers emanates from statements by the Government during the 1999/2000 elections that certain basic municipal services would in future be supplied to citizens who cannot afford to pay for them free of charge. The majority of local authorities who reacted to these promises implemented both free water and free electricity on the basis of higher charges for these services where consumption exceeded the basic free provisions. This appears to be the only practical way of implementing the free delivery of services as the monitoring of thousands of households on a monthly basis to establish whether they could afford the payment for services is undisputedly impossible. 2

3 Cape Town proceeded to implement the charges referred to previously on 1 July 2001 although a reply from the NER had not been received at that stage. Shortly after implementation the NER responded by not only disallowing portions of the 6% inflation increases but also in addition refusing approval of the 1.6% surcharge intended to cover the costs of the free basic electricity. This culminated in the legal action by Cape Town requesting the Supreme Court to issue a declaratory order on a number of issues placed in dispute. The Court proceedings are still in the preparatory stage and a decision will only become available later in the year. Cape Town contends that electricity reticulation and therefore the supply and distribution of electricity to end-users is in terms of the Constitution a functional area of competence of municipalities. This Constitutional competence gives municipalities the right to deal with electricity reticulation, to make by-laws in this regard and to exercise any power concerning a matter reasonably necessary for, or incidental to, the effective performance of their functions. This power therefore includes the right to decide on the tariffs charged for electricity supply. There is in fact a specific section in the Constitution authorising municipalities to determine and impose surcharges on fees for services provided. The NER derives its powers to regulate electricity provision in South Africa and particularly to issue licences to electricity distributors and to control and approve of the tariffs raised by local authorities from the provisions of the Electricity Act. This Act was accepted in Cape Town refers to a further provision in the Constitution dealing with the fiscal powers and functions of municipalities forming part of a whole section of the Constitution dealing with Provincial and Local Government financial matters. This section in various places refers to national legislation that may be made impacting on the financial powers of municipalities and requires for such legislation a prescribed procedure. The implication of these provisions is that if the prescribed procedure is not followed for such legislation it will be void and of no force and effect. In view of the fact that the Electricity Act was adopted long before the provision of the Constitution came onto the law books the 3

4 argument is that the Electricity Act was not enacted in accordance with these sections of the Constitution and is therefore not valid. In terms of the papers before the court Cape Town makes the following submissions : May the City, without first obtaining the authority of a licence issued by the NER, perform the function of electricity reticulation in its area or authorise someone else to do so on its behalf? Cape Town argues that is has the right to decide on such matters as how electricity reticulation should take place in its geographical area, who should supply electricity to end consumers, the conditions on which electricity will be supplied and the circumstances in which such supply will be limited or discontinued. Does the NER have the power to determine the prices at which, and conditions on which. Electricity may be distributed and supplied by or on behalf of the City? The Electricity Act does not apply to final phase municipalities such as Cape Town (and all other newly established municipalities in terms of the Structures Act) as the definition in the Electricity Act of local government body does not include these municipalities. The City derives its power to charge tariffs for the delivery of services to its inhabitants from the provisions of the Constitution. It is clear from the Constitution that the national and provincial legislatures have supporting, strengthening and monitoring powers over these powers of local authorities and that they can legislate in this regard. Such legislation cannot, however, again based on the wording of the Constitution compromise or impede a municipality s ability or right to exercise its powers or perform its functions or encroach on the functional or institutional integrity of local government. Although the power of a municipality to impose surcharges on fees may be regulated by national legislation this Constitutional power does not extend to 4

5 Parliament depriving a municipality of the power to charge surcharges on fees or to interfere unduly with the discretion vested in the municipality to impose surcharges and tariffs Even if the Electricity Act should be found to be valid the contention is that in so far as the Act deals with the licensing by the NER of municipalities and the setting of tariffs at which they may supply electricity it exceeds the bounds of the national government s powers in the Constitution. The NER obviously does not agree with the legal arguments of Cape Town. It contends as follows : Cape Town City may not supply electricity unless it is in possession of a licence issued by the NER. Such a licence contains a schedule of approved tariffs and charges and any attempt to levy tariffs outside of such approval is illegal. The Systems Act requires all municipalities to approve of a tariff policy that complies with the provisions of the Act and any other applicable legislation. The Electricity Act falls under this category of other applicable legislation since the Act regulates a municipality s power to determine the tariffs at which electricity is supplied. The fact that the Constitution provides the national government with the power to legislate on the municipal functions in the Constitution makes it clear that the power of a municipality to administer electricity reticulation is not absolute but is subject to national legislation. Therefore the right of a municipality to govern its affairs on its own initiative must give way in circumstances where the Constitution provides for national legislation on the topic. Various provisions in the Constitution provide for national legislation regarding the matter of electricity reticulation. 5

6 The Electricity Act does not deprive a municipality of its executive authority, but regulates the exercise of such authority. It is clear that the positions held by Cape Town and the NER respectively are complex and reading or listening to their arguments sounds fairly convincing. It is imperative that an authoritive court judgement on these legal issues become available as soon as possible, not only for the clarity in terms of the powers and functions of the various bodies involved but also for proper service delivery to citizens of South Africa. The Restructuring Process I am sure that you have given considerable attention during the course of this conference to the restructuring process of the electricity distribution industry. I am also sure that no one can find fault with the reasons for the restructuring and the goals that have been enunciated for this process. It is important to take note again of these reasons and goals so that one can in the end judge whether the restructuring process and the legislation underpinning the process provides an adequate and comprehensive answer to the existing problems. In its 1998 white paper on energy the government confirmed its commitment to the promotion of access to affordable and sustainable energy services for small businesses, disadvantaged households, small farms, schools, clinics, in our rural areas and a wide range of other community establishments. Energy should be available to all citizens at an affordable cost. Energy production and distribution should not only be sustainable, but should also lead to the improvement of the standard of living of all of the country s citizens. For this to become a reality, the state should ensure that energy production and utilisation are done with maximum efficiency at all times. These statements have in time been augmented by the statements on a certain level of free electricity and other basic services to all households below the subsistence level of income. These ideals have enormous implications and it is no wonder that the Business Day of 7 January labels the overhaul as enormously complex with significant risks. 6

7 To facilitate the restructuring process the Minister of Minerals and Energy has issued a document entitled Final Draft Electricity Distribution Industry Restructuring Bill. This document is dated 25 January I am told that the Department of Minerals and Energy was requested to revise the draft bill to conform to S A legal standards and a further draft is awaited to comment on. Some of the provisions of the Bill are pretty ordinary e.g. the incorporation of REDs under the Companies Act or approvals required under other legislation and it is not the intention to deal with these run of the mill issues but to concentrate on the provisions that will have a material effect on the distribution industry as it currently operates. Even then only specific issues that are of particular concern are addressed in this paper. Participation in the new distribution process appears to be compulsory for all local authorities. There are provisions in the Bill that seem to be ambivalent on the question of participation where municipalities are merely empowered to take certain actions but in most cases the use of the word shall certainly indicates a clear intention that municipalities shall have no choice in the matter and that the distribution of electricity shall be transferred to the REDs irrespective of how efficient and competently electricity may be distributed in its area of jurisdiction at present. The main argument regarding participation in distribution schemes by the REDs is the one put forward by Cape Town in its Supreme Court action previously referred to. Cape Town argues, and there is considerable support for the view in local government, that the fact that electricity and gas reticulation is a functional area of local competence of local government, the Constitution gives local government the right to decide on such matter as how electricity reticulation should take place in its are of jurisdiction, who should supply electricity to end users, the conditions on which electricity will be supplied and the circumstances in which such supply will be limited or discontinued. It follows from this argument that any move and certainly any legislation that impede this constitutional right of municipalities shall be unconstitutional and therefore invalid. The threat is therefore that the draft bill is invalid on this point. The main issue in the Cape Town court action is the right of a municipality to set its own tariffs without the interference of the NER and the contention regarding the constitutional right of municipalities to appoint electricity service providers in its area of jurisdiction is only peripheral to the principal dispute. 7

8 The court may or may not therefore make a finding on this issue during the finalisation of this case. In a recent presentation to the Association of Municipal Electricity Undertakings Mr Kevin Morgan of the NER expressed the view that the transfer schemes were voluntary and because of the benefits Municipalities in his view would all volunteer. He made no mention of the power of the Minister to intervene if municipalities did not volunteer. Too much weight should no be attached to this view of Mr Morgan as he may have been speaking from a worst-case scenario in terms of the interpretation of the constitutional rights of municipalities. The Department of Minerals and Energy has commissioned a legal opinion on this matter but it is understood that the opinion was not completely satisfactory in terms of its depth and analysis and its was consequently resolved to await the decision in the Cape Town court action. Other legal opinions may also be obtained or existing. Legal opinions are just that and eventually if they do not supply clear answers to problems someone will approach the courts to have the matter settled. In the event of the court in the Cape Town action finding against the compulsory participation of municipalities or in the event of a subsequent court decision to this effect the only alternative would be an amendment of the Constitution removing the electricity function or in any event the distribution of electricity from schedule 4 and thus from the sphere of municipal competency. This sounds like an attractive option but note must be taken of the consistent opinion of organised local government in the form of the South African Local Government Association that the local government constitutional position is a given and must be preserved. Coupled with the effect that such a constitutional amendment may have on the principal of strong local government in South Africa this option may be one that the government would prefer to avoid. Should all of these legal-constitutional problems be resolved the bill provides for the transfer of all municipal officers, employees, assets, liabilities, rights and obligations relating to the distribution or retail of electricity to a RED. The argument about the loss of income from electricity sales by municipalities and the important role that this income plays in the cross subsidisation of a wide variety of services is addressed in the bill. It provides in this regard for the stipulation in the 8

9 transfer scheme by the relevant municipalities for the payment of an amount to the municipality that it would have been entitled to as part of the electricity charges payable to it that would now be payable to the RED. The sting in this proviso is however, that these schemes are subject to the approval of the Minister and the Minister will prescribe the amount of such payments. Within 24 months after the creation of the scheme one of a number of functionaries may amend the transfer scheme. These transfers schemes originally drafted by the municipalities concerned is further subject to a variety of amendments, impositions, directives and provisos and municipalities will have little or no say in these matters over a period of time. The draft bill eventually states that the transfer scheme does not require the consent of the relevant municipality or RED. There is consequently no guarantee for the payment of the loss of income to municipalities and some of the policy documents ominously refer to these payments only for a limited period of time nor is there any guarantee in relation to any other matter contained in the bill. I have no doubt that the existing levels of cross subsidisation of local government services from electricity sales will not be maintained at these levels and will be eroded over time. I will return to the consequences of this conclusion later in this presentation. In relation to the transfer of staff the bill provides for the transfer of employees in terms of the Labour Relations Act. This means that the electricity distribution businesses of municipalities will be transferred to the REDs as a going concern and the affected employees will have no choice in the matter. Conditions of service shall be no less favourable than before such transfer. This is a standard clause in legislation of this nature and one that is required through the operation of the law but its implementation can prove to be quite costly to the new employer. Conditions of service and service benefits between different municipalities vary in the extreme and the question that arises is how do you consolidate these benefits into a singly set of benefits. The answer would probably be in retaining benefits as personal to transferred employees and the establishment of a new norm by the RED as the employer for all new employees. Given the many local authorities involved in the creation of each of the REDs this will be an administrative nightmare. Some of the larger municipalities have not yet finalised their staff structures, placements and benefits dating back to local government transformation exercises of 7 years ago. 9

10 The transfer of staff and their consolidation into a new structure is therefore not a simple matter. The bill provides for the payment to municipalities in consideration for the transfer of assets to REDs by way of cash or set off or through the issue of shares in the RED, debt instruments or other securities. Again the Minister has the final say in the nature of these payments and the amounts involved. The right of municipalities to become shareholders in the REDs and share in the dividends of the companies are somewhat eroded by these provisions and it is accepted that municipalities will not receive market value for the assets transferred to the REDs. This seems to confirm the apprehension of municipalities that they will become minority shareholders in the REDs. The liability of REDs to extend electricity to the rural unserviced areas may in any event mean that there will be very little profit available for dividends to shareholders. Wide regulatory powers are given to the Minister to deal with the transfer schemes. The Minister may even make regulations prescribing legislation that do not apply to a transfer thereby effectively giving the Minister legislative powers that ordinarily would have been exercised by Parliament as the responsible elected body. An important provision contained in the bill is that REDs will not be the only suppliers of electricity to end-users. REDs are authorised to engage a third party as a seller of electricity supplied by the RED. Whether this includes municipalities as such sub-service providers is not clear from the legislation. Provision is also made for any natural person, company, body corporate, a statutory body, a partnership or association of persons to supply electricity to consumers exceeding certain levels of electricity consumption in competition to the REDs. Municipalities are excluded from participating in such competitive supply but Eskom is authorised to participate. REDs are obliged within reason to provide consumers with an electrical service and may discontinue the electricity supply if the consumer is insolvent, fails to pay for electricity consumed by him/her or is unlawfully connected to the electricity distribution network. 10

11 Further regulatory powers are given to the Minister to deal with the safety of electricity distribution networks, standards of performance by REDs in supplying their customers with electricity services, and to empower the NER or any other substituting body to deal with these standards. The power of the NER or substituting body to determine the tariffs at which electricity is sold to the consumer is continued in the new legislation and the issuing of a licence by the NER can be made subject to the REDs being sufficient for and efficient as licensees to recover the full costs of its business activities, including a reasonable margin of profit. In addition the NER is obliged to permit cross-subsidies of tariffs by REDs to consumers in order to encourage widespread electrification or consumption of electricity by non-serviced households in South Africa and are designed to enable low-income consumers to connect to the distribution network. Municipalities are required to enter into service agreements with REDs regarding the distribution of electricity in their areas of jurisdiction. The NER may also prescribe certain of the provisions of these service agreements. The service delivery agreement may authorise and require a municipality to act within its municipal area as the agent of the RED for various services like receiving complaints, issuing accounts, receiving moneys due to the RED and for other administrative matters. In the absence of specific agreement to the contrary the provisions of the Municipal Systems Act to use the provision of and payment for electricity in its credit control procedures are excluded and therefore not applicable. This means that in the absence of special approval and agreement, electricity may not be used to consolidate any separate accounts of persons liable for payments to the municipality, credit any payments by such person against any account of that person and implement any of the debt collection and credit control measures to any arrears of such person in so far as it relates to electricity payments. This may mean that the existing effective way of ensuring payment of rates and service charges through the provision of electricity to consumers will fall away. The possibility created in the new legislation to continue with this practice is subject to a variety of ifs and buts and it is foreseen that in time the REDs will vehemently oppose approvals of this nature. 11

12 A question that is not addressed by the legislation and should be considered for the improved revised edition is whether a RED may conclude an agreement with a municipality to continue to do the distribution of electricity on behalf of that RED even if only for a limited period of time. There are provisions in the bill that may be interpreted as allowing for this possibility but as the wording is vague and unclear a clarification of this issue is recommended. An interesting aspect of the service agreements between municipalities and the REDs is the chapter dealing with the contents of service delivery agreements. It is explicitly stated that these agreements should provide for the termination of these agreements. Even if this authorisation is not included in the bill it is submitted that any agreement is terminable in the event of non-performance. The question can be asked as to what the position would be if a RED is unable to perform its obligations in terms of electricity distribution. Can the municipalities in the area of the RED then terminate the agreements with the RED concerned and who will then provide the service of electricity distribution in municipal areas? In terms of the restructuring there will be no other bodies or institutions available to deliver the service. Is the idea that no matter how outrageously bad the service of a RED is or what the level of corruption is, that it will continue to deliver the service? When a municipality fails to deliver a proper service the citizens can address this situation through the accountability of the elected councillors by voting for other councillors to ensure that the situation is rectified. In the RED scenario there is only a theoretic form of accountability but ultimately the consumers have no redress in the event of sustained incidences of poor delivery or corruption. Termination is the only alternative and can be considered as the ultimate tool of control. Electricity for All Does the proposed legislation and the solution of the legal issues impeding progress with the restructuring of the distribution industry contribute to the ideal of electricity for all or can it impact negatively on this goal? 12

13 Any process or system can be made to work even if it requires substantial funds to be pumped into a scheme. I have no doubt that the government will support the restructuring process to the maximum and that the REDs will be labelled as a success. Objective judgement on the success of the restructuring process will in my opinion be measured against the following factors : Whether electricity tariffs will be maintained as the existing levels or whether ideally electricity tariffs will be reduced over a period of time in order to keep South Africa competitive in the international markets. Whether the thousands of households currently without the benefit of electricity will be provided with the opportunity to gain access to electricity supplies. Whether those households who cannot afford to pay for electricity services will be granted a specified level of electricity supply free of charge. Whether existing standards and levels of supply can be maintained. The restructuring process is essentially an exercise in the redistribution of wealth at local government level. There is a long standing but mistaken opinion that local government services can be extended to the full population of South Africa by such a redistribution of local government finances and that by merely re-prioritising local government spending all citizens can be serviced without an increase in rates and service charges. This is a fallacy. The bad news is that there is not enough funding available in local government to address the huge backlog of municipal services nor to extend free services, albeit it at a fairly low level to the thousands of households that cannot pay for these services. Financing of services can only come from the pockets of ratepayers and consumers, be it services at the national, provincial or local government level. If increases in electricity charges are to be avoided at all costs another source of funding will have to be found, most probably from increased property rates for municipal consumers. 13

14 In order to meet the ambitious plans for electricity distribution the extent of this funding will most likely be beyond the capacity of the current South African economy. Despite the sincere efforts of the government to improve our economic outlook and often due to circumstances beyond the control of the government, the financial position of South Africa remains a matter of concern. Our economic survival in the global markets is extremely sensitive to price increases, leave alone the substantial increases that the entire package of policies of the government in relation to local government will require. Even if the existing level of cross subsidisation of municipal services from electricity sales is reduced substantially and the burden of the responsibilities shifted elsewhere the expressed goals with the restructuring of the electricity distribution industry will require steep price increases. The additional administrative expenses of the REDs delivering services at the local level is a further factor that will impact on service charges for electricity. The government itself is unsure of the philosophy of redistribution of wealth in relation to the question as to whether local government or national resources should be used as the right vehicle to achieve this. It is assumed that the restructuring process will lead to a reduced level of cross subsidisation of electricity profits on other local government services and even to the complete exclusion thereof. This may be recorded as the success of the redistribution exercise as the ideal for electricity for all may in reality be extended over a longer period of time and electricity tariffs kept at a competitive level. The effect on the ability of municipalities to deliver the other services in terms of its constitutional mandate will, however, be devastating. One tends to forget the great variety of services delivered by municipalities to its communities and their economic well-being and development. It is important to take note at this time again of the scope and variety of these services excluding the commercial services that generate an income to match the expenses. Consider the following : Business licences Information Temporary liquor licences 14

15 Community halls Property transactions Council meetings, agendas and minutes Councillor salaries Compliance with tender procedures Marchers, posters and advertising Airports Libraries Rendering of accounts for services, rates and sundries Clearance certificates for the deeds office Meter readings Sewerage purification Roads Stormwater Cutting of grass on all public and open spaces Development of parks Cutting and cleaning of municipal properties Cemeteries Provision and maintenance of sport facilities Recreation services Beach and pool services Environmental services Human resources Marketing with a view to economic development Publicity Museums Arts and crafts facilities Ward committees Housing Health services Clinics Fire services Disaster management Traffic 15

16 Motor licensing Integrated development planning Township development Land use planning There are many subdivisions of these various services where considerable services, not mentioned above, are rendered to communities. If the success of the restructuring of the electricity distribution function means the failure of all of the above services such success will not be celebrated by the ordinary citizens of this country