Municipalities want a piece of Eskom’s distribution pie

Say higher municipal tariffs should apply everywhere.
The matter could see end users who currently buy their electricity from Eskom being charged the higher municipal tariffs. Image: Waldo Swiegers, Bloomberg

Municipalities want a piece of the pie for the electricity Eskom distributes in their areas of jurisdiction to address the financial distress many are in, especially smaller municipalities.

The matter is expected to come before the Constitutional Court within months and, if successful, could result in higher tariffs for end users who buy their electricity from Eskom, since they would then be charged higher municipal tariffs.

Read: Joburg prepaid electricity customers in for a shock

According to Eric Bott, director of Green Energy Management Consultants,  residents of Soweto who buy electricity from the metro’s City Power pay about 25% more than their neighbours supplied by Eskom.

In a case study he did, he found that a hotel in Rosebank paid R2 million per year more for electricity than it would have if it was situated in nearby Sandton, which is within Eskom’s area of distribution.

Service delivery agreements

The Chartered Institute of Government Finance Audit and Risk Officers (Cigfaro) and the South African Local Government Association (Salga) are driving the municipal cause and accuse Eskom of contravening the Municipal Systems Act by refusing to sign a service delivery agreement with each municipality where it distributes electricity.

They responded to an earlier statement by Eskom group chief executive Andre de Ruyter, who accused municipalities of driving up the cost of electricity to consumers by adding large margins to their bulk purchase cost.

Read: Confirmation that municipalities are a huge burden on taxpayers

According to Peet du Plessis, president of Cigfaro, Eskom does the distribution in up to two thirds of the country, mostly to townships, farm areas and mines. It charges tariffs that are generally lower than those charged by municipalities.

This is a legacy from when the area of municipal jurisdiction was limited to towns and did not include townships and surrounding agricultural areas.

Deprived of revenue

The municipalities argue that electricity distribution is designated as a municipal function in the constitution and Eskom’s conduct is depriving them of a large and important source of revenue.

Eskom has, however, questioned whether it is an exclusive function.

The municipalities insist that Eskom’s distribution should be governed by a Service Delivery Agreement with the relevant municipality, in terms of which Eskom should charge the same tariffs the municipality does and pay the increased amount over to the municipality as a surcharge.

Since the disconnection of electricity supply is the most effective measure of credit control, Eskom should also on request of the municipality disconnect its customers if they are in arrears regarding other municipal services.

Tariff standardisation

Cigfaro also wants Eskom to standardise the tariffs it charges municipalities per unit for bulk purchases. Du Plessis says large metros buy at lower tariffs from Eskom than small municipalities. Although it is technically justifiable, Cigfaro is advocating for equal tariffs with metros subsidising smaller municipalities.

Salga and Cigfaro hope that this could relieve the financial distress in many small municipalities and provide financial sustainability.

By the end of March municipalities’ arrear debt to Eskom amounted to R28 billion.

Bertus Maritz, an attorney at Bokwa Incorporated who represents among others the Matjhabeng, Letsemeng and Nala municipalities, estimates that Eskom “owes” municipalities R100 billion in lost revenue over the last three years.

He believes a surcharge of 20% on Eskom retail tariffs is fair.

According to Maritz the Matjhabeng municipality, based in Welkom in the Free State, is deprived of the opportunity to sell electricity to the townships, farms and mines in its area of jurisdiction because Eskom does the distribution.

This leaves it with little more than electricity sales and property rates in town as its main sources of revenue, which is completely unsustainable, he says.

Control lever

Payment rates in the township are extremely low and without the opportunity to cut power supply, the municipality has no lever for credit control.

Matjhabeng is been opposing legal action by Eskom for arrears of R3.5 billion and the case is expected to be heard in the High Court in Bloemfontein in July or August.

Maritz says the municipality aims to have the dispute about the constitutional mandate to distribute electricity and several other principles before the Constitutional Court within six months thereafter.

Salga is expected to join the matter as a friend of the court.

Read: City Power sees a future that is ‘less reliant on Eskom’

Eskom maintains that it distributes electricity in accordance with the Electricity Regulation Act and the conditions of the distribution licences it was issued by energy regulator Nersa.

It said it is talking to Salga to find a solution so that municipalities fulfil their obligations.

The tariffs it charges municipalities for bulk purchases are based on cost reflectivity and have been approved by Nersa, the utility said.

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Let’s say they give smaller municipalities what they want i.e. the right to sell electricity and cut off supply to those who don’t pay. The non-payers will be at your municipal offices within seconds after their free power has been cut off and they will torch your offices within an hour if “their” electricity supply is not restored. Be careful what you ask for.

25% more than Eskom? That is a bargain. In Drakenstein (Paarl in Western Cape) the council marks up their Eskom cost by 95% for some consumers. I will be paying over R3/kWh in 2021.

But as to the issue, there will need to be standard end consumer tariffs that apply to all licensees – whether Eskom or Municipality. There is no such thing as an Eskom Distribution area, only municipal areas serviced by municipalities. We cannot have a situation such as exists now where Business A located within Municipality X pays an average (basic plus variable fees) o R2.78/kWh to council but Business B in same municipality pays R1,48/kWh to Eskom Distribution.

Eskom Distribution has none of the other obligations of the municipality with regard operating expenses or capital projects.

Eskom Distribution should only serve monster sized direct consumers – ones that are bigger energy users than the councils they are located in. It would mean councils need to take on the staff and assets of Eskom Distribution in their areas.

Municipalities are just a name for a bunch of highly unsuited people appointed to do a job they have no clue about, they serve no purpose except allowing theft. Most are dysfunctional and bankrupt, this will also be mismanaged and a conduit for theft AGAIN.

R3 odd per kilowatt hour is the cutover price that makes domestic solar viable. The municipalites and Eskom cross that line at their peril.

Electricity generation and distribution in South Africa has become a farce. The market for electricity in this country is the epitome of unsustainability, instability and stupidity.

Let’s begin with the average consumer who is under immense financial pressure, who is over-indebted, many are under debt counselling, while those who still have an income, see it fall behind the rising cost of electricity. More and more consumers simply don’t pay for electricity. In the meantime, the electricity grid is like the tentacles of a giant parasite that sucks the lifeblood out of households and businesses to nurture the socialist policies at SOEs, BEE companies and municipalities. We have these enormous structural inefficiencies and looting on the side of this parasitic monster whose position is protected by the ANC with the privilege of a monopoly.

The ANC protects Eskom’s monopoly on parasitism. Then the ANC uses laws, regulations and by-laws to enable municipalities to join in the looting of the anaemic consumers. This whole pyramid of inefficiency and plunder rests upon the pale and anaemic consumer who is crushed under this mess. The market for electricity is nothing but a tool for the redistribution of property. The combination of Eskom and the municipality is an ambush, under the protection of the ANC, to plunder the property owner.

As they run out of revenue, the one arm of the state attacks another arm of the state. Municipalities turn on Eskom, Eskom turns on Nersa, Nersa turns on the consumer, the consumer goes into debt-counselling, the debt-counsellor turns on the municipality, and the entire pyramid comes crashing down. The ANC is attacking the ANC now. The children of the socialist revolution started eating one another. The looters are fighting one another for the last scraps of the taxpayer.

Yep – I am in the very weird space that I now need to call on the HSRC and NERSA to back me in taking a DA council to task for gross abuse of virtually all concepts of just plain old, doing right by the people that pay your salaries.

When Eskom charged 25c/KWh, municipalities charged around 50c / KW/h – and the double-up principal generally applies – therefor municipalities were making around 25c for covering their ‘cost’, a practice in place for decades… and in the good old days municipalities actually ‘made’ extra money from the electricity charge to use for other services.
However, when Eksdom’s rates shot up to over R 1/KWh, the municipalities quietly kept to the double -up system, effectively quad-tripling their ‘profit’ on electricity by asking more than R2 /KW/h,and their profits shot up to more than R1/KW/h!
This quietly put extra billions into their raiding arsenals. No ANC cader ever said a single word about that, and neither did the media report anything on this either…where were the municipalties then, when they should have adopted a much more consevative approach when electricity prices went up and up and up? – they just doubled up all the time, filling their coffers even further, and now they are ‘entitled’ to that profit??
Because they ALWAYS endeavour to spend 110%+ of what comes in (no matter how much you put into it) they are now looking for new ways of taxing (stealing) those few who are still paying.
If municipalities do get this ‘entitlement’ grant from Eksdom, tarrifs from Eksdom will even go up further for the consumer, while municipalties will again double up on that again as well..!
Not a single word of finding ways to rather cut cost, curb corruption, working more efficiently….none of that,no…let’s milk the few taxpayers left even further.

95% of all electricity in SA is generated and transmitted by Eskom and then distributed, at about 50/50, by Eskom and municipal distributors. There are basically three cost, or tariff, levels:
Level 1: Generation tariff: the cost of electricity when it leaves the power station and enters the transmission network.
Level 2: Transmission tariff: The cost of electricity where it leaves the transmission network and enters the distribution network. Simply, it is the cost of generation + the cost of transmission.
Level 3: Distribution tariff: the cost of electricity where it leaves the distribution network and enters the end user premises. Simply, it is the cost of generation + the cost of transmission + the cost of distribution + the profit the supplier ads.
There are two types of distributors licensed by NERSA, Eskom distribution and Municipal distribution. Eskom distribution “buys” electricity from Eskom at transmission tariff, distributes it through their network and sells it to the end user at Distribution tariff. The municipal distributor has to buy the electricity from Eskom at the Distribution tariff, distribute it through its network and sells it to the end user. Although Eskom has no distribution costs for the electricity it sells to Municipal distributors, the municipal end user now pays twice for distribution.
The only way to level this playing field, is for NERSA to determine a transmission tariff that is the same to all licensed distributors. This will mean that the Eskom distribution tariff will increase to make up for the unfair profits it now makes on municipalities and NERSA can then put pressure on municipalities to bring their distribution tariffs down to the same level.
I was representing the smaller municipalities on a NER (before NERSA) Wholesale Energy Pricing System (WEPS) working group in the late nineties, but the moment we from the municipalities raised this issue, the working group was disbanded.

End of comments.

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