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[2020] ZAGPJHC 168
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Eskom Holdings SOC Limited v National Energy Regulator of South Africa and Others (74870/2019) [2020] ZAGPJHC 168 (28 July 2020)
REPUBLIC OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 74870/2019
In
the matter between:
ESKOM HOLDINGS SOC
LIMITED Applicant
and
NATIONAL ENERGY REGULATOR
OF SOUTH AFRICA First
Respondent
MINISTER OF MINERAL
RESOURCES AND ENERGY Second
Respondent
MINISTER
OF
FINANCE Third
Respondent
SOUTH
AFRICAN LOCAL GOVERNMENT ASSOCIATION Fourth
Respondent
JUDGMENT
KATHREE-SETILOANE
J,
[1]
This is a review application in terms of the Promotion of the
Administrative Justice Act 3 of 2000 ("PAJA") for the
review
and setting aside of a decision taken by the First Respondent,
the National Energy Regulator of South Africa ("NERSA")
in
relation to an application made by the Applicant, Eskom Holdings SOC
Limited ("Eskom") on 14 September 2018, for the
approval of
allowable revenue that would be reflected in electricity tariffs for
the financial years of 2019/20, 2020/21 and 2021/22
("the
2019/2022 application"). In this application, Eskom sought
approval of:
1.1 Total Allowable
Revenue of R219bn for financial year 2019/20, which would have
translated into a tariff increase of approximately
15% to standard
tariff customers.
1.2 Total Allowable
Revenue of R252bn for financial year 2020/21, which would have
translated into a tariff increase of approximately
15% to standard
tariff customers.
1.3 Total Allowable
Revenue of R291bn for financial year 2021/22, which would have
translated into a tariff increase of approximately
15% to standard
tariff customers.
[2]
On 9 October 2019, NERSA published its reasons for its
decision ("the 2019/2022 decision"). NERSA approved:
2.1 Total Allowable
Revenue of R206bn for financial year 2019/20, which translates into a
9.41% tariff increase to standard tariff
customers.
2.2 Total Allowable
Revenue of R222bn for financial year 2020/21, which translates into
an 8.1% tariff increase to standard tariff
customers.
2.3 Total Allowable
Revenue of R233bn for financial year 2021/22, which translates into a
5.22% tariff increase to standard tariff
customers with an average
standard tariff of R116.72.
[3]
Eskom was dissatisfied with the decision and launched this
application. It contended, in its founding affidavit, that in making
the 2019/2022 decision, NERSA misappropriated R69bn in equity
injections that government (as the sole shareholder of Eskom) made
to
Eskom for the three financial years covered by the 2019/2022
decision. NERSA deducted R23 billion from Eskom's allowable revenue
for each of the three financial years.
[4]
Government made the equity injection to stem a liquidity
crisis which affects Eskom so severely that it has a knock-on effect
on
the country as a whole. Eskom contends that NERSA's decision
effectively negated the governmental intervention and left the
liquidity
crisis unaffected, but the fiscus R69 billion lighter.
[5]
Eskom
alleged, in its founding affidavit, in the review application that
NERSA's decision to deduct the R23bn equity injections
was unlawful
because neither section 15 of the Electricity Regulation
[1]
("the ERA"), the Multi-Year Pricing Methodology ("MYPDM4")
in terms of which NERSA took its decision nor any
other law make
provision for the deduction of equity injections from the return of
assets or any other allowable revenue item that
NERSA takes into
account when making its revenue decisions. This notwithstanding,
NERSA deducted the R23bn equity injections from
the return of assets
in respect of each of the revenue decisions for the financial years
covered by the 2019/2022 decision.
[6]
Eskom launched this application a day after NERSA published
the reasons for its decision. In part B of the application Eskom
seeks
an order reviewing and setting aside the NERSA decision on the
grounds that it is
ultra vires,
irrational and procedurally
unfair. In Part A of the application Eskom sough interim relief which
was directed at staving off the
financial crisis, which it claimed
NERSA has exposed it and the South African State to. Kollapen J
dismissed that application on
10 February 2020.
[7]
As is apparent from Eskom's supplementary affidavit, the Rule
53 record includes a full set of draft reasons in support of a
recommendation
to be placed before the NERSA meeting of 7 March 2019.
This is NERSA's original reasons (NERSA's original reasons. They are
described
in the Index to the Rule 53 Record as "Draft RfD MYPD
4 Special ELS". They thus appear to be the draft reasons that
were
tabled at the Special Electricity Sub-Committee Meeting of 6
March 2020, which was to finalise the MYPDM4 recommendation for
NERSA's
meeting the following day.
[8]
Eskom explains that the original NERSA reasons run to over 150
pages, and, for the most part, were incorporated verbatim into the
final reasons adopted by NERSA. However, the original NERSA reasons
differed from the final NERSA reasons in one crucial respect
-
although they provided for no return to Eskom, they did not provide
for the misappropriation of the annual R23 billion equity
injections
from government. Thus, the original NERSA reasons were in support of
a recommendation for a decision by NERSA on 7 March
2020 that would
provide Eskom with:
8.1 allowable revenue of
R225.062 billion, R241.342 billion and R253.714 billion for the
2019/20, 2020/21 and 2021/22 financial
years respectively (including
carried over RCA amounts of R8.173 billion for each of the three
financial years as appears);
8.2 projected annual
sales to tariff customers of 186 064GWh, 184 898GWh and 183 856 GWh
over the 2019/20, 2020/21 and 2021/22 financial
years respectively;
8.3 an aggregate price
increase (including the 3.9% RCA price increase) of 20.12% for the
2019/20 tariff year, with this tariff
then serving as the base for
increases of 7.82'/o and 5.3% increases over the next two tariff
years (p 1415), and thus
8.4 average standard
tariffs of R112.66, R121.48and R127.94 over the three tariff years.
[9]
The Special Electricity Sub-Committee meeting of 6 March 2019
was open to the public and representatives of Eskom were present at
the meeting to observe it. There was no mention at that meeting of
the R23 billion annual equity injections from government, still
less
any suggestion that these could be misappropriated to subsidise the
Eskom tariff. Hasha Tlhotlhalemaje, who was one of the
Eskom
employees present at the meeting, confirmed the correctness of these
facts in her confirmatory affidavit.
[10]
Between 6 March 2019, when the Special Electricity
Sub-Committee meeting considered the original NERSA reasons and 2
April 2020,
when a revised draft of the reasons was prepared for the
Electricity Subcommittee meeting of 10 April 2020, someone within
NERSA
raised the idea of misappropriating the annual R23 billion
equity injections to reduce the average standard tariffs (without the
3.9'/o RCA increase) to R102.62, R110.93 and R116.72 with the same
projected annual sales to tariff customers. There is, however,
nothing in the Rule 53 Record that casts light on inter alia who came
up with the idea of misaapropriating the annual R23 billion
equity
injection amd when it was mooted.
Departure from the Part B
notice of motion
[11]
NERSA has now conceded the merits of this application (Part
B). Thus, the only remaining issue for determination is the question
of the appropriate remedy to be ordered in this case.
[12]
In its notice of motion in Part B of this application, Eskom
simply sought to review and set aside NERSA's 2019/2022 decision and
remit it to NERSA for redetermination. However, it now seeks the
relief set out in its draft order. The relief sought in the draft
order differs substantially from the relief sought in the Part B of
the notice of motion. Eskom now seeks substituionary relief
in the
following terms:
1.
The decision taken by NERSA on 7 March 2019 in respect of the
Eskom allowable revenue and tariffs for the years 2019/2020 to
2021/22
decision of NERSA is reviewed and set aside.
2.
A sum of R23bn will be added to the allowable revenue already
determined by NERSA for the 2021/2022 financial year.
3.
The average standard Eskom tariffs approved by NERSA for the
2021/2022 financial year will be increased by from 116.72 c/kwh to
128.24 c/kwh.
4.
After such time as NERSA has determined the allowable revenue
for Eskom in respect of the 2022/23 and 2023/24 financial years,
NERSA
is directed to add a sum of R23bn to the allowable revenue in
respect of each of those years.
5.
NERSA is precluded from making any adjustment or compensation
to offset the R23bn from the allowable revenue determined for these
financial years or otherwise to deduct, directly or indirectly, the
R23bn equity injection from the allowable revenue for those
financial
years.
6.
NERSA is to pay Eskom's costs of this application, including
the costs of two counsel and including the costs of the Part A
application.'
[13]
Why does the draft order differ from the notice of motion in
Part B of this review application. Eskom submits that this is because
the application, as launched, anticipated that immediate tariff
increases would be provided to Eskom in Part A of the application
(interim relief). It contends that this Court's (Kollapen J) refusal
to grant the interim relief sought in Part A of the application,
means that Eskom now seeks the relief in Part B which is designed to
put back the equity injection which was removed by NERSA from
the
allowable revenue in its 2019/2022 decision.
[14]
Eskom relies, in the review application, on both section
6(2)(f) of PAJA as well as the legality principle reflected in
section
1(c) of the Constitution. In a PAJA review a court has the
power to grant just and equitable relief under section 8(1).
Similarly,
in a legality review in terms of section 1(c) of the
Constition, a court has the power to grant just and equitable relief
under
s 172(1)(b) of the Constition.
[15]
In
Economic
Freedom Fighters (2)
,
the Constitutional Court held that the power to grant a just and
equitable order is so wide and flexible that it allows courts
to
formulate an order that does not follow prayers in the notice of
motion or some other pleading. This power enables courts to
address
the real dispute between the parties by requiring them to take steps
aimed at making their conduct consistent with the
Constitution.
[2]
It is clear from a survey of the caselaw, that the Constitutional
Court, including other courts, regularly exercise their remedial
powers under section 172 of the Constitution to grant orders that
differ from the terms of those sought in the notice of motion
of the
successful litigant.
[3]
By the
same token, a court exercising its remedial powers to grant just and
equitable relief under section 8(1), may grant orders
that differ
from the relief sought in the notice of motion.
[16]
I am accordingly of the view that this Court has the rememdial
power to grant the substitutionary relief which Eskom seeks in the
draft order; provided it can demonstrate that it is appropriate in
the circumstances of this case.
The Regulatory Framework
[17]
Although NERSA has conceded the merits of this application,
the regulatory framework remains relevant to the question of remedy.
I accordingly set out the pertinent aspects of the regulatory
framework below.
[18]
NERSA
was established in terms of the National Energy Regulator Act
[4]
("the NERA"). Its mandate is to, inter alia, regulate the
generation, transmission and distribution of electricity. Section
4
of the NERA, inter alia, provides that NERSA must undertake the
functions set out in section 4 of the Electricity Regulation
Act 4 of
2006 ("the ERA"). One of its core functions under the ERA
is the
consideration
of applications for licences and issuing of licences, for the
operation of generation, transmission or distribution
facilities, and
the regulation of electricity prices and tariffs.
[19]
Section 2 of the ERA sets out its
objects. Two central objects of the ERA are to:
19.1 achieve the
efficient, effective, sustainable and orderly development and
operation of electricity supply infrastructure in
South Africa; and
19.2
ensure that
the interests and needs of present and future electricity customers
and end users are safeguarded and met, having regard
to the
governance, efficiency, effectiveness and long-term sustainability of
the electricity supply industry within the broader
context of
economic energy regulation in South Africa.
[5]
[20]
Section 14(1) of the ERA entitled 'Conditions of licence'
provides,
inter alia
that:
'(1)
The Regulator may make any licence subject to conditions relating to
. .
.
(d)
the setting and approval of prices,
charges, rates and tariffs charged by licensees;
(e)
the methodology to be used in the
determination of rates and tariffs which must be imposed by
licensees".
[21]
Section 15 of the ERA sets out the 'Tariff principles'. It
provides:
'(1)
A licence condition determined under section 14 relating to the
setting or approval of prices, charges and tariffs and the
regulation
of revenues
(a)
must enable an efficient licensee to
recover the full cost of its licensed activities, including a
reasonable margin or return;
(b)
must provide for or prescribe incentives
for continued improvement of the technical and economic efficiency
with which services
are to be provided;
…
(2)
A licensee may not charge a customer any other tariff and make use of
provisions in agreements other than that determined or
approved by
the Regulator as part of its licensing conditions.
'
[22]
The
Suprme Court of Appeal described the effect of these provisions in
the
Borbet
judgment:
[6]
"The provisions set
out above create a situation where licensees are the ones empowered
to charge a tariff for electricity
consumption within parameters set
by the Regulator. Licences, as can be seen from the provisions of ss
14(1)(d) and (e) of ERA,
may contain conditions relating to the
setting and approval of prices, charges, rates and tariffs to be
charged by licensees. Licences
may be made subject to conditions
relating to the methodology to be used in the determination of rates
and tariffs which must be
imposed by licensees (s 14(1)(e)). NERSA is
therefore responsible for determining whether a licence should be
granted; the terms
of the licence; the methodology by which tariffs
and charges are to be determined and the imposition of that
methodology on the
licensee by way of a licence condition; and the
tariffs and charges that the licensee may recover from its customer.
All of these
are embodied directly or indirectly in the licence and
the obligation to adhere to them flows from the licence."
NERSA
is bound by section 15(1)(a) of the ERA when determining what tariffs
a licensee may charge. Any tariff which it determines
"
must
enable an efficient licensee to recover the full cost of its licensed
activities, including a reasonable margin or return".
The
MYPDM
[23]
NERSA has, since 2006, been determining Eskom tariffs under a
system of multi-year price determinations ("MYPDs"). The
MYPDs are governed by a methodology, developed by NERSA, to determine
the allowable tariffs as well as their increases to be charged
by
licensees to consumers ("MYPDMs"). MYPDM1 applied from 1
April 2006 to 31 March 2009. MYPDM2 applied from 1 April
2010 to 31
March 2013 and MYPDM3 applied from 1 April 2013 to 31 March 2018.
MYPDM4 applies to the latest cycle which commenced
on 1 April 2018.
Although MYPDM4 governs the 2018/19 to 2021/22 financial years, NERSA
allowed Eskom to make a discrete tariff
application for the 2018/19
financial year before making the tariff application for the 2019/2022
financial years, which relate
to the present proceedings.
[24]
As explained in Eskom's founding affidavit, MYPDM4 provides
for a "cost plus" system of tariffs. Tariffs are to be set
to recover Eskom's "allowable revenue" on the basis of
projected electricity consumption. The formula in MYPDM4 for
determining "allowable revenue" is set out in section 5.2
thereof which reads:
"The
following formula must be used to determine the AR:
AR=(RAB×WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA
Where:
AR =
Allowable Revenue
RAB =
Regulatory Asset Base
WACC =
Weighted Average Cost of Capital
E =
Expenses (operating and maintenance costs)
PE =
Primary Energy costs (inclusive of non-Eskom generation)
D =
Depreciation
R&D
= Costs related to research and development programmes/projects
IDM =
Integrated Demand Management costs (EEDSM, PCP, DMP, etc.)
SQI =
Service Quality Incentives related costs
L&T
= Government imposed levies or taxes (not direct income taxes)
RCA =
The balance in the Regulatory Clearing Account (risk management
devices of the MYPD)".
[25]
The MYPDM4 methodology sets out how each one of these cost
components, and the projected sales volumes, are to be determined.
This
ensures that there is a detailed system for projecting the total
revenue upon which the tariffs will be based.
[26]
The
last element in the allowable revenue formula is the balance in the
Regulatory Clearing Account ("the RCA"), or more
accurately
the amount of the RCA balance that is allowed to be recovered or paid
back in a particular financial year.
[7]
The RCA is a risk management device which ensures that Eskom (and
consumers) are protected against the consequences of projection-based
tariffs that prove to be inappropriate in the light of actual
experience. As explains in its founding affidavit, the RCA provides
for allowable revenue to be adjusted
ex
post facto
on
the basis of a retrospective comparison of actual financial facts in
respect of a particular financial year with the projections
upon
which the tariff for that year was determined. Any "under
recovered" revenue that is not attributable to negligence
on the
part of Eskom is then recoverable by Eskom through additional
increases to tariffs in subsequent years. Conversely, if the
allowable revenue is shown to have been excessive, tariffs in
subsequent years will be adjusted downwards to reverse this effect.
[27]
As emphasised by counsel for Eskom at the hearing, the RCA
does not afford Eskom the opportunity of recovering the
misappropriated
R23 billion equity injections that are the subject
matter of the present proceedings. This is because the
misappropriations would
not be covered by any of the RCA recovery
categories.
The Context
[28]
The context in which NERSA decided the 2019/2022 tariff
application is germane to the assessment of the appropriateness of
the remedy
sought by Eskom in this application.
[29]
NERSA's provided reasons for its decision on 9 October 2019.
The reasons confirm that NERSA deducted from the Total Allowable
Revenue
for each of the three years covered by the 2019/2022 decision
the amount of R23 billion. These amounts correspond to annual equity
injections that Government first announced in the Minister of
Finance's Budget speech of 20 February 2019. This announcement was
made barely 2 weeks prior to the NERSA decision.
[30]
Government provided the equity injections to Eskom against the
following background:
30.1 Historically
electricity prices in South Africa were maintained at artificially
low levels by pricing electricity without adequately
accounting for
the cost of generating, transmitting and distributing electricity.
30.2 The dire
implications of this position began to be felt over the last ten
years because Eskom has had to embark on an ambitious
build program
with the construction of 3 large-scale power stations, and the
upgrading of its transmission network. Eskom's balance
sheet weakened
over this period owing to prices, approved by NERSA, which did not
cover its prudent and efficient costs.
30.3 Notably, the World
Bank has concluded that 81% of Eskom's inability to achieve cost
recovery is due to inadequate tariffs.
30.4 The five year tariff
proposals put forward by the electricity consumer groups, Business
Unity of South Africa and the Energy
Intensive User Group for MYPD3
which ran to 2017/18 would have led to electricity prices in 2018
which, in real terms, were significantly
less than those sought by
Eskom in MYPD4. Neither the EIUG nor BUSA has a vested interest in
seeing an increase in electricity
prices. Indeed, the opposite is
true. But both, quite responsibly, made submissions based on a
realistic assessment of what was
needed for Eskom to be sustainable.
They reveal the inadequacy of NERSA's approach.
30.5 In downgrading the
credit ratings of Eskom, all three ratings agencies have repeatedly
stressed the uneconomic nature of Eskom's
tariffs.
30.6 The harm caused by
NERSA's inadequate revenue determinations has been compounded by
egregious delays by NERSA in applying the
RCA mechanism which, as
pointed out above, is designed to remedy inadequate revenue
determinations. NERSA only decided the RCA
applications for the
financial years 2014 to 2017 in June 2018. And the R32.69 billion
which NERSA acknowledged was due to Eskom
in respect of underallowed
revenue for those three financial years, will not be fully recovered
until the end of the 2022/23 financial
year.
30.7 Moreover, NERSA has
recently conceded that its decision to grant only R32.69 billion to
Eskom in relation to these RCA applications
is one which falls to be
reviewed and set aside. In making this concession, it acknowledges
that it must now reconsider Eskom's
application for an additional
R33.91 billion rands in respect of the 2014 to 2017 financial years.
The full extent of the additional
amounts found to be due to Eskom
may only be capable of being recovered after the 2022/23 financial
year. This is will be 8 to
10 years after the relevant amounts should
have been paid to Eskom in tariffs.
30.8 Eskom's revenue
shortfall caused by a decade of inadequate NERSA revenue
determinations that do not cover costs and return
on capital has
grown steadily since 2012 and exceeded R300 billion by 2018/19. Eskom
states that with no other options open to
Eskom, these shortfalls
have had to be funded by raising additional debt.
30.9 At the time of the
launch of this application, Eskom's debt burden stood at R441
billion. It states that much of this debt
is interlinked. So, default
on one facility can trigger default on other facilities with full
outstanding capital and interest
amounts becoming immediately payable
on demand by lenders.
30.10 Eskom points out
that its debt imperils the finances of the State because R350 billion
of that debt is guaranteed by the South
African State. Moreover,
since much of the South African national debt is itself interlinked,
a failure by the State to meet any
demand made on it as guarantor of
Eskom, would potentially trigger acceleration of the full liability
of national debt. This will
expose the State to demands for immediate
repayment of $68 billion which was over R980 billion at the exchange
rate of 14.5 R/$
at the launch of this application. At the date of
finalisation of this judgment, this figure increased to over R1.116
trillion
at the prevailing exchange rate of 16.42 R/$.
[31]
According to Eskom, the equity injections of R23 billion per
annum were, therefore, implemented by Government to stave off a
crisis
in Eskom's finances that presents a material risk to the
finances of the Republic as a whole. In his two State of the Nation
addresses
of 7 February 2019 and 20 June 2019, President Ramaphosa
explained the need for these equity injections in the following
terms:
'Eskom is in crisis and
the risks it poses to South Africa are great. It could severely
damage our economic and social development
ambitions. We need to take
bold decisions and decisive action. The consequences may be painful,
but they will be even more devastating
if we delay."
'[Government accordingly
decides that it] will support Eskom's balance sheet.'
'The utility's financial
position remains a matter of grave concern. With the current
committed funding from government, outlined
in the 2019 Budget, Eskom
has sufficient cash to meet its obligations until the end of October
2019. For Eskom to default on its
loans will cause a cross-default on
its remaining debt and would have a huge impact on the already
constrained fiscus. We will,
therefore, have to address this matter
by tabling a Special Appropriation Bill on an urgent basis to
allocate a significant portion
of the R230 billion fiscal support
that Eskom will require over the next 10 years in the early years.
This we must do because Eskom
is too vital to our economy to be
allowed to fail.'
'It is imperative that we
undertake these measures without delay to stabilise Eskom's finances,
ensure security of electricity supply,
and establish the basis for
long-term sustainability.'
[32]
Eskom contends that in its decision, NERSA unilaterally
misappropriated these equity injections aggregating to R69bn and
converted
them into tariff subsidies for electricity consumers. By so
doing, it placed the finances of Eskom and the South African State in
jeopardy.
[33]
Eskom goes onto explain that NERSA's decision simply ignores
that Government came to the assistance of Eskom because it
appreciated
that, were it not to do so, the finances of Eskom and the
country as a whole would be in dire jeopardy. To the contrary, the
effect
of NERSA's decision is to pull the rug from under government's
feet by neutralising the effect of the government assistance.
[34]
Eskom states that the reason why government support was
necessary was because NERSA's tariffs decisions resulted in cash from
operations
being insufficient to service Eskom's debt (taking into
account the principal debt and interest), which required government
to
intervene. The Government support was to assist Eskom in servicing
debt. NERSA's decision to deduct the R23bn means that the R23bn
support has no impact on debt servicing. It has been nullified by
NERSA's decision.
[35]
The government intervention, so it explains, was designed to
put Eskom on the path to sustainability and stabilise Eskom's
finances.
Most importantly and urgently, it was designed to save
Eskom (and therefore the country) from the catastrophic implications
of
default. NERSA's decision expressly undercuts these imperatives by
neutralising the effect of the government intervention. It contends
that NERSA's decision also undermines Eskom's ability to meet its
debt commitments going forward, and thus imperils Eskom and the
country. In doing so, the decision violates basic accounting
principles by treating the equity injection as revenue.
[36]
The question of remedy must be determined within this context
as it is trite that the remedy adopted by the Court in this case must
fit the injury.
Scope of the Relief
Sought by Eskom
[37]
Eskom's primary motivation for the adoption, by this Court, of
the substitutionary relief is that it is directed at correcting the
unlawful act of NERSA (in removing Governments R23 billion per annum
equity injection from Eskom's allowable revenue) by returning
that
R23 billion per annum into Eskom's allowable revenue (albeit without
any increase for two years' lost interest on that revenue).
The
thrust of Eskom's contention is that it does not ask this Court to
usurp NERSA's expert function, but rather to only correct
a patently
unlawful act of NERSA, that had precise liquidated consequences in
terms of Eskom's allowable revenue.
[38]
Eskom submits that NERSA's regulatory function was to use its
expert knowledge to determine the allowable revenue of Eskom under
the MYPDM4 formula (an expert regulatory function that a Court would
be reluctant to second guess). Having done so, it then unlawfully
deducted from the allowable revenue an amount of R23 billion per
annum corresponding to the equity injections of government.
[39]
As concerning the doctrine of the separation of powers, Eskoms
argues that by restoring the 3 amounts of R23 billion unlawfully
deducted, this Court will not be tresspassing on any expert
regulatory function of NERSA, but that the Court will be merely
correcting
NERSA's unlawful removal of R23 billion per annum from
Eskom's allowable revenue.
[40]
NERSA, on the other hand, argues that the doctrine of
separation of powers demands that the Court should remit the decision
to NERSA
for redetermination because, as the Regulator, is it best
placed to deal with it. Its primary motivation for remittal, is
premised
on NERSA's reasons for the 2019/2022 decision which relate
specifically to the negative returns demonstrated by Eskom in its
application
for the 2019/2022 tariff determinations. NERSA argues
that it should be given an opportunity to deal with these returns and
whether
they be adjusted upwards.
[41]
In its reasons for the decision, NERSA explains that because
"the negative returns" posed potential risks for Eskom and
the industry, it gave Eskom an opportnunity to mitigate the risk
reflected in its application. NERSA goes onto explain that Eskom
then
adjusted its figures and decreased the negative return by R394m in
2019/20 instead of closing the gap and mitigating the risk.
NERSA
says that this caused it to conclude that:
'Given that most of
Eskom's efficiencies are systematic in nature and within the control
of Eskom, NERSA was of the view that, it
would not be fair that
consumers be held responsible for such costs relating thereto.
…
NERSA took note of the
R23bn shareholder injection to assist Eskom with debt repayments and
saw fit to consider the said injection
when determining Eskom's
application. NERSA was of the view that if the cash injection was not
taken into account, it would have
caused excess returns to Eskom. In
balancing excess returns, as required by the MYPD4 Methodology, the
R23bn government assistance
was used to reallocate risks between
Eskom and its customers in accordance with section 2.2.1 of the MYPD4
Methodology.'
[42]
Eskom responded as follows in its replying affidavit:
'NERSA's ultimate
decision was to allow Eskom a negative return only, except that it
widened the gap between what would constitute
a reasonable return and
the tariff to be charged over the three-year period.
Moreover, as explained by
Eskom in its founding affidavit (and as well known by NERSA), Eskom's
application was based on the need
to move smoothly towards
sustainability and avoid shock to the consumer. It was designed to
provide for a sustainable tariff over
the full course of the MYPD4
cyde. It was not reached as a result of any "superficial
mathematical calculation".
The
bizarre feature of NERSA's reasoning - and this is most evident in
the last sentence of paragraph 239- is that it criticises
Eskom for
its use of the balancing mechanism (which, as already mentioned, was
designed to facilitate a smooth transition to more
reasonable
returns) because it says that it is inconsistent with the
methodology, and it responds to that by departing from the
methodology. Or, to put it differently, it criticises Eskom for
providing for a negative return and then responds by imposing a
more
extreme negative return. This is self-evidently irrational.
It
is simply false for NERSA to say, as it does in paragraph 241, that
it granted Eskom a positive return. This may be a reference
to the
WACC decision of 1.5%, but as shown in the founding affidavit, the
reduction of the equity injection had the effect of reducing
the
allowable revenue to a negative return. The ultimate decision
reflects a negative return of approximately -1%.
The
return allowed before the R23 billion adjustment is 1.5% compared to
a WACC of 7.1%% (as calculated by NERSA). By deducting
the R23
billion the return is negative and therefore the risk is shifted to
the shareholder (which, in essence, is the tax-payer).'
[43]
As I see it, the question of the "negative returns"
raised by NERSA is aimed to distract from the issue at hand. What's
more is that NERSA cannot have its cake and eat it. On the one hand,
it concedes that its decision to decrease the 2019/2020 tariff
determination by the equivalent of R23bn for the three years was
irregular and falls to be set aside. Whilst, on the other hand,
it
seeks to justify the correctness of the decision with reference to
the
ex post facto
reasons for its decision, which it provided
in justification of its decision, seven months subsequent to arriving
at the decision.
In my view, once NERSA conceded the merits of the
application for review, it was not open to NERSA to place reliance on
its reasons
for decision in relation to the appropriateness of the
remedy now sought by Eskom.
The Law on Remedy
[44]
In
Allpay
the Constitutional Court stated:
"Logic, general
legal principle, the Constitution and the binding authority of this
court all point to a default position that
requires the consequences
of invalidity to be corrected or reversed where they can no longer be
prevented. It is an approach that
accords with the rule of law and
principle of legality."
[8]
This
is a well-accepted starting point when it comes to the determination
of judicial reviews.
[45]
The
remedies of remittal
[9]
and
substitution
[10]
are widely
recognised remedies in judicial reviews. The remedy of substitution
would be appropriate in "exceptional circumstances"
only.
Eskom submits that the remedy proposed by Eskom in its draft order
envisages only "partial" substitution by the
Court, as only
a component of NERSA's decision will require substitution if the
relief sought in the draft order is accepted.
[46]
In
Trencon
,
[11]
the Constitutional Court had occasion to consider the issue of
substitution. It was mindful of the doctrine of separation of powers
which requires a court not to trespass on the terrain of the other
arms of state when exersing its powers. In doing so, it referred
to
several factors that it considered relevant to whether substitution
should be ordered:
'The first is whether a
court is in as good a position as the administrator to make the
decision. The second is whether the decision
of an administrator is a
foregone conclusion. These two factors must be considered
cumulatively. Thereafter a court should still
consider other relevant
factors. These may include delay, bias or incompetence of an
administrator.'
[47]
The Constitutional Court emphasised in
Trencon
that:
"[The] ultimate
consideration is whether a substitution order is just and equitable.
This will involve a consideration of fairness
to all implicated
parties. It is prudent to emphasise that the exceptional
circumstances enquiry requires an examination of each
matter on a
case-by-case basis that accounts for all relevant facts and
circumstances."
[12]
[48]
In
Aquila
Steel
,
[13]
a decision of the High Court confirmed on appeal by the
Constitutional Court,
[14]
the
court pointed out that substitution is only appropriate as a remedy
in exceptional circumstances and where it would be fair,
just and
equitable to order it.
[15]
In
that case, the inordinate delay of the administrators in making the
relevant administrative decision, coupled with a long history
of
administrative incompetence, motivated the court to grant
substitution.
[16]
[49]
In
Director-General,
Department of Home Affairs v Link
,
[17]
the High Court ordered substitution because the decision was a
foregone conclusion - "there was only one proper and inevitable
conclusion that the court could come to" - and there was no
"further information or factual or technical enquiry"
that
was needed before one inevitably arrived at this conclusion.
[18]
Appropriateness of
Substitution
[50]
As I understand it, the proposed order is designed to ensure
that the R23bn that was taken out of Eskom's allowable revenue for
each of the three relevant financial years, is put back into its
allowable revenue in the first three available financial years
going
forward. I see the need to highlight that this determination cannot
apply to two of the three financial years covered by
the 2019/2022
decision because of the passage of time.
[51]
I
consider the draft order to strike the ideal balance between
providing just and equitable relief, on the one hand, and preserving
the separation of powers
[19]
on the other. The proposed order will require NERSA to put back the
R23bn per annum that it unlawfully removed when making the
2019/22
decision. In relation to the 2021/2022 financial year NERSA will be
required to add, to the allowable revenue that it has
already
determined, the sum of R23bn that it illegitimately removed. Although
in respect to the 2122 to 2024 financial years, this
will amount to a
species of substitution, as the Court would be imposing on NERSA a
portion of its decision on allowable revenue,
it would be a very
limited form of substitution. This is because NERSA will retain the
power to determine the rest of the allowable
revenue on the normal
basis, with the caveat, of course, that it must add the sum of R23bn
that it illegally removed.
[52]
As concerning the limited issue of restoring the R23 billion
illegitimately removed, I conclude that the Court is in as good a
position
as NERSA to make the decision because the R23 billion that
was unlawfully removed is a liquidated amount. This means that its
restoration
is a legal question, not an expert regulatory question.
[53]
I am of the considered view that the aspect of NERSA's
decision that will be substituted is a foregone conclusion. There is
simply
no way for the harm caused by NERSA's 2019/22 decision, to be
rectified other than by reinstating the misappropriated R23bn in each
of the next three available financial years. The limited question of
how to rectify the misappropriated R23bn per annum, is also
not a
technical question within the regulator's specialist expertise. It is
a simple mechanism to return what was unlawfully removed.
[54]
The substitutionary order is also necessary to avoid undue
delay in remedying NERSA's unlawful act. NERSA's lenghty delay in
furnishing
its reasons (seven months after making the decision)
coupled with conceding that it unlawfully misappropriation of the R23
billion
per annum, some eight months later (on 5 June 2020), has
meant that Eskom has already been deprived of R23 billion per annum
in
two of the three years to which MYPDM4 applied, namely the
2019/2020 and 2020/2021 financial years. As alluded to earlier in the
judgment, these delays have compounded NERSA's existing delays in
deciding the 2014 to 2017 RCA decisions. What this means, is
that in
2023 Eskom will still be recovering tariff revenue due to it from the
period 2014 to 2017.
[55]
Significantly NERSA's tariff decision for 2018/19 was reviewed
and set aside by Kollapen J earlier this year. Kollapen J has also
set aside NERSA's June 2018 decision on the RCA application for the
2014 to 2017 financial years. As in this case, NERSA conceded
the
merits in both the abovementioned decisions. Needless to say, NERSA
has taken irregular decisions in three consecutive applications
made
by Eskom. This, to my mind, points to a modicum of incompetence on
the part of NERSA in relation to Eskom's tariff applications.
[56]
Counsel for NERSA argued that NERSA was allowed to get the
2019/2022 decision wrong, and then concede the merits, and that the
Court
should not draw an inference of incompetence on its part for
doing so. I have difficulty with this argument. The point is that
NERSA got it wrong on three separate occasions. An in this event, it
got it horribly wrong as it was not allowed to treat Government's
equity injection as a subsidy. To the contrary, the equity injection
was made to obviate Eskom's debt burden.
[57]
It is clear from these considerations that each of the four
grounds for substitution specified by the Constitutional Court in
Trencon
is present in this case. Eskom has, in addition, also
successfully demonstrated that the circumstances of this case are
exceptional.
In its founding affidavit, Eskom has provided extensive
detail about Eskom's liquidity crisis, government's timely
interventions
to address it, and the grave threat to State finances
if NERSA's decision to misappropriate government's equity injection
is not
reversed. This evidence, in context, pertinently illustrates
the injury that the remedy of substitution is designed to assuage in
this case.
[58]
Given NERSA's numerous delays described above, coupled with
failure to properly apply its mind to the legal framework and
supporting
information provided by Eskom in its 2019/2022 tariff
application, I am inclined to the view that the ordinary remedy of
remittal
does not constitute effective relief. Of greater concern, is
that it may inevitably result in a national economic crisis. As aptly
illustrated by Eskom, in its founding affidavit, the government
equity injection was made in 2019 because, at that stage, Eskom's
was
facing a financial crisis that posed a serious risk to the finances
of the State. Lamentably, R46 billion of that equity injection
has
already been lost to Eskom.
[59]
In the circumstances, I have grave misgivings that should this
Court consider it appropriate to remit the matter to NERSA for
redetermination,
there is every likelihood that the R23 billion
equity injection for 2021/2022 will also be lost, before Eskom is
granted additional
allowable revenue to recover that which was
rightly due to it from 2019. Without the proposed substitution order,
there will accordingly
be an increased risk of a collapse of Eskom's
finances with catastrophic consequences for the finances of the South
African State.
[60]
In the circumstanes, I am satisfied that the substitutionary
relief sought by Eskom is appropriate in the context of this case.
[61]
For all these reasons, I conclude that Eskom has made out a
case for the relief set out in its draft order.
Costs
[62]
Eskoms seeks a costs order against NERSA in both Part A and B
of this application. NERSA submits that in view of its concession in
Part B of the application, the Court should order each party to pay
its own costs in both Part A and B.
[63]
In relation to the question of costs in Part A of the
application, Kollapen J stated at paragraph 75 of the judgment:
"While
this part of the proceedings were characterised by
various delays on the part of [NERSA] which resulted in the hearing
date having
to be adjusted on two occasions, I am not satisfied that
such conduct warrants an adverse costs order. Costs of this part of
the
proceedings should be held over for determination in Part B."
[64]
Eskom argues that because NERSA delayed the hearing of Part A
of the application on two occasions and filed its answering affidavit
late it is not entitled to costs in Part A of the application and nor
should the Court make an order that each party pays its own
costs in
that application. I agree. This is not a matter where NERSA made a
simple concession to the merits in Part B of the application.
It's
delay in filing its answering affidavit resulted in the court hearing
having to be changed on two occasions. In this regard,
the notice of
motion provided for NERSA to file its answering affidavit by 15
November 2019. On that day, NERSA's attorneys sought
an extention to
25 November 2019. Eskom granted NERSA the indulgence. This resulted
in the hearing being moved to 9 December 2019.
However, NERSA did not
file its affidavit on 25 November 2019. At a case management
conference on 26 November 2019, NERSA undertook
to file its answering
affidavit by 6 December 2019. NERSA did not comply with this deadline
either. That resulted in the hearing
date being moved to 13 January
2020.
[65]
On 13 December 2019, NERSA provided Eskom with an unsigned
affidavit, but then reserved the right to make changes to it. At a
further
case management meeting on 19 December 2019, NERSA confirmed
that it intended to make changes to the unsigned verion of the
affidavit.
After Eskom's counsel recorded its prejudice at this turn
of events, Kollapen J directed NERSA to file its answering by 23
December
2019. Although NERSA complied by filing its answering
affidavit on 23 December 2019, its delay once again caused the
hearing date
to be moved from 13 January to 15 January 2020.
[66]
NERSA's delay in filing its answering affidavit on time meant
that the timetable for the hearing of the Part A application had been
compressed to the inconvenience of the Court and Eskom. While papers
ought to have been finalised in November 2019, they were only
finalised two days before the hearing and Eskom had to prepare its
replying affidavit and heads of argument whilst counsel were
away on
holiday.
[67]
In the ordinary course, NERSA would be entitled to costs
because it has had substantial success in Part A of the application.
But
in view of NERSA's unquestionably prejudicial conduct described
above, I exercise my discretion in favour of awarding costs to Eskom
in both Part A and B of this application.
Order
[68]
In the result, I make the following order:
1.
The decision taken by NERSA on 7 March 2019 in respect of the
Eskom allowable revenue and tariffs for the years 2019/2020 to
2021/22
decision of NERSA is reviewed and set aside.
2.
A sum of R23bn will be added to the allowable revenue already
determined by NERSA for the 2021/2022 financial year.
3.
The average standard Eskom tariffs approved by NERSA for the
2021/2022 financial year will be increased by from 116.72 c/kwh to
128.24 c/kwh.
4.
After such time as NERSA has determined the allowable revenue
for Eskom in respect of the 2022/23 and 2023/24 financial years,
NERSA
is directed to add a sum of R23bn to the allowable revenue in
respect of each of those years.
5.
NERSA is precluded from making any adjustment or compensation
to offset the R23bn from the allowable revenue determined for these
financial years or otherwise to deduct, directly or indirectly, the
R23bn equity injection from the allowable revenue for those
financial
years.
6.
NERSA is to pay Eskom's costs of this application, including
the costs of two counsel and including the costs of the Part A
application.
_______________________________
F KATHREE-SETILOANE
JUDGE OF THE HIGH COURT
GAUTENG
LOCAL DIVISION, JOHANNESBURG
Counsel
for Eskom
: M Chaskalson SC with A Friedman
Instructed
by
: Gildenhuys Malatji Inc
Counsel
for NERSA
: MA Dewrance SC with B Rowjee
Instructed
by
: Prince Mudau Attorneys
Date
of Hearing
: 24 June 2020
Date
of Judgment
: 28 July 2020
[1]
No. 4 of Act 4 of 2006.
[2]
Economic Freedom Fighters v Speaker of the National Assembly
2018
(2) SA 571
(CC) at para 211 ("Economic Freedom Fighters (2)");
Head of Department: Mpumalanga Department of Education v Hoërskool
Ermelo
2010 (2) SA 415
(CC) para 211.
[3]
Economic Freedom Fighter (2) at paras 211 and 222. See also: Eskom
Holdings Soc Limited v NERSA 2020 JDR 0629 (GP) at paras 90-91.
[4]
No. 40 of 2004.
[5]
Section 2(a) and (b) of the ERA.
[6]
NERSA v Borbet SA (Pty) Ltd; Eskom Soc Ltd v Borbet SA (Pty) Ltd
[2017] 3 All SA 559
(SCA) at para 12.
[7]
This is addressed in paragraph 17, and in particular paragraph 17.2,
of MYPDM4.
[8]
Allpay Consolidated Investment Holdings (Pty) Ltd v Chief Executive
Officer, South African Social Security Agency
2014 (4) SA 179
(CC)
at para 30
[9]
Section 8(1)(c)(i) of PAJA.
[10]
Section 8(1)(c)(ii)(aa) of PAJA.
[11]
Trencon Construction (Pty) Ltd v Industrial Development Corporation
of South Africa Ltd 2015 (5) SA 245 (CC)
[12]
Trencon at para 47
[13]
Aquila Steel (SA) Ltd v Minister of Mineral Resources 2017 (3) SA
301 (GP)
[14]
Aquila Steel (SA) Ltd v Minister of Mineral Resources 2019 (3) SA
621 (CC)
[15]
Aquila Steel at para 106
[16]
Aquila Steel at paras 111-112
[17]
Director-General, Department of Home Affairs v Link
2020 (2) SA 192
(WCC)
[18]
Link at para 68
[19]
See: Minister of Home Affairs v Saidi
2017 (4) SA 435
(SCA) at para
43