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[2016] ZAGPPHC 702
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Borbet SA (Pty) Ltd and Others v National Energy Regulator of South Africa and Others (24364/2016) [2016] ZAGPPHC 702 (16 August 2016)
IN THE HIGH COURT OF
SOUTH AFRICA
(GAUTENG DIVISION,
PRETORIA)
Case number:
24364/2016
Date: 16 August 2016
Not reportable
Not of interest to
other judges
Revised.
In the matter between:
BORBET SA (PTY)
LTD FIRST
APPLICANT
PG GROUP (PTY)
LTD SECOND
APPLICANT
CROWN CHICKENS (PTY)
LTD THIRD
APPLICANT
AGNI STEELS SA (PTY)
LTD FOURTH
APPLICANT
AUTOCAST SOUTH AFRICA
(PTY) LTD t/a
AUTOCAST PORT
ELIZABETH FIFTH
APPLICANT
NELSON MANDELA BAY
BUSINESS CHAMBER SIXTH
APPLICANT
And
THE NATIONAL ENERGY
REGULATOR OF
SOUTH
AFRICA FIRST
RESPONDENT
ESKOM HOLDINGS SOC
LTD SECOND
RESPONDENT
MINISTER OF
ENERGY THIRD
RESPONDENT
NELSON MANDELA BAY
MUNICIPALITY FOURTH
RESPONDENT
SOUTH AFRICAN LOCAL
GOVERNMENT
ASSOCIATION FIFTH
RESPONDENT
JUDGMENT
PRETORIUS
J,
(1)
In
this review application the applicants are seeking an order declaring
the decision published by the first respondent on 1 March
2016 in
respect of the Regulatory Clearing Account (“RCA”)
application by the second respondent – third Multi-Year
Price
Determination (MYPD3) Year 1 (2013/2014) (the “Decision”)
to be inconsistent with the Constitution and invalid
and an order
reviewing and setting aside the Decision, as well as an order that
all future RCA applications by the second respondent
in respect of
the MYPD3 be submitted and evaluated strictly in accordance with
paragraph 14 of the MYPD Methodology, or any future
amendment
thereof. Furthermore the applicants are seeking an order:
“
Declaring
the allowed revenue for Eskom for 2016/2017, to be the amount of
R170 264 million, as reflected in Table 3 of the
Decision,
resulting in an average approved increase to standard tariff
customers of the Second Respondent for 2016/2017 of 3.51%
and 8% for
2017/2018 (the “Lawful Tariff”)”
[1]
.
(2)
A further order is sought
to direct the first respondent to amend all electricity tariffs
approved based on the decision and directing
the second respondent to
refund all credits resulting from the introduction of the lawful
tariff. An order should be issued
in relation to distributors
and directing that any amount overpaid to the second respondent be
credited as excess revenue and directing
the first respondent to
adjust the revenue requirement for the 2017/2018 calendar year under
the MYPD3.
(3)
In the alternative an
order is sought remitting the decision to the first respondent for
reconsideration with directions regarding
how the RCA is to be
implemented and determined.
THE PARTIES:
(4)
The first applicant is
BORBET SA (PTY) LTD, a private company. Borbet’s primary
business is the manufacture of aluminium
alloy wheels and as a
supplier to the automotive sector.
(5)
The second applicant is PG
GROUP (PTY) LTD t/a SHATTERPRUFE, a private company.
Shatterprufe is a producer of automotive safety
glass.
(6)
The third applicant is
CROWN CHICKENS (PTY) LTD, a private company. Crown Chickens’
core business is the production
of processed poultry products.
(7)
The fourth applicant is
AGNI STEELS SA (PTY) LTD, a private company. Agni Steels
conducts its primary business as a manufacturer
of various steel
products.
(8)
The fifth applicant is
AUTOCAST SOUTH AFRICA (PTY) LTD t/a AUTOCAST PORT ELIZABETH, a
private company. Autocast is a manufacturer
and supplier of
cast components to the automotive sector.
(9)
The first to fifth
applicants are businesses operating within the Nelson Mandela Bay
Metropolitan Municipality (“the municipality”).
They are consumers and users of electricity supplied by the
municipality, and are directly and negatively affected by NERSA’s
decision.
(10)
The sixth applicant is the
NELSON MANDELA BAY BUSINESS CHAMBER. The Business Chamber
represents a broad spectrum of business
in the Nelson Mandela Bay
with a membership of close to one thousand businesses (including the
first to thirteenth applicants).
(11)
NERSA
is the first respondent. It is a regulatory authority
established in terms of section 3 of the
National
Energy Regulator Act
[2]
(“the NERSA Act”). NERSA’s mandate is to
regulate the electricity industry in South Africa in terms of
the
Electricity
Regulation Act
[3]
.
The Regulator is the custodian and enforcer of the regulatory
framework provided for in the
Electricity
Regulation Act
[4]
(“ERA”).
(12)
Eskom is the second
respondent. It is a public company. The applicants seek
costs against Eskom as Eskom opposes this
review application.
This review application is opposed by the first and second
respondents.
(13)
The third respondent is
the MINISTER OF ENERGY, cited in her official capacity as the
National Executive Authority. NERSA
falls under the Minister’s
authority. Aside from costs in the event of opposition, no
relief is sought against the
Minister.
(14)
The fourth respondent is
the NELSON MANDELA BAY MUNICIPALITY. The fourth respondent
filed an affidavit setting out that it
is not opposing or supporting
the application, as long as it does not adversely affect the fourth
respondent.
(15)
The fifth respondent is
the SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION. The third and
fifth respondents did not file opposing
papers.
(16)
Counsel for both the
applicants and the first and second respondents launched condonation
applications for the late filing of their
heads of argument. In
both instances these applications were not opposed and were granted.
LEGAL FRAMEWORK:
(17)
A regulatory framework has
been put in place to determine the price of electricity.
According to the applicants the most recent
price adjustment has
strayed from that framework in circumstances that are impermissible
and for unjustified reasons.
(18)
Pricing
of electricity is regulated by the
Electricity
Regulation Act
[5]
(“ERA”). Section 4(a)(ii) of the Act states that
“
the
Regulator must regulate prices and tariff”
.
Section 15(1) and (2) of the Act prescribes the principles:
“
(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;
(c)
must give end users proper information regarding the costs that their
consumption imposes on the licensee's business;
(d)
must avoid undue discrimination between customer categories; and
(e)
may permit the cross-subsidy of tariffs to certain classes of
customers.
(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.”
(19)
The
Electricity
Pricing Policy
[6]
(“EPP”) gives broad guidelines to National Energy
Regulator of South Africa (NERSA) in approving prices and tariffs
for
the electricity supply industry. The EPP sets out principles
for determining and approving the revenues that a licensed
generator,
transmitter or supplier of electricity may derive from its licensed
activities. Tariffs are then determined so
that the approved
revenues are achieved.
(20)
The multi-year price
determination methodology has been put in place. The MYPD
methodology is a comprehensive document.
It deals with the
Regulatory Clearing Account (“RCA”).
(21)
The
purpose of the RCA is set out in the Methodology as
[7]
:
“
14.1
Risk
Management Device
The risk of excess or
inadequate returns is managed in terms of the RCA. The RCA is
an account in which all potential adjustments
to Eskom’s
allowed revenue which has been approved by the Energy Regulator is
accumulated and is managed as follows:
14.1.1 The nominal
estimates of the regulated entity will be managed by adjusting for
changes in the inflation rate.
14.1.2 Allowing the
pass-through of prudently incurred primary energy costs as per
Section 8 of the Methodology.
14.1.3 Adjusting
capital expenditure forecasts for cost and timing variances as per
Section 6 of the Methodology.
14.1.4 Adjusting for
prudently incurred under-expenditure on controllable operating costs
as may be determined by the Energy Regulator.
14.1.5 Adjusting for
other costs and revenue variances where the variance of total actual
revenue differs from the total allowed
revenue. In addition, a
last resort mechanism is put in place to trigger a re-opener of the
price determination when there
are significant variances in the
assumptions made in the price determination.”
(22)
ERA and EPP set out the
principles and the MYPD methodology sets out the process. Each
determination of price covers a period
of 3 to 5 years. The
recent determination by NERSA was the third multi price
determination, known as MYPD3. MYPD3 covers
five tariff years,
between 1 April 2013 and 31 March 2018. The tariff years and
Eskom’s financial years coincide.
(23)
The RCA application was
made in terms of the Regulator’s Multi-Year Price Determination
Methodology (MYPD). It forms
the basis on which NERSA will
evaluate the price adjustment application from Eskom.
(24)
The MYPD methodology was,
according to the NERSA document, developed for the regulation of
Eskom’s required revenues.
The capability and expertise
of NERSA’s personnel were not an issue in the present
application.
(25)
The Regulatory Clearing
Account (“RCA”) is used to debit or credit potential
adjustments to Eskom’s allowed revenue
and it is set out,
inter
alia
, how it should be
used in section 14.2.4 pertaining to the methodology. Section
14.2.5 obliges Eskom to present NERSA with
possible adjustments based
on the methodology on a quarterly basis. The applicants further
rely on the provisions of paragraph
14.2.6 which refer to “
any
adjustment required in the subsequent financial year’s tariff
adjustment”
.
(26)
According to NERSA the
following objectives were adopted to develop the MYPD methodology:
“
1. to ensure
Eskom’s sustainability as a business and limit the risk of
excess or inadequate returns; while providing incentives
for a new
investment;
2. to ensure
reasonable tariff stability and smoothed changes over time consistent
with socio-economic objectives of the Government;
3. to appropriately
allocate commercial risk between Eskom and its customers;
4. to provide
efficiency incentives without leading to unintended consequences of
regulation on performance;
5. to provide a
systematic basis for revenue/tariff setting; and
6. to ensure
consistency between price control periods.”
(27)
According to the first
respondent the methodology does not preclude NERSA from applying
reasonable judgment to its consideration
of Eskom’s revenue,
bearing in mind and after due consideration of the best interests of
the South African economy and the
consumers as a whole.
(28)
NERSA approved an 8%
annual increase on the approved revenues for the 2013/2014 tariff
year. NERSA approved an additional
price increase in respect of
the 2013/2014 tariff year of R11.2 billion to take effect on 1 April
2016, to be recovered during
the 2016/2017 tariff year.
(29)
This decision by NERSA is
being challenged by the applicants, as it represents a tariff
increase for the 2016/2017 tariff year of
5.9% in addition to the
previously approved increase under MYPD3. The applicants
contend that NERSA has allowed Eskom to
reach back to the 2013/2014
period to recover an additional R11.2 billion in 2016/2017, 27 months
after the annual audited financial
statements became available.
(30)
The Regulatory Clearing
Account (“RCA”) is governed by section 14.2 of the
methodology which provides:
“
The RCA is used
to debit/credit all the aforementioned potential adjustments to
Eskom’s allowed revenue and must be used as
follows:
14.2.1 The RCA will be
created at the beginning of the financial year and continuously
monitored. The evaluation of the account
(for the purpose of
determining the pass-through and/or claw-back will be done with
actuals for the full financial year.
14.2.2
This account
must be updated quarterly so as to use it for regular alerts to
customers of any possible adjustment in the coming
year. Eskom
must therefore submit actual financial data on a quarterly basis
.
14.2.3 The RCA balance
will be measured as a percentage of total allowed revenue and will
act as a trigger for a re-opener as follows:
14.2.3.1 ...
14.2.3.2 ...
14.2.3.3 If the
balance is greater than 10% of the allowable revenue, there will be a
full stakeholder consultation process before
any pass-through is
allowed.
14.2.4
The
adjustment to be included in the RCA and balance of the RCA will be
approved by the Energy Regulator in terms of the MYPD Methodology
.
The Energy Regulator will only have to determine the timing of
when it should be passed through or clawed-back.
14.2.5
Eskom will,
on a quarterly basis, present the Energy Regulator with possible
adjustments based on the Methodology, the costs to
date and the
projections to year-end
.
14.2.6 The Energy
Regulator will review Eskom’s submissions and make a
preliminary assessment of any adjustments
required in the
subsequent financial year’s tariff adjustment
.
14.2.7
The review will be performed on receipt of audited statements from
Eskom.”
(Court
emphasis)
The RCA allows Eskom to
obtain adjusted revenues for prior years by after the fact
adjustments to the electricity price. Once
NERSA has approved
it, the adjustment is effected through price increases in subsequent
years. This decision is that of NERSA
only. NERSA does
not agree that it has an unlimited discretion to depart from the
methodology, but argues that the methodology
gives NERSA the
discretion to weigh up several considerations in the interest of the
consumers and the South African economy.
(31)
Section
10(1) of
National
Energy Regulator Act
[8]
(“NERA”)
provides:
“
(1) Every
decision of the Energy Regulator must be in writing and be-
(a)
consistent with the Constitution and all applicable laws;
(b) in the
public interest;
(c) within
the powers of the Energy Regulator, as set out in this Act, the
Electricity Act, the Gas Act and the Petroleum
Pipelines Act;
(d) taken
within a procedurally fair process in which affected persons have the
opportunity to submit their views and
present relevant facts and
evidence to the Energy Regulator;
(e) based
on reasons, facts and evidence that must be summarised and recorded;
and
(f)
explained clearly as to its factual and legal basis and the reasons
therefor.”
SEPARATION OF POWERS:
(32)
The first respondent dealt
with the concepts of the separation of powers at great length.
I agree with the first respondent’s
argument that courts are
reluctant to become involved in issues of policy. However, I
have to decide whether dealing with
this review on the grounds of
rationality, lawfulness and fairness would interfere in the sphere of
policy of the executive and
the implementation of the decision by
NERSA.
(33)
I
am mindful of the
dictum
as set out in
Bato
Star Fishing (Pty) Ltd v Minister of Environmental Affairs and
Others
[9]
where the court held:
“
In
treating the decisions of administrative agencies with the
appropriate respect, a Court is recognising the proper role of the
Executive within the Constitution
.
In doing so a Court should be careful not to attribute to itself
superior wisdom in relation to matters entrusted to other branches
of
government. A Court should thus give due weight to findings of fact
and policy decisions made by those with special expertise
and
experience in the field. The extent to which a Court should give
weight to these considerations will depend upon the character
of the
decision itself, as well as on the identity of the decision-maker. A
decision that requires an equilibrium to be struck
between a range of
competing interests or considerations and which is to be taken by a
person or institution with specific expertise
in that area must be
shown respect by the Courts. Often a power will identify a goal to be
achieved, but will not dictate which
route should be followed to
achieve that goal. In such circumstances a Court should pay due
respect to the route selected by the
decision-maker. This does not
mean, however, that where the decision is one which will not
reasonably result in the achievement
of the goal, or which is not
reasonably supported on the facts or not reasonable in the light of
the reasons given for it, a Court
may not review that decision.
A
Court should not rubber-stamp an unreasonable decision simply because
of the complexity of the decision or the identity of the
decision-maker
.”
(Court emphasis)
(34)
In
Logbro
Properties CC v Bedderson NO and Others
[10]
,
Cameron JA dealt with “polycentric decision-making” as
follows:
“
The fact is
that the committee's performance of its duty in 1997 was a prime
instance of what commentators have dubbed 'polycentric
decision-making'. It was not a unilinear question involving the
assertion of one subject's rights against the administration. The
appellant had a right to a fair tender process in 1995…. When,
therefore, the committee set out to 'reconsider' the compliant
tenders, it undertook the typically complex task of balancing all the
public interests its mandate required it to fulfil. This
included
fair reconsideration of the appellant's tender - but not to the
exclusion of considerations involving its broader responsibilities.
These included the public benefit to be derived from obtaining a
higher price by re-advertising the property.”
In
paragraph 21 he dealt with judicial deference as follows:
“
It is in just
such circumstances that a measure of judicial deference is
appropriate to the complexity of the task that confronted
the
committee. Deference in these circumstances has been recommended as
'.
. . a judicial willingness to appreciate the legitimate and
constitutionally-ordained province of administrative agencies; to
admit the expertise of those agencies in policy-laden or polycentric
issues; to accord their interpretation of fact and law due
respect;
and to be sensitive in general to the interests legitimately pursued
by administrative bodies and the practical and financial
constraints
under which they operate. This type of deference is perfectly
consistent with a concern for individual rights and a
refusal to
tolerate corruption and maladministration.
It
ought to be shaped not by an unwillingness to scrutinize
administrative action, but by a careful weighing up of the need for
-
and the consequences of - judicial intervention. Above all, it ought
to be shaped by a conscious determination not to usurp the
functions
of administrative agencies; not to cross over from review to
appeal
.'”
(Court emphasis)
(35)
In
Minister
of Environmental Affairs and Tourism and Others v Phambili Fisheries
(Pty) Ltd; Minister of Environmental Affairs and Tourism
and Others v
Bato Star Fishing (Pty) Ltd
[11]
the court emphasized that a court in a review application is not
sitting in appeal on the correctness of the functionary’s
decision, even more so where the subject matter of administrative
action is very technical.
(36)
The court has been warned
not to intrude in the executive sphere and not to blur the separation
of powers.
(37)
I am thus mindful,
referring to all the above decisions, that I am confined to review
the procedure that NERSA had adopted in arriving
at its decision.
It is so that the court will deal with each review application on its
own merits when considering procedural
fairness, reasonableness and
the balance that has to be maintained between the competing
interests.
RATIONAL, LAWFUL AND
PROCEDURALLY FAIR REVIEW:
(38)
The
applicants set out clearly that this court is only requested to
consider whether the decision by NERSA was rational, lawful
and
procedurally fair in all respects. In
Democratic
Alliance v President of the Republic of South Africa
[12]
the court held:
“
It
is therefore difficult to conceive how the separation of powers can
be said to be undermined by the rationality enquiry
.
The only possible connection might be that rationality has a
different meaning and content if separation of powers is involved
than otherwise. In other words, the question whether the means
adopted are rationally related to the ends in executive
decision-making
cases somehow involves a lower threshold than in
relation to precisely the same decision involving the same process in
the administrative
context. This is wrong.
Rationality
does not conceive of differing thresholds. It cannot be suggested
that a decision that would be irrational in an administrative
law
setting might mutate into a rational decision if the decision being
evaluated was an executive one.
The separation
of powers has nothing to do with whether a decision is rational. In
these circumstances, the principle of separation
of powers is not of
particular import in this case. Either the decision is rational or it
is not
.”
(Court emphasis)
(39)
In
Albutt
v Centre for the Study of Violence and Reconciliation, and Others
[13]
the Constitutional Court dealt with a rationality review as follows:
“
The
Executive has a wide discretion in selecting the means to achieve its
constitutionally permissible objectives. Courts may not
interfere
with the means selected simply because they do not like them, or
because there are other more appropriate means that
could have been
selected.
But,
where the decision is challenged on the grounds of rationality,
courts are obliged to examine the means selected to determine
whether
they are rationally related to the objective sought to be achieved
.
What must be stressed is that the purpose of the enquiry is to
determine not whether there are other means that could have been
used,
but
whether the means selected are rationally related to the objective
sought to be achieved
.
And if,
objectively
speaking, they are not, they fall short of the standard demanded by
the Constitution. This is true of the exercise of
the power to pardon
under s 84(2)(j)
.”
(Court emphasis)
(40)
The process by which the
decision is made and the decision itself must be rationally related
as set out in the abovementioned cases.
In the present
application the court has to decide whether NERSA applied the MYPD
methodology lawfully, rationally and fairly if
all the facts are
considered.
BACKGROUND:
(41)
The facts in the review
are not in dispute. The applicants allege that NERSA did not
comply with the MYPD methodology when
it approved Eskom’s RCA
application and therefor the decision was unlawful, irrational and
procedurally unfair.
(42)
On 28 February 2013
Eskom’s MYPD3 was approved by NERSA. At the same time the
average percentage tariff increase for
each of the years in the five
year period from 1 April 2013 to 31 March 2018 were approved as
follows:
“
On
28 February 2013, the Energy Regulator approved Eskom’s MYPD3
Revenue Requirement for the control period 2013/2014 to 2017/2018
as
follows:
2013/2014
2014/2015
2015/2016
2016/2017
2017/2018
Allowed revenues from tariffs based sales (R’m)
142 746
155 477
171 838
189 396
209 025
Forecast sales to tariff customers (GWh)
217 890
219 744
224 877
229 495
234 519
Standard average price (c/kWh)
65.51
70.75
76.41
82.53
89.13
Percentage price increase (%)
8.0%
8.0%
8.0%
8.0%
8.0%
Total expected revenue from all customers (R’m)
149 937
163 584
180 378
196 378
216 322
(43)
On 10 November 2015 Eskom
submitted its RCA application for the 2013/2014 tariff year under
MYPD3. This lead to the decision
by NERSA that is currently
under review.
(44)
The application by Eskom
was for an RCA balance of R22 789 million for the first
financial year of the MYPD3 cycle, which was
1 April 2013 to 31 March
2014. If granted this would have the effect of increasing the
average electricity tariff for 2016/2017
by a greater percentage than
would have been the case otherwise.
(45)
Eskom’s reason for
launching the RCA application was according to Eskom, the
under-recovery of revenue and the incurring of
higher energy costs to
meet demand.
(46)
On 6 January 2016 the
Regulator published a notice in the Business Day Newspaper titled
“
Notice on the
public hearings on Eskom’s Regulatory Clearing Account (“RCA”)
Application – Third Multi Year
Price Determination (MYPD) (Year
One) (2013/2014)”
.
Interested parties had to submit their request to make a presentation
at the public hearing to the respondent by 13 January
2016.
Public hearings were conducted from 18 January 2016 until 4 and 5
February 2016 in Cape Town, Port Elizabeth, Durban,
Mahikeng,
Kimberley and Johannesburg.
(47)
During 13 November 2015
until 22 February 2016 NERSA published Eskom’s RCA application
for public comment and held public
hearings. Private
individuals, small users, energy-intensive users, environmental
activists and local government, including
the sixth applicant
submitted comments.
(48)
On 22 February 2016 the
Electricity Subcommittee (“ELS”) met, after notice had
been given that a special meeting of
ELS would take place on this
date. The meeting was held to consider the decision and reasons
for the decision of Eskom’s
RCA application.
(49)
An
aide
memoire
,
dated 12 January 2016 was prepared for the benefit of the ELS, which
provided background information to Eskom’s MYPD3 RCA
application and the decision making process; analysed each of Eskom’s
requests and summarised and analysed the written stakeholder
comments
[14]
.
(50)
On 24 February 2016, the
Chairperson of the ELS signed a written report to the Regulator
setting out the reasons why the Regulator
should approve the draft
decision and reasons for the decision of Eskom’s application,
as recommended by the ELS.
(51)
The
public was notified on the Regulator’s website, as provided for
in section 8(9)(a) of ERA
[15]
of the meeting to be held by the Regulator on 1 March 2016 to
consider Eskom’s RCA application. The decision and
reasons
were published on the Regulator’s website on 29 March
2016, after NERSA had approved Eskom’s RCA application on 1
March
2016.
(52)
According to the
applicants NERSA had not complied with the MYPD methodology when it
approved Eskom’s RCA application and
therefor the decision was
unlawful, irrational and procedurally unfair.
(53)
The
test that must be applied in “unlawfulness” as a ground
of review is whether the purpose sought to be achieved by
the
injunction has been achieved as set out in
Democratic
Alliance v President of the Republic of South Africa and Others
[16]
.
(54)
I
find in the present application that although I am mindful of the
separation of powers, it does not preclude me to consider whether
the
decision was rational if measured against the principles set out in
the
Democratic
Alliance case
[17]
.
(55)
The
first respondent argues that the decision by NERSA “
is
one that required an equilibrium to be struck between a range of
competing interests or considerations by the Regulator, employing
specific expertise in the field of electricity and economics”
.
The further argument by the first respondent, as I understand it, is
that the grounds of review set out in the applicants’
supplementary affidavit and the applicants’ heads of argument
are confusing. According to the first respondent the
applicant
relies in the supplementary founding affidavit on temporal and
procedural requirements of the Methodology derived from
the
principles of legality and section 6(2)(a)(i), 6(2)(b), 6(2)(d),
6(2)(e)(iii), 6(2)(f)(i), 6(2)(h) and 6(2)(i) of the
Promotion
of Administrative Justice Act
[18]
(“PAJA”). According to the applicants both the
temporal and procedural requirements in the MYPD methodology were
not
complied with.
(56)
The
applicants further contend that the ground of review based on the
efficiency testing requirement of the methodology derived
from the
principle of legality and sections 6(2)(a)(i), 6(2)(b), 6(2)(d),
6(2)(e)(iii), 6(2)(e)(vi), 6(2)(f)(i), 6(2)(f)(ii), 6(2)(h)
and
6(2)(i) of
PAJA
[19]
.
(57)
According to the first
respondent the issue stated by the applicants is whether the decision
and decision-making process were lawful,
rational and procedurally
fair. The second respondent argues that the applicants’
case is an appeal dressed up and
disguised as a judicial review, as
the applicants attack the correctness of NERSA’s decision, not
the irregularity of the
decision. The second respondent’s
argument is that both Eskom and NERSA had complied with material
procedures and conditions
prescribed by the relevant laws in the
result that their actions were procedurally fair.
(58)
The court will deal with
the question whether NERSA, when NERSA made the decision, applied the
MYPD methodology lawfully, rationally
and fairly in this review
application.
(59)
In
Chairperson
of the National Council of Provinces Appellant v Julius Malema and
Another
[20]
the Supreme Court of Appeal held:
“
What
is in dispute is whether the Chairperson [of the National Council of
Provinces] lawfully and rationally applied the standing
order.
The legality and
rationality thresholds are not lowered because the decisions were
made in Parliament. And testing the Chairperson’s
exercise of what, after all, is a public power against those
thresholds falls well within the judiciary’s constitutional
province
.”
(Court emphasis)
I have to deal with the
present application having regard to this finding.
(60)
The
decision
[21]
by NERSA was set
out as:
“
Based on the
available information and the analysis of the Regulatory Clearing
Account (RCA) Application for Year 1 (2013/2014)
of the third
Multi-Year Price Determination (MYPD3) the Energy Regulator, at its
meeting held on 01 March 2016 decided that:
1.
the RCA balance of
R11 241m be recoverable from the standard tariff customers,
local SPA’s and international customers
in the financial year
2016/2017;
2.
the amount of
R10 257m be recoverable from standard tariff customers for the
2016/2017 financial year only;
3.
the average tariff
for standard tariff customers be increased by 9.4% for the 2016/2017
financial year only;
4.
the amount of R983m
be recoverable from Eskom’s local SPA customers and
international customers for the 2016/2017 financial
year only; and
5.
Eskom must submit a
new MYPD application, within three months, based on revised
assumptions and forecasts that reflect the recent
circumstances.”
THE GROUNDS OF REVIEW:
(61)
According
to the applicants the MYPD methodology was not followed in two broad
respects as NERSA did not comply with the temporal
and procedural
requirements set out in the methodology and did not comply with the
methodology’s requirements of efficiency
testing. In the
reasons set out by NERSA: “
The
Act places an obligation on the Energy Regulator to consider an
application that has been brought in terms of section 15,
read
with the MYPD methodology
”
(Court emphasis). It further set out: “
The
MYPD methodology is premised on the principle that total allowed
revenue has to cover all the allowed costs plus a reasonable
return”
[22]
.
NERSA stated in the decision
[23]
:
“
116. The
divergences from the allowed revenue and costs in the first three
years of the MYPD3 are unlikely to be corrected by further
submissions of RCA applications by Eskom. Thus the objectives
of the MYPD methodology. Furthermore, they do not achieve
the
abovementioned objectives of the MYPD.
117.
There is a need to revisit and revise the assumptions for further
electricity price increases in view of the current circumstances
(i.e. low commodity prices, economic downturn, generation fleet
performance, maintenance strategy and implementation).”
In
the answering affidavit NERSA averred: “
The
Regulator avers that its decision complied with the MYPD
methodology”
[24]
.
This position was reiterated in the answering affidavit where NERSA
stated
[25]
:
“
This
decision is in line with the purposive approach to the issue of
substantial compliance with a statutory provision.
There
was compliance with the MYPD Methodology
.
The object sought to be achieved by the RCA procedure was achieved in
this instance.”
(Court
emphasis)
(62)
In
the founding affidavit to the urgent application, the applicants
submitted
[26]
:
“
Once
implemented millions of consumers will be forced to pay the unlawful
portion of the electricity tariff. If NERSA’s
decision is
subsequently set aside, it may be difficult for the applicants and
the public to recover those sums. Although
I am advised that an
enrichment claim would lie, there may be significant hurdles.
These include that it may be impossible
to “unscramble the
egg”: overpaid amounts may be difficult to separate from the
fiscus of Eskom and municipalities.
A court may be unwilling to
order Eskom and municipalities to reverse budgetary processes,
particularly where overpaid sums have
been spent on capital
investment and infrastructure.”
The first respondent
replied to this by stating:
“
The
applicants state that the NERSA decision was also unlawful under MYPD
methodology because the RCA process should have been initiated
during
the 2013/2014 tariff year and completed when the Eskom financial
statements were released, instead of which the RCA application
was
only submitted during November 2015 (paras 88-9).
However,
this is not a peremptory requirement in terms of the applicable MYPD
methodology
.”
[27]
(Court emphasis)
(63)
In the answering affidavit
NERSA changed its position and averred:
“
The
development of the Methodology does not preclude the Regulator from
applying reasonable judgment to its consideration of Eskom’s
revenue after due consideration of the best interests of the overall
South African economy and the public.”
[28]
(64)
This
statement relied on paragraph 1 of the NERSA MYPD3 document where it
is stated: “
The
development of the methodology does not preclude the Energy Regulator
from applying reasonable judgment on Eskom’s revenue
after due
consideration of what may be in the best interest of the overall
South African economy and the public”
[29]
and adds “…
it
is an oversimplification to describe the MYPD methodology as being
more than guidelines”
.
(65)
Therefor NERSA is, on the
one hand, relying on compliance with the MYPD methodology, but on the
other hand it is keeping its options
open by declaring it was
empowered to depart from the methodology.
(66)
NERSA mentioned the
last-mentioned argument for the first time in its answering affidavit
as it was neither raised in the RCA application,
nor at the public
hearings.
(67)
The
applicants argue that NERSA must decide on which facts it is relying,
citing the
Chamber
of Mines of South Africa v National Union of Mineworkers and
Another
[30]
where it was said:
“
One
or other of two parties between whom some legal relationship subsists
is sometimes faced with two alternative and entirely inconsistent
courses of action or remedies. The principle that in this situation
the law will not allow that party to blow hot and cold is a
fundamental one of general application
.”
(Court emphasis)
(68)
NERSA criticizes the
applicants for arguing that a “host” of documents was not
included in the review record.
According to NERSA the only
documents not included were the bi-annual reports from Eskom.
It must be mentioned that according
to the methodology quarterly
reports had to be furnished to NERSA and not bi-annual reports.
NERSA is of the opinion that
reference to the documents in the
aide
memoire
of 12 January
2016 and the Chairperson’s report of 22 February 2016 are
adequate and therefor the bi-annual reports, which
form part of the
record, supports the decision by NERSA.
(69)
According
to the first respondent the court has to decide whether the purpose
of the RCA had been met as the actual figures for
the financial year
had been submitted. In the summary of comments the purpose of
the methodology, according to the stakeholders
[31]
:
“…
is to
provide a clear price path and predictability. Eskom has not
followed the prescribed RCA methodology in that it did
not provide
quarterly updates during 2013/2014.
The stakeholders are
urging NERSA to either reject the application due to procedural
failure or penalise Eskom for not following
process prescribed in the
MYPD methodology.”
NERSA conceded that
quarterly reports were not submitted, but did not deal with concerns
regarding the purpose of the methodology.
(70)
The
second respondent argues that the applicants have mistakenly argued
that procedural requirements are considered on their own
merits,
instead of concentrating on the final outcome. In
Allpay
Consolidated Investment Holdings (Pty) Ltd and Others v Chief
Executive Officer, South African Social Security Agency, and
Others
[32]
the court found:
“
Under
the Constitution there is no reason to conflate procedure and merit.
The proper approach is to establish, factually, whether
an
irregularity occurred. Then the irregularity must be legally
evaluated to determine whether it amounts to a ground of review
under
PAJA.
This legal
evaluation must, where appropriate, take into account the materiality
of any deviance from legal requirements, by linking
the question of
compliance to the purpose of the provision, before concluding that a
review ground under PAJA has been established
.”
(Court emphasis)
(71)
The purpose of the
temporal requirement appears from paragraph 14.2 of the MYPD
methodology. Both NERSA and Eskom conceded
that Eskom had not
provided quarterly reports as regular alerts to customers of any
possible adjustment in the coming tariff year.
(72)
Should
I find that there was a deviation from the methodology then the
question will be whether the deviation from the methodology
was done
arbitrarily, irrationally or unfairly and whether the purpose of the
RCA application has been met. The applicants’
argument is
that NERSA published the methodology and created the impression that
it would be followed as there was no notification
at any time to any
party that there would be a deviation from the methodology when
considering the RCA application. This,
according to the
applicants, is unlawful as set out in
Premier,
Mpumalanga, and Another v Executive Committee, Association of
State-Aided Schools, Eastern Transvaal
[33]
where O’Regan J held that:
“
Expectations
can arise either where a person has an expectation of a substantive
benefit,
or an
expectation of a procedural kind
.
There are also circumstances in which a legitimate expectation will
arise which has interrelated substantive and procedural elements,
as
Corbett CJ also recognised in Traub (at 758F). Once a person
establishes that a legitimate expectation has arisen, it is clear
from the language of s 24(b) of the interim Constitution that he or
she will be entitled to procedural fairness in relation to
administrative action that may affect or threaten that expectation”.
(Court emphasis)
(73)
NERSA
relies on paragraph 1 of the MYPD methodology as set out above, but
that does not absolve NERSA from justifying a decision
to deviate and
to publish the reasons for such a deviation so that the public can
make an informed decision whether to oppose such
a deviation and to
deal with such a deviation. This NERSA did not do and only
relied on this ground for the first time in
the answering affidavit.
In
MEC
for Agriculture, Conservation, Environment and Land Affairs v Sasol
Oil (Pty) Ltd and Another
[34]
the Supreme Court of Appeal found:
“
The
adoption of policy guidelines by state organs to assist
decision-makers in the exercise of their discretionary powers has
long
been accepted as legally permissible and eminently sensible.
This is particularly so where the decision is a complex one,
requiring
the balancing of a range of competing interests or
considerations
,
as well as specific expertise on the part of a decision-maker. As
explained in Bato Star Fishing (Pty) Ltd v Minister of Environmental
Affairs, a court should in these circumstances give due weight to the
policy decisions and findings of fact of such a decision-maker.
Once
it is established that the policy is compatible with the enabling
legislation, as here, the only limitation to its application
in a
particular case is that it must not be applied rigidly and
inflexibly, and that those affected by it should be aware of it.
An affected party would then have to demonstrate that there is
something exceptional in his or her case that warrants a departure
from the policy
.”
(Court emphasis)
I find that NERSA was
obliged to inform the customers and public in general that it
intended deviating from the methodology and
to provide reasons for
the deviation to the affected parties, as set out in the above case.
FIRST GROUND OF
REVIEW: TEMPORAL/PROCEDURAL:
(74)
The applicants rely on the
temporal requirements of the MYPD methodology as set out in section
14, which governs RCA applications.
The argument by the
applicants is that there exist several textual markers which
temporally provide that an RCA application should
relate to the
tariff year. According to this argument Eskom is not permitted
to submit and NERSA to evaluate a RCA application
beyond that time
limit.
(75)
The temporal requirement
is set out in sections 14.2.1, 14.2.2 and 14.2.6 under the heading
“
The Regulatory
Clearing Account”
(“RCA”).
(76)
The RCA is used to debit
or credit potential adjustments to Eskom’s allowed revenue and
it is clearly stated that it “
must
be used as follows”
,
which includes the aforementioned paragraphs.
(77)
In
the present instance the RCA application for the 2013/2014 tariff
year was submitted on 10 November 2015 and not during 2013/2014.
The applicants argue, firstly that Eskom did not open an RCA account
and provide quarterly updates as required by the methodology
in
section 14. Secondly, that Eskom should have applied earlier to
NERSA for this tariff increase. This was admitted
by NERSA in
the answering affidavit where it set out the facts of compliance
as
[35]
:
“
112.1.2.1 Eskom
did not open an RCA
in the 2013/2014 year.
112.1.2.2 It
did
not submit quarterly
RCA reports to the Regulator.
112.1.2.3 It submitted
two “bi-annual” RCA reports in around October 2014 to the
Regulator.
112.1.2.4 It submitted
a proper MYPD3 RCA Application
in November 2015
.
112.1.2.5
It submitted its audited annual financial statements for the
2013/2014 year to the Regulator in
July
2014
.”
(Court emphasis)
(78)
According to NERSA the
issue is not whether Eskom proved that it had complied with the MYPD
methodology, but whether the Regulator
was satisfied with Eskom’s
compliance with the MYPD methodology. Eskom submitted its
annual financial statements as
early as 11 July 2014, 27 months
before launching the RCA application.
(79)
The applicants argue that
the failure to adhere to the procedural and/or temporal requirements
defeated the purpose of a RCA application
by not giving Eskom’s
customers regular quarterly alerts of possible price adjustments in
the coming year, so that the customers
and South African public at
large could take it into account when planning for the future.
(80)
In
Allpay
Consolidated Investment Holdings (Pty) Ltd and Others v Chief
Executive Officer, South African Social Security Agency, and
Others
[36]
the court found:
“
That
strict mechanical approach has been discarded. Although a
number of factors need to be considered in this kind of enquiry,
the
central element is to link the question of compliance to the purpose
of the provision. In this court O'Regan J succinctly put
the question
in ACDP v Electoral Commission as being '
whether
what the applicant did constituted compliance with the statutory
provisions viewed in the light of their purpose'.
This is not
the same as asking whether compliance with the provisions will lead
to a different result
.”
(Court emphasis)
The argument by the
applicants is that the provisions of section 14.2.1, 14.2.2 and
14.2.6 are peremptory due to the fact that section
14.2.1 sets out
that the RCA “
will be created at the beginning of the
financial year”
and section 14.2.2 sets out that the
account has to be updated quarterly. This is also set out in
peremptory language, “
This account must be updated
quarterly…”
and “
Eskom must therefore
submit actual financial data on a quarterly basis”
.
NERSA “
will make a preliminary assessment of any adjustment
required in the
subsequent financial year’s tariff
adjustment
”
. Although our law no longer
relies on terms of “
peremptory”
or “
directory”
,
the purpose of the provision, in this instance section 14.2 of the
MYPD methodology must guide the court’s enquiry to consider
the
statutory provisions “
in the light of their purpose
”.
(81)
NERSA’s argument is
that the purpose of the methodology and the regulation of RCA
applications is to “
ensure
Eskom’s sustainability as a business and to limit the risk of
excess or inadequate returns”
.
This does not acknowledge the purpose as set out in section 14.2.2 of
the methodology.
(82)
The further argument is
that the proper approach is that the issue of compliance with the
statutory requirements is whether the
jurisdictional facts have been
complied with. NERSA argues that the court has to determine the
purpose of the legislation
and measure the decision against it.
The second respondent, Eskom, argues that the court has to interpret
section 14.2 of
the Methodology sensibly and contextually. The
court agrees with this, but the question is whether NERSA complied
with the
provision of section 14 of the Methodology in view of the
purpose of the methodology.
(83)
The
argument is that Eskom’s auditors had confirmed that the RCA
application had complied with the MYPD3 methodology.
Eskom
further relies on section 17 of the MYPD methodology and argues that
NERSA will conduct a review of the MYPD methodology,
but that special
circumstances may arise, resulting in NERSA making changes to the
methodology as set out in section 17.1 of the
MYPD Methodology
[37]
.
Section 15(3) of
ERA
[38]
provides that NERSA may in prescribed circumstances approve a
deviation from set or approved tariffs.
(84)
In
this regard Eskom disagrees with NERSA as to the purpose of the RCA
and section 14.2 of MYPD Methodology and sets out
[39]
:
“
9.5.2.1
creation, monitoring and quarterly updates by Eskom of a RCA to alert
customers of possible adjustment in the coming year;”
And
“
22.1
Save to admit
that the creation of the RCA, quarterly updates of the RCA and
submissions by Eskom in terms of section 14.2 of the
MYPD Methodology
are (i) meant for regular alerts to consumers of any possible
adjustment in the coming year and (ii) NERSA’s
preliminary
assessment of any adjustment required
,
the remainder of the allegations contained in these paragraphs are
denied.”
(Court
emphasis)
The contents of these
paragraphs correspond with the applicants’ submission as to the
purpose of section 14.2.2 of the RCA
application.
(85)
NERSA concedes that the
RCA serves a signalling function, but argues that this is only one
aspect, whilst NERSA viewed it as part
of the whole paragraph on the
RCA, contrary to the applicants’ view that it impacts on the
whole process. The further
argument by NERSA is that quarterly
alerts would not be a reliable basis for customers to do forward
planning as to future expenses,
as Eskom’s RCA balance varies
throughout different times of the year. This may be so, but it
is precisely for this
reason that the account must be updated
quarterly in terms of section 14.2.2 to alert customers as to
possible future increases
or decreases.
(86)
It is further common cause
that Eskom’s financial statements were available, in this
instance, for the 2013/2014 tariff year
in July 2014, although a RCA
application was only launched in November 2015. There is no
real explanation for the delay of
the application for more than a
year. According to NERSA an implementation of an MYPD2 balance
resulted in a tariff increase
from 1 April 2015 and that it would not
have been feasible and undesirable to consider a double increase in
the same year.
This does not explain why the RCA application
could not have been launched as soon as the audited financial
statements for 2013/2014
tariff year became available in July 2014
and could have been dealt with in 2014.
(87)
The
argument, by Eskom, is that the methodology has a signalling function
and is separate from NERSA’s assessment of the RCA
application. Therefor a failure to comply with section 14.2,
does not impact on section 14.1 of the MYPD. Eskom sets
out
that the audited financial statements are traditionally made
available in July of every year. In the present instance
Eskom’s RCA application was only submitted and evaluated in
2015. The applicants argue that this breach of section
14.2
resulted in NERSA’s decision to be irrational. According
to NERSA Eskom’s audited financial statements were
available
and submitted to NERSA in July 2014. NERSA’s submission
that
[40]
:
“…
the
soonest that the tariff increase (or decrease) can be assessed is in
the financial year following the year in which the revenue
was
generated and/or the expenditures were incurred. This means
that the increase (or decrease) can only be effected in a
subsequent
financial year (and after assessment); effectively in the second year
after the relevant tariff year. Eskom’s
RCA application
was therefore not out of time…”
I cannot agree with this
statement as the audited financial statements had been available for
the 2013/2014 tariff year, at the
latest in July 2014 and the tariff
increase could and should have been assessed in the 2014 tariff year.
(88)
Eskom submits that section
14 and the MYPD methodology as a whole do not prescribe any time
limits for the submission of the RCA
application. This
statement disregards the provisions of section 14.2.6 of the
Methodology.
(89)
Eskom
admits that it did not comply with most of the procedural
requirements as follows
[41]
:
“
It
should also be born in mind that the process for the MYPD2 RCA which
covered a period (2010/11 – 2012/13) was started in
August 2013
and ended in November 2014. It took a long time to implement.
Since it was the first time it was implemented,
there were
discussions and clarifications that occurred.
Eskom
had to see the process through to the final decision of NERSA before
submitting next RCA, since the one for MYPD2 would, amongst
other
things, set precedents
.
As already indicated, the initial submission of the MYPD2 RCA was
made during August 2013. The MYPD2 RCA balance,
implementation
and tariff decisions were made between March 2015 and November 2015.
During this period several discussions
were held between the parties,
and some agreements were reached.”
(Court emphasis)
And
“
It
is admitted that Eskom does not have any records as contemplated by
clause 14.2.1, 14.2.2, 14.2.4, 14.2.5 and 14.2.7
.
Although NERSA agreed with the stakeholders that the quarterly
reports were not submitted by Eskom, NERSA further stated
that the
requirements in section 14.2 are for monitoring purposes and that
Eskom submitted both the bi-annual reports and the audited
financial
statements. It has already been indicated that the RCA
submitted by Eskom should be measured for compliance with
section
14.1 of the MYPD Methodology in relation to its content and the
audited financial statements are the basis for determining
the RCA
application as compared to the quarterly reports that would not have
been audited and are only required for the monitoring
purpose in
section 14.2 that informs public alertness and NERSA’s
preliminary assessments.”
(Court emphasis)
It is thus clear that the
MYPD methodology, which was put in place, was to assist both Eskom
and NERSA when required to deal with
an RCA application, but
furthermore and foremost to inform the SA public, businesses and
consumers as to how further price increases
are to be expected and to
ascertain what impact it may have on their future business and the
economy as a whole. The concession
by both Eskom and NERSA that
quarterly reports had not been submitted by Eskom and the concession
by Eskom as to the purpose of
the quarterly reports, must result in
the court finding that the non-compliance with the MYPD methodology
in this regard was irrational,
unfair and therefor unlawful.
(90)
The
reasons for the decision were published by NERSA on 29 March 2016 as
set out above. In the answering affidavit by Fransiskus
Esser
Hinda the respondents produced the following reasons for the
decision
[42]
:
“
13.1 the timing
of the release of Eskom’s audited annual financial statements
meant that the MYPD methodology could not be
complied with;
13.2 NERSA was
permitted to deviate from the methodology;
13.3 Eskom was advised
in its various pricing applications by an executive “War Room”;
and
13.4 There were
various “discussions and clarifications” between NERSA
and Eskom, presumably about Eskom’s RCA
applications and its
compliance with the MYPD methodology.”
(91)
These new reasons were
submitted
ex post facto
and did not form part of the Rule 53 record and were not dealt with
by NERSA in the March 2016 decision and were thus not the basis
on
which NERSA relied when coming to the decision in this instance.
(92)
As already set out above,
the timing of the release of Eskom’s audited annual financial
statements could not have played a
role as to why NERSA could not
comply with the MYPD Methodology as these statements had already been
available in July 2014.
(93)
These
reasons were not dealt with during the decision making, nor were they
canvassed at the public hearings. The applicants’
argue
that if these documents do not form part of the Rule 53 record and
were not before NERSA at the time of the decision and
are now
supplied as reasons for the decision, then the court must decide that
the decision is unlawful. NERSA relies on the
fact that NERSA
is expressly given the power to determine the timing when the RCA
balance should be passed through or clawed back,
referring to
[43]
:
“
The adjustments
to be included in the RCA and balance of the RCA will be approved by
the Energy Regulator in terms of the MYPD Methodology.
The
Energy Regulator will only have to determine the timing of when it
should be passed through or clawed-back.”
The Regulator uses the
example that the respondents may, in the customer’s interest,
spread the tariff increase, pursuant
to an RCA balance over two
years. This may be so, but in this instance the adjustment did
not take place in the subsequent
financial year as is provided for in
section 14.2.6 of the Methodology and once more NERSA did not comply
with the provisions of
its own methodology. I must agree with
the applicants that by submitting the RCA application 27 months after
the first quarterly
report was due, the consumers were confronted by
a
fait accompli
. There is thus no certainty to consumers
if Eskom can draw on the RCA years after the particular tariff year
had lapsed.
(94)
In
Allpay
[44]
it was decided that “
if
there has been compliance with the injunction the object sought to be
achieved by the injunction and the question whether this
object has
been achieved are of importance”
.
In this instance NERSA found
[45]
:
“
The application
is procedurally correct in that actuals for the full financial year
have been submitted in line with the provisions
of the MYPD
methodology.”
This cannot be correct as
Eskom had not complied with the methodology by providing quarterly
reports and did not comply with section
14.2.6 of the MYPD
methodology. Eskom waited for more than a year after the annual
financial statements were available to
launch the RCA application in
November 2015.
(95)
I find that NERSA had to
adhere to the methodology and cannot rely on substantial compliance,
although no quarterly reports had
been filed. Section 14.2.4 of
the MYPD Methodology sets out in clear terms:
“
The adjustments
to be included in the RCA and balance of the RCA will be approved by
the Energy Regulator in terms of the MYPD Methodology.”
There can be no doubt
that section 14.1 cannot be divorced from section 14.2 when deciding
whether NERSA had reviewed the temporal
and procedural aspects of the
RCA application. Eskom has conceded that it did not comply with
section 14.2.5 by only providing
bi-annual adjustments and
projections of costs to year-end based on the methodology and not
doing so on a quarterly basis.
NERSA did not comply with the
provisions of section 14.2.6 as NERSA did not adhere to the temporal
aspect. I find that NERSA
did not apply the MYPD methodology in
the temporal and procedural aspects.
(96)
If
I apply the test as set out in
Allpay
[46]
then I have to decide whether the non-compliance by NERSA of the
methodology has an impact on the purpose of the provisions.
NERSA did not inform any of the applicants, customers or the South
African public that it intended deviating from the methodology
and
did not set out and inform the public to which extent it would
deviate from the methodology or at all. NERSA published
the
methodology and I find that the deviation from the methodology causes
such serious consequences to the applicants, business
and customers
in South Africa that the decision was irrational, unfair and
unlawful.
SECOND GROUND OF
REVIEW: EFFICIENCY:
(97)
I will deal with the
second ground of review as well, should it be found that I was wrong
in my decision on the first ground of
review. The second ground
of review is the failure to test the efficiency of Eskom’s
costs. The applicants submit
that the primary purpose of the
RCA is to facilitate price adjustments if pricing assumptions do not
hold. There should be
a rational relationship between this
purpose and NERSA’s decision. The applicants argue that
the efficiency of Eskom
is central to the regulatory framework and
that the respondents failed to test for the efficiency of the costs
at all, or did so
irrationally.
(98)
In
the answering affidavit NERSA set out that this is not the only
reason, as the applicants also rely on alerting customers to
a
possible increase. This is so, but then NERSA sets out
that
[47]
:
“…
ensuring
Eskom’s sustainability as a business and limiting the risk of
excessive or inadequate returns; and appropriately
allocating
commercial risk between Eskom and its customers. Also the
Regulator may consider what is best for the overall
South African
economy and public.”
NERSA further argues that
Eskom claimed an increase in the RCA application in the amount of
R22 789 billion, whilst NERSA only
granted R11 241 billion.
(99)
The applicants’
submission in this regard is that the purpose of the RCA is not a
survival mechanism for Eskom, as taxpayers
and the RCA cannot be
utilized to come to the rescue of Eskom, when Eskom do not pass the
efficiency test. Therefor the strict
controls imposed by the
MYPD methodology should apply to decide when Eskom can draw on the
RCA. NERSA is obliged to act independently,
lawfully and fairly
in deciding a RCA application and to consider the impact the decision
will have on the South African economy.
(100)
Section
15(1) of the
ERA
[48]
provides as set out above.
Efficiency
is the cornerstone for electricity tariffs. The EPP set
out
[49]
:
“
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;
c.
must give end
users proper information regarding the costs that their consumption
imposes on the licensee’s business
;”
(Court emphasis)
And set out in the table
of objectives as:
“
Price
levels should assume an efficient and prudent utility, in other
words, prices should be based on least cost options
and
exclude inefficiencies
”
.
(Court emphasis)
(101)
The methodology deals with
efficiency throughout as it requires expenses to be “
prudently
and efficiently incurred”
and NERSA to “
decide
on incentives to Eskom to minimise costs that are under its control
as well as to encourage Eskom to reduce some of the costs
that are
not under its control”
.
(102)
As set out above section
15(1)(a) enables the licensee to recover the full cost of its
licensed activities, including a reasonable
margin of return.
Adjusting for changes in the inflation rate, adjusting capital
expenditure forecasts for costs and timing
variances and adjusting
for other costs and revenue variances where the variance of total
actual revenue differs from the total
allowed revenue are not
subjected to the prudency assessment in the Methodology.
(103)
In
Foodcorp
(Pty) Ltd v Deputy Director-General, Department of Environmental
Affairs and Tourism: Branch Marine and Coastal Management,
and
Others
[50]
Harms JA founds:
“
A
reasonable decision-maker would, in my judgment, have used a formula
to make a provisional allocation but would have considered
the output
as a result of the application of the formula and then have
considered whether the output gives reasonably justifiable
results
bearing in mind the facts
.”
(Court emphasis)
I agree with the first
respondent that efficiency is not the only criterion and that NERSA
may not limit its decision making by
adherence to a fixed rule of
efficiency. It is however one of the facts that have to be
considered and dealt with in a transparent
manner. This did not
take place in this RCA application as NERSA did not deal with
efficiency in an adequate manner, or at
all.
(104)
Independent Power
Producers (“IPP”) are entities, other than Eskom, that
owns or operates independent power generation
facilities.
Purchases by Eskom of electricity from independent power producers
(“IPB”) must be reviewed by NERSA
for efficiency and
prudency of these amounts before and after they are concluded and
“
Each
pass-through cost will be reviewed by the Energy Regulator to
determine the
efficiency
and prudence with which pass-through costs have been incurred above
”
.
(Court emphasis)
(105)
It
is thus, according to the applicants, incumbent on NERSA to test the
efficiency of the costs claimed in a RCA application.
It seems
as if NERSA did not deal with this part adequately or at all and does
not pass the test as set out above in
Foodcorp
[51]
.
(106)
The applicants submit that
the court has to decide whether NERSA applied an efficiency test to
the cost categories that were allowed,
either rationally or at all.
The argument is that NERSA did not apply its mind within the
framework of the MYPD methodology
to the actual costs incurred in the
agreement with Aggreko International Projects Limited, an IPP, in
Mozambique. This agreement
was approved by NERSA in May 2011.
(107)
In
the RCA application and the decision by NERSA, the prudency and
efficiency of costs incurred in terms of the Aggreko agreement,
there
is no indication that NERSA tested the efficiency and prudency of
costs incurred once more, but relied on its approval of
the agreement
in May 2011. In paragraphs 49, 50 and 51 of the decision NERSA
set out
[52]
:
“
49. The
Independent Power Producer (IPP) costs were based on approved Power
Purchase Agreement (PPA) contracts submitted by Eskom.
50. Therefore Eskom is
allowed the variance of R580m with regard to IPP costs in its favour.
51. The purchase of
power from the regional IPP was approved by the Energy Regulator when
generation performances deteriorated as
a cheaper option.”
This
was thus not done in accordance with paragraph 9.2 of the EPP.
NERSA argues that
[53]
:
The “review”
of each pass-through cost by the Regulator for efficiency and
prudence means the Regulator’s consideration
thereof and not
its decision thereon. It cannot be that the Regulator
authorises a PPA and then refuses to allow costs incurred
in terms of
the agreement.”
(108)
This is contrary to what
is stated in paragraph 9.2 and 9.9 in the EPP, as it requires NERSA
to review the efficiency and prudency
of the IPP before and after
contracts are concluded. The applicants argue that without
efficiency testing there is no rational
connection between the
decision by NERSA and the efficiency purpose of the methodology.
This review by NERSA would not have
impacted on the agreement which
was in place at the time, but NERSA had to consider whether the
variance of R580 million was in
line with the efficiency review.
If NERSA found that the variance was due to Eskom’s
inefficiency, it should not have
allowed the variance. The
original agreement with Aggreko would not have been affected and no
breach of contract would have
taken place.
(109)
In the present instance
NERSA allowed a variance for decreased revenue, but this could only
be done if the lower sales had not been
due to Eskom’s own
inefficiencies. NERSA ignored the fact that Eskom actively
encouraged its consumers to use less
electricity and provided
monetary incentives to consumers in this regard. According to
the applicants this conduct by Eskom
is irrational and the decision
by NERSA to compensate Eskom for the lesser income, is therefore
irrational, unfair and thus unlawful.
(110)
I
must agree that this results in double-counting. Eskom receives
money from the consumers, pay money to other consumers to
use less
electricity which results in a decreased income for Eskom and then
NERSA decides to grant a RCA increase to compensate
for the decreased
income. This decision does not impact on the IPP’s as
they are the beneficiaries of further costs
incurred by Eskom from
them and has no relation to the contracts already concluded with the
IPP’s. The Methodology
requires the IPP variances must be
assessed for efficiency during a RCA application. The first
respondent maintains that
it is not only the methodology that should
be considered, but that the relevant law is contained in the
Regulatory Rules for Power
Purchase Cost Recovery
[54]
(“Rules”) as well as the methodology.
(111)
Although the Rules provide
that, once the Regulator has authorised power purchase cost recovery
“
costs incurred
will be allowed as a pass-through for the duration of the PPA”
,
this will not exempt the Regulator to ensure that the efficiency
assessment of the use of the IPP’s is consistent with the
methodology. I do not understand the applicants to argue that
costs incurred in terms of the agreement should not be allowed,
but
that the variance which was allowed by NERSA should have been tested
for prudency and efficiency. There is no indication
that this
would result in a breach of contract with the IPP’s.
(112)
NERSA
stated in the decision
[55]
:
“
The inclusion
of actual cost of electricity generated in South Africa as part of
net export is disallowed as it is already accounted
for in the total
primary energy variances.”
The decision by NERSA is
in variance with its own findings where NERSA found that Eskom could
only achieve an EAF of 75.1%, whilst
the target was 81.5%.
NERSA is forced to test the efficiency of the costs claimed by Eskom
and find that the cost claimed
were efficiently incurred.
(113)
Eskom acknowledges that
many of the costs incurred were due to inefficiencies on the part of
Eskom. Furthermore NERSA took
into consideration the decrease
in revenue where Eskom actively encouraged consumers not to use
electricity. I have dealt
with this phenomenon already, but
find this to have been irrational. I find, due to my findings
on inefficiency that NERSA
failed to apply the MYPD methodology
benchmark on efficiency by not testing it or testing it
irrationally. NERSA did not
discharge its statutory and
regulatory mandate.
(114)
I cannot find that NERSA’s
decision is due to incompetence or bias from the Regulator. I
find it was irrational for
NERSA not to have the quarterly financial
reports for the 2013/2014 year, not to alert consumers and the public
that it intended
to deviate from the MYPD methodology and not to
allow the consumers and public to deal with the deviation in the
public hearings
and submissions to NERSA. I further find that
it was irrational, unfair and unlawful to not deal with the deviation
in 2014,
which was the subsequent year, but to wait 27 months before
launching the RCA application. Furthermore, it was irrational
of NERSA to grant the RCA application, not dealing properly with the
inefficiencies of Eskom, and allowing an adjustment to the
agreement
with Aggreko International Projects Limited by passing it through
without any consideration as it was supposed to do.
I find that
due to all the above-mentioned actions and non-compliance with the
MYPD methodology in regards to the temporal and
procedural
requirements, as well as the efficiency requirement, the decision by
NERSA was irrational, unfair and unlawful and should
be set aside.
REMEDY:
(115)
Eskom
argues that it will not be in the interest of justice should the
court hand down a declaratory order if regard is being had
of the
impact it will have on the whole economy. I have, at the
outset, indicated that I am aware of the issues in this review
application and that I will not make a decision which will intrude in
the other spheres of government, but will deal with the review
at
hand as set out in
National
Treasury and Others v Opposition to Urban Tolling Alliance and
Others
[56]
.
(116)
In
Fose
v Minister of Safety and Security
[57]
the Court held:
“
When Courts
give relief, they attempt to synchronise the real world with the
ideal construct of a constitutional world created in
the image of s
4(1). There is nothing surprising or unusual about this notion. It
merely restates the familiar principle that rights
and remedies are
complementary. The relationship holds true and is uncontroversial at
common law. The Constitution is also
a body of legal rules and
we should expect to find in it the same pairing of rights and
remedies.”
(117)
I do agree with Mr
Gauntlett that it will not be in the interest of justice to issue a
declaratory order if the impact on the economy
of South Africa is
considered.
(118)
Section
15(2) of
ERA
[58]
precludes this court from determining a tariff as it provides:
“
A licencee may
not charge a consumer any other tariff…other than that
determined or approved by the regulator as part of
its licencing
conditions.”
(119)
The respondents argue that
this court cannot set aside the RCA increase as it is indivisible
from the tariff approved by NERSA under
MYPD3. I do not agree
with this argument, as the MYPD3 decision is not reviewed. At
the time NERSA approved the RCA
application it did not re-evaluate
and re-approve the MYPD3 decision. The only decision currently
under review is the approval
of the RCA application.
(120)
I agree with the
applicants that a just and equitable remedy has two functions by,
firstly, ensuring that there are no undue interruption
to the
provision and pricing of electricity and, secondly, to ensure that
consumers who have overpaid receive just and equitable
relief.
(121)
The
question is whether the court can deal with this, without interfering
with the executive arm of government. There are
two types of
electricity tariffs; the tariff Eskom charges its customers and the
tariff charged by municipalities to their ultimate
customers.
The applicant set out in great detail how the overpayments can be
dealt with as Eskom had already indicated in
its answering
affidavit
[59]
that the
applicants’ prejudice is commercial and limited and it can be
addressed by crediting customers, whether directly
or indirectly,
dependant whether they are direct or indirect customers.
(122)
I agree with the
applicants that, even if the RCA increase is set aside, the revenue
approved for the 2016/2017 tariff year will
remain in force, as well
as the direct tariff to customers and the tariff to municipalities.
(123)
I
was referred to the case of
Organisation
Undoing Tax Abuse v The National Energy Regulator of South Africa and
Others
[60]
where the court held:
“
Of critical
importance, in my view, is that according to NERSA, should the tariff
have been interdicted there would have been no
tariff applicable at
all as from 01 April 2016 onwards, as section 15(2) of ERA proscribes
the charging of the tariff other than
the one approved by NERSA.
Mr Raath retorted that the tariff which applied before 01 April 2016
would continue to apply.
I disagree. My understanding of the tariff
regulation regime applicable here is that, each tariff is borne by
its own circumstances.
So the previous tariff as approved by NERSA
could never have been the default or fall-back position, when the
increased tariff
was set aside. The reason being that the
justification of the tariff approved and imposed, is in terms of the
realities of ESKOM's
business, as approved by NERSA.”
I cannot agree with this
finding, as the tariff for 2016/2017 can be separated from the
tariffs as set out in the decision.
(124)
In
Minister
of Environmental Affairs and Tourism and Others v Phambili Fisheries
(Pty) Ltd; Minister of Environmental Affairs and Tourism
and Others v
Bato Star Fishing (Pty) Ltd
[61]
Schutz JA held:
“
Judicial
deference is particularly appropriate where the subject-matter of an
administrative action is very technical or of a kind
in which a Court
has no particular proficiency.”
This
is the case in this instance.
(125)
I
agree that section 8(1)(c)(ii) of PAJA only permits a court in
exceptional cases to substitute the court’s finding for that
of
NERSA. I will not usurp the decision making powers of NERSA as
in
Trencon
Construction (Pty) Ltd v Industrial Development Corporation of South
Africa Ltd and Another
[62]
the court found:
“
In
our constitutional framework a court considering what constitutes
exceptional circumstances must be guided by an approach that
is
consonant with the Constitution. This approach should entail
affording appropriate deference to the administrator. Indeed, the
idea that courts ought to recognise their own limitations still rings
true. It is informed not only by the deference courts have
to afford
an administrator but also by the
appreciation
that courts are ordinarily not vested with the skills and expertise
required of an administrator
.”
(Court emphasis)
(126)
I cannot find exceptional
circumstances and therefor I will not substitute the decision as
requested by the applicants.
(127)
I have been furnished with
draft orders by both the applicants and the respondents on 13 August
2016, with notes by both parties.
I have considered these draft
orders, as well as the comments. Once more counsel have been
able to assist the court in this
regard. The order of Manamela
AJ in the interim application on 31 March 2016 in regard to costs
was: “
The
costs of this hearing shall be reserved”
.
Therefore I will deal with the costs of the interim application as
well.
(128)
In the result the
following order is made:
1.
The decision published by
the first respondent on 1 March 2016 in relation to the Regulatory
Clearing Account (“RCA”)
application by the second
respondent – third Multi Year Price Determination (MYPD3) Year
1 (2013/2014) (the “Decision”)
is reviewed, set aside and
remitted to the first respondent.
2.
It is directed that all
future RCA applications by the second respondent in relation to the
MYPD3 must be submitted and evaluated
in accordance with paragraph 14
of the MYPD3 Methodology, or any future amendment thereof.
3.
The first and second
respondents are to pay the costs of this application jointly and
severally, as well as the costs occasioned
by the interim application
of 31 March 2016, including the costs of three counsel.
_____________________
Judge C Pretorius
Case
number
: 24364/2016
Matter heard
on
: 14 & 15/06/2016
For the
Applicants
: Adv DN Unterhalter SC
Adv M Du Plessis
Adv J Mitchell
Adv ALS Msimang
Instructed
by
: Couzyn Hertzog & Horak
For the First
Respondent
: Adv DM Fine SC
Adv A Pantazis
Instructed
by
: Hogan Levells (SA) Inc
For the Second
Respondent
: Adv JJ Gauntlett SC
Adv SM Lebala SC
Adv EM Baloyi-Mere
Instructed
by
: Ledwaba Mazwai Attorneys
Date of
Judgment
: 16 August 2016
[1]
Page 561 paragraph 4
[2]
Act 40 of 2004
[3]
Act 4 of 2006
[4]
Supra
[5]
Act 4 of 2006
[6]
Government Notice No. 1398 dated 19 December 2008
[7]
Page 80 paragraph 14.1
[8]
Act 40 of 2004
[9]
2004(4) SA 490 CC at paragraph 48
[10]
2003(2) SA 460 (SCA) at paragraph 20 and 21
[11]
2003(6) SA 407 (SCA)
[12]
2013(1) SA 248 CC at paragraph 44
[13]
2010(2) SACR 101 (CC) paragraph 51
[14]
Record page 255 item 4
[15]
Supra
[16]
2013(1) SA 248 CC at paragraph 44 (
Supra)
[17]
Supra
[18]
Act 3 of 2000
[19]
Supra
[20]
(535/2015)
[2016] ZASCA 69
(20 May 2016)
[21]
Page 905
[22]
Paragraph 24 footnote 913
[23]
Page 927
[24]
Page 1137 paragraph 106.2
[25]
Page 1152 paragraph 116.2
[26]
Page 44 paragraph 93
[27]
Page 451 paragraph 12.5
[28]
Page 1108 paragraph 50.2
[29]
Page 5 paragraph 1
[30]
1987(1) SA 668 (A) at 690 D-G
[31]
Page 278 paragraphs 133 and 134
[32]
2014(1) SA 604 CC at paragraph 28
[33]
1999(2) SA 91 (CC) at paragraph 36
[34]
2006(5) SA 483 (SCA) at paragraph 19
[35]
Page 1143 paragraph 112.1.2
[36]
Supra
at paragraph 30
[37]
Record page 33
[38]
Supra
[39]
Page 1286 paragraph 9.5.2.1; Page 1300 paragraph 22.1
[40]
Page 1092 paragraph 23
[41]
Page 1302 paragraph 23.2; Page 1303 paragraph 24.1
[42]
Page 7 of Applicants’ Heads of Argument
[43]
Page 81 paragraph 14.2.4
[44]
Supra
[45]
Record page 342 paragraph 12
[46]
Supra
[47]
Page 1156 paragraph 121.1.1
[48]
Supra
[49]
Supra
[50]
2006(2) SA 191 SCA at paragraph 19
[51]
Supra
[52]
Page 917 paragraphs 49, 50 and 51
[53]
Page 1171 paragraph 126.4
[54]
GNR119 in GG32964 of 22 February 2010
[55]
Page 921 paragraph 77
[56]
2012(6) SA 223 CC at paragraphs 44, 68 and 70
[44] … This
means that the Constitution requires courts to ensure that all
branches of government act within the
law. However, courts in turn
must refrain from entering the exclusive terrain of the executive
and the legislative branches of
government unless the intrusion is
mandated by the Constitution itself.
[57]
1997(3) SA 786 CC at page 834 G-H
[58]
Supra
[59]
Page 394 and 395 paragraph 7.7
[60]
(24365/2016) [2016] ZAGPPHC 479 (8 April 2016) at paragraph 55
[61]
2003(6) SA 407 (SCA) at paragraph 53
[62]
2015(5) SA 245 (CC) at paragraph 43