SCA tells Eskom to exhaust alternative dispute resolution before cutting electricity

Eskom is struggling to recover monies owed to it by municipalities for the supply of bulk electricity. Municipal debts to Eskom have ballooned to alarming proportions. To address this, Eskom introduced a debt recovery process that would see the supply of electricity to many indebted municipalities cut off, or limited. In Eskom Holdings SOC Ltd v Resilient Properties (Pty) Ltd and Others, the Supreme Court of Appeal ruled that Eskom‘s decision to cut off electricity to Emalahleni (ELM) and Thaba Chweu local municipalities (TCLM) was unconstitutional.

Background

The precursor to the proceedings in the Supreme Court of Appeal were two separate applications in the High Court, which were launched on an urgent basis by both Resilient Properties and the Sabie Chamber of Commerce and Tourism. This was after Eskom had threatened to interrupt the bulk electricity supply to Emalahleni (ELM) and Thaba Chweu local municipalities (TCLM), following their failure over several years to pay Eskom. Both municipalities had also failed to honour earlier payment plans they had signed with Eskom. The High Court set aside Eskom’s decision to embark on scheduled interruptions of electricity to the two municipalities. The Court held that while Eskom had the power to interrupt the supply of electricity, it had failed to comply with the requirements of cooperative governance, as prescribed in section 41 of the Constitution, read with sections 40 and 41 of the Intergovernmental Relations Framework Act 13 of 2005 (IRFA), before taking the impugned decision. Unhappy with this judgment, Eskom appealed to the Supreme Court of Appeal.

Arguments

Eskom contended that the IRFA was not applicable because the proceedings in the High Court were instituted by private entities and not by organs of state. The power utility further argued that, even if the IRFA was applicable this would not directly benefit the applicants (Resilient Properties and Others). It based this on the fact that the three organs of state, i.e. Eskom and the two municipalities, had reached agreement amongst themselves on the amounts owed to Eskom, and how they were to be paid off.

On the other hand, Resilient Properties argued that it is unconstitutional and unlawful for Eskom to interrupt the electricity supply to the municipalities when the end-users have met their payment obligations to the municipalities. They argued that it would have potentially disastrous consequences for the local communities and the local economy, thereby adversely affecting paying customers. They also submitted that Eskom and the municipalities concerned, as organs of state, did not fully exhaust other interventions and dispute resolution mechanisms before resorting to the interruption of electricity supply. Thus, they argued that Eskom failed to comply with the constitutional requirements of cooperative governance as given effect to by the IRFA, particularly given the fact that discontinuing electricity would have ‘catastrophic’ implications for the municipalities and their residents.

Decision of the Court

The Court had to decide whether Eskom’s decision to interrupt the supply of bulk electricity to the ELM and the TCLM could be reviewed, and if so, whether the decision was irrational and unconstitutional. Also, it had to decide whether section 41 of the Constitution and section 40 of the IRFA were applicable to the relationship between Eskom and the two municipalities. In other words, the question was whether the power utility failed first to exhaust alternative dispute resolution before approaching the Court.

The Court ruled that the decision by Eskom to interrupt the electricity supply to the two municipalities was unconstitutional. It reasoned that, although the two municipalities signed acknowledgments of debt detailing how the debt was to be paid, these acknowledgements mandated Eskom to have due regard to all relevant legislation before taking whatever legal remedies available to it, including the disconnection of electricity supply. The relevant legislation in this context was the IRFA. The Court elaborated by holding that municipalities are obliged to provide their communities with basic services, including electricity, while as an organ of state, Eskom bears certain constitutional duties. The relationship between Eskom, ELM and TCLM is thus more than merely a contractual one. The Court stated that, this relationship is unique in that Eskom, as an organ of state, supplies electricity to municipalities to secure the economic and social wellbeing of the people. This then, according to the Court, brought the relationship within the purview of the IRFA. Accordingly, the Court concluded, that Eskom’s decision to interrupt bulk electricity supply to the entire municipality without prior compliance with sections 41 of the Constitution and 40 of the IRFA, is inimical to that constitutional obligation and is therefore unconstitutional.

Commentary

This is an important judgment for municipalities, Eskom and other organs of state. Many municipalities are not functioning as they should, but Eskom cannot simply cut off electricity to municipalities that are in debt. As an organ of state, Eskom must implement debt recovery processes that are informed by the principle of cooperative governance enshrined in the Constitution and given effect to by the IRFA. This ensures that an organ of state such as Eskom cannot act in a manner that renders another organ of state, namely, a municipality, unable to discharge its constitutional and statutory obligations, which include the provision of electricity. This judgment is relevant to other bulk suppliers of services to municipalities such as water boards who may find themselves in a similar position.

by Xavia Poswa, Doctoral Researcher