Municipal debt-crisis: Can Eskom reduce bulk electricity supply to defaulting municipalities?

Background of the case 

The Ngwathe Local Municipality based in the Free State and Lekwa-Teemane Local Municipality, in the North West Province signed electricity supply agreements with Eskom in 2008 and 2010, stipulating that Eskom would supply bulk electricity to the municipalities in accordance with the Notified Maximum Demand (NMD) specified in the supply agreement. The NMD is a contractual demand value that binds Eskom and the client, in this case, the two municipalities. In 2010, Eskom increased Lekwa Municipality's contractual NMD. However, the municipalities' power use and demand surpassed the agreed-upon NMD supply levels. Consequently, Eskom supplied both municipalities with more power than the agreed NMD for an extended length of time. Eskom issued monthly fines to these municipalities, however, despite these fines, the municipalities failed to pay Eskom for the electricity supplied to them.

Both municipalities applied to increase their NMD supply levels to meet the additional electricity demand, but Eskom refused to agree to these increases. Seemingly, because the municipalities had defaulted on their payment obligations. In 2020, Eskom decided to reduce the municipal bulk electricity delivery to the NMD levels specified in the supply agreements. Eskom cited that the restrictions of supply were necessitated by the failure of the municipalities to eliminate illegal connections; their inability to recover payment for electricity supplied; and their failure to provide the infrastructure required to support the supply of electricity above the NMD, and thus secure the integrity of the national grid.

Eskom informed the municipalities of its decision, but not the residents and the business community in the two municipalities. This is even though the restriction of bulk electricity supply to these municipalities directly affected citizens and businesses. The reduction in bulk electricity supply meant that municipalities had to impose rotational blackouts impacting their ability to provide basic municipal services such as water supply and sewage disposal. The interruption in electricity supply caused the municipalities to shut down their water treatment plants, resulting in dry taps and the cessation of industrial and commercial activity, such as the poultry industry and abattoirs, in or near the impacted towns.

Efforts on the part of the Ngwathe and Lekwa residents to engage Eskom, the municipalities and the Provincial leadership in the Free State and North West Province were unsuccessful. Negotiations between Eskom and the two municipalities to increase their contractually agreed NMD supply levels also yielded no results. The residents of Ngwathe Municipality, acting through the Vaal Development Associations (Association) and the residents of Lekwa Municipality, acting through the Lekwa Ratepayers Association – both non-profit organisations, approached the High Court in terms of which they sought an interim interdict to prevent Eskom from implementing its decision to reduce bulk electricity supply.

Both the High Court and, subsequently, the Supreme Court of Appeal (SCA) — an issue previously explored in the Bulletin – sided with the residents. They ordered Eskom to increase or alternatively restore the maximum electricity load supply to the level supplied prior to the reduction decision; thus, prohibiting Eskom from implementing its decision to limit electricity supply. The order of the High Court was an interim interdict pending final adjudication of the residents’ application for a review of Eskom’s reduction decision in terms of the Promotion of Administrative Justice Act of 2000 (PAJA) and/or on legality.

Eskom appealed the High Court's decision to award the temporary interdict. On appeal, the SCA was tasked with determining whether the High Court correctly concluded that the residents had a prima facie entitlement to interim interdictory relief. The SCA concurred, citing Resilient, which held that electricity is a component of the basic services that municipalities are constitutionally required to provide to their residents, and that Eskom, as a state organ, is not constitutionally permitted to unilaterally reduce the bulk electricity supply to municipalities without first making all reasonable efforts to resolve intergovernmental disputes involving municipalities and other spheres of government. 

Arguments

Eskom

Eskom challenged the SCA's decision before the CC on multiple grounds. First, Eskom stated that the lower court’s orders are compelling it to supply sufficient electricity to the municipalities. According to Eskom, this is at odds with the CC’s decision in Mazibuko v City of Johannesburg, where the Court held that in terms of section 26(2) of the Constitution, the state must take reasonable legislative and other measures to progressively realise the right of access to adequate housing within available resources.

Eskom further contended that the lower courts failed to consider that its circumstances have changed. It no longer has the capacity to supply electricity exceeding the agreed NMD. It argued that the orders of the lower courts put a strain on the national grid and the electricity infrastructure. Eskom further argued that the municipalities have, as a result of the lower courts’ decisions, been absolved of their constitutional obligations.

Eskom also challenged the jurisdiction of the Court. It submitted that the matter ought to have been resolved in terms of section 30 of the Electricity Regulation Act of 2006 (ERA), as opposed to the Intergovernmental Relations Framework Act (IRFA) of 2005 and PAJA. Eskom argued that the High Court had no jurisdiction to hear the matter prior to the internal remedies of ERA having been exhausted. It contended that the National Energy Regulator of South Africa (NERSA), as the specialist regulator, has the necessary expertise and exclusive jurisdiction to resolve a dispute pertaining to a complex issue such as NMD supply.

Lastly, Eskom contended that the interruptions it implemented are different from what was contemplated in Resilient, where the interruption occurred with the aim of terminating electricity supply. In this instance, Eskom submitted that it had no intention of terminating the electrical supply; rather, it will continue to supply electricity to the municipalities, albeit at a lower level. As such, Resilient which dealt with the termination of electricity supply is not applicable to the current matter, so Eskom argued.

Association(s)

The Associations submitted that the order of the High Court does not compel Eskom to exceed the agreed-upon NMD. Rather, it is an interim decision pending a review of Eskom’s decision to decrease the electricity supplied to the municipalities. The residents further argued that there is no material difference between the present matter and the Resilient matter because in both cases Eskom reduced bulk electricity supply to obtain payment by relying on a contractual right to interrupt electricity supply in the event of non-payment. The Associations thus contended that the same legal framework is applicable and the effect of both decisions to interrupt or reduce electricity supply is the same, namely catastrophic consequences for the residents.

The residents further argued that Eskom cannot reduce or interrupt electricity supply by relying on a contractual right it has against a municipality, without engaging with the residents first. Reliance was placed on the Joseph case where the CC held that a municipal service cannot be denied to a citizen because of a municipality’s outstanding debts. The residents noted that while the contract existed between two organs of state, they did not seek to enforce contractual rights, but instead enforce their public law rights because Eskom is an organ of state. It was also contended that Eskom’s decisions constituted administrative action and are reviewable under PAJA. The residents further argued that citizens have a public law right to electricity, and the supply of electricity is required to realise other fundamental rights such as the right to water, education and a healthy environment. Regarding the application of ERA, the residents submitted that it was incumbent on Eskom to approach NERSA and seek to resolve the dispute, which it failed to do in this instance. 

Judgment

The judgment of the court was split 5 to 4, with the majority written by Justice Madlanga, and concurred by (Mathopo J, Mhlantla J, Theron J and Tshiqi J) while the minority judgment was penned by Justice Unterhalter (Kollapen J, Majiedt J and Mlambo AJ concurring). It is important to deal with both judgments because they raise significant questions relating to intergovernmental relations and service delivery. Both judgments acknowledged and found that determining Eskom’s constitutional and statutory duties and to whom these duties are owed raised a constitutional matter of importance, which engages the Court’s jurisdiction.  

Majority

The majority judgment found that this matter is less about the resident’s right to electricity supply as established by the minority judgment. Rather it is about Eskom’s decision to reduce electricity supply which was taken without notice to the residents and therefore unfair. This renders Eskom’s decision reviewable in terms of section 6(2)(c) of PAJA.

Significantly, the majority judgment disclaimed that it does not hold that the residents are entitled to a continued supply of electricity even in circumstances where Eskom is entitled to terminate or reduce electricity supply in terms of section 21(5) of the ERA. This is because the residents must be afforded interim relief that directs Eskom to restore electricity supply to what it was before the reduction pending the determination of the proposed PAJA review of Eskom’s exercise of section 21(5) ERA power. It was observed that the residents’ case does not stand in the way of warranted section 25(1) ERA reductions or terminations of supply. The Associations’ case is that bulk electricity supply reductions or terminations must occur in a manner not susceptible to a PAJA review. As such, the majority’s decision does not bar section 21(5) reductions or terminations. In other words, while Eskom is permitted to avert an ominous grid collapse by reducing electricity supply to municipalities, it can only do so in accordance with the law.

Returning to the question of whether the residents have established a right implicated by Eskom's decision, the majority held that the residents have demonstrated several constitutional rights that have been violated as a result of the reduction decision, and that the infringements would have continued if it was not for the interim interdict. It held that the decision to reduce bulk electricity supply has had an adverse impact on the residents in that it has resulted in the breach of several of their rights protected by the Bill of Rights: the right to life, the right to dignity, the right of access to water, the right to basic education and the right to an environment that is not harmful to health or well-being.

The majority disagreed with the minority in that they did not find it necessary to establish that the right to electricity has been breached for the interim relief to be granted. They found that the minority judgment failed to consider the fact that many rights protected in the Bill of Rights might be violated by a single conduct, and that these rights are not necessarily directly or precisely correlative or matching. In this case, it found that the logical corrective action to address the infringement of the rights is the reversal of the offending act, namely the restoration of the usual electrical supply. The majority also interpreted Eskom's decision to restrict the bulk electricity supply to these municipalities as a debt-collection device, therefore the Court did not accept Eskom's attempt to justify its decision on the national grid failure. Thus, the majority, for the above reasons, sided with the residents and determined that Eskom's appeal must fail.

Minority

The minority judgment determined whether the residents have a right to the supply of electricity from Eskom, and hence whether the Associations have prospects of success in the main review proceedings. The minority judgment decided otherwise for the following reasons. First, the minority judgment after reviewing the regulatory framework (the Constitution, Municipal Structures Act of 1998, the Municipal Systems Act of 2000 as well as ERA) found that there is a constitutional duty on municipalities to supply electricity directly to their residents. This was confirmed by the CC in Joseph. The minority judgment further held that it is inappropriate to ascribe the constitutional obligations of municipalities to another organ of state, Eskom. This disregards the constitutional structure that establishes the constitutional responsibilities of each organ of state. They noted that while section 7(2) of the Constitution binds Eskom, (the provision requires all organs of state, and spheres of government to respect, promote and fulfill rights in the Bill of Rights), there is no right to electricity in the Bill of Rights. They further reasoned that the constitutional obligation on municipalities to provide basic services, including electricity supply, does not stem from the Bill of Rights. Rather, it finds its origins in the constitutional duties of the municipalities to provide municipal services. Ultimately, the minority found that the Association(s) failed to establish that residents have a right to be supplied with electricity by Eskom.

The failure to establish the right to electricity also meant that Eskom had no duty to extend procedural fairness to the residents when taking the decision to reduce the bulk supply of electricity. The minority reasoned that, because the constitutional obligation to supply electricity rests with municipalities, and given that Eskom is not an agent of local government, Eskom does not owe or need to extend procedural fairness to residents.

The minority also established that the residents had failed to make use of the internal remedy provided for in section 30 of ERA (disputes adjudicated by NERSA). Consequently, they failed to exhaust internal remedies, as they should have referred the disagreement to NERSA before turning to the courts. Finally, the minority observed that if duplicated, the conclusions of the majority judgment will oblige Eskom to fulfill the obligations of municipalities across the country in the same position. This will ultimately pose a substantial threat to Eskom, considering that the underlying origin of the problem is municipalities, those who are defaulting in payments to Eskom. In conclusion, the minority determined that Eskom's appeal must be upheld for these reasons.

Commentary

The supply of electricity, which has reached crisis levels, presents a significant challenge not just for Eskom and other stakeholders involved but also for the courts, who are increasingly adjudicating on these matters. The non-provision of electricity (reduction or termination) has a far-reaching effect on the country’s economy, infrastructure and the livelihood of the citizens. The crisis implicates a variety of fundamental rights, including water, dignity, and life, all of which were upheld in the Vaal River Development judgment. The ruling illustrates that courts play and will continue to play an important role in holding stakeholders involved in the electricity value chain accountable. Moreover, the judgment confirms and builds on the existing intergovernmental principles and those that relate to the protection of citizens’ rights, as recipients of municipal services. The judgment established that the constitutional duty to supply electricity to end users’ rests with municipalities and not Eskom. This duty does not stem from the Bill of Rights, but from the constitutional obligations imposed on municipalities. The judgment further adds to the principle established in Resilient namely that Eskom may not unilaterally terminate bulk electricity supply to defaulting municipalities without first making all reasonable efforts to resolve intergovernmental disputes involving municipalities and other spheres of government. Eskom has a further duty to inform and consult with residents and businesses of its decision to reduce or terminate bulk electricity supply to a defaulting municipality. The judgment calls on Eskom to follow a fair procedure by giving affected residents and businesses adequate notice and opportunity to make representations. If Eskom fails in this regard, its decision may be challenged by residents in terms of PAJA. The judgment further clarifies that Eskom is allowed to terminate or reduce the bulk electricity supply to municipalities that exceed the agreed NMD levels or who are defaulting on their payment obligations. This is important to note given the widespread disarray that has assailed municipalities throughout the country, Eskom’s inability to meet the country’s electricity demand, and the threat of a total grid collapse.

By Curtly Stevens, Doctoral Researcher