The High Court in Johannesburg recently set aside a decision by energy regulator Nersa to exclude Glencore’s struggling Rustenburg ferrochrome smelter from a negotiated pricing agreement for four of the company’s other smelters spread throughout the country.

The court further prohibited the Rustenburg local municipality from charging a surcharge on the electricity sold to the smelter. The electricity is provided by Eskom, using its own infrastructure, but the power utility currently invoices the municipality, which in turn invoices Glencore as a pass-through. The municipality argued that it is entitled to a 6.1% surcharge.

This brings to finalisation a dispute between the municipality and the smelter that has been unresolved since 2014.

The matter came to a head after Eskom submitted an application to Nersa for a negotiated pricing agreement with the five Glencore ferrochrome smelters, which included the Rustenburg smelter.

The Department of Mineral Resources and Energy developed a framework for such long-term agreements with large energy-intensive users in financial distress. It provides for discounted electricity tariffs for a limited period, aimed at assisting these industries to be globally competitive and to preserve jobs.

Read: Eskom working on tariff suite for energy-intensive users

Surcharge

The Rustenburg local municipality supported the application on condition that it be allowed to add a 6.1% surcharge to the electricity tariffs to bolster its finances before its expected move to metro status.

Glencore argued that it could not afford the surcharge, and if it had to pay it, it would have no choice but to switch off and close the business.

At first, Nersa said the municipality is not entitled to a surcharge since the smelter gets its electricity directly from Eskom and argued that it has no mandate to rule over surcharges.

Read: SA’s biggest energy users oppose Eskom cost claw back

After consultation with Eskom and the municipality, it changed its position. It decided to process the application for special pricing but excluded the Rustenburg smelter in light of the pending dispute between the smelter and the municipality. The regulator further stated that the smelter is situated in the licensed distribution area of the municipality. Eskom has not been licensed to distribute in that area, and therefore the exclusion is justified pending the resolution of the dispute.

Unreliable substations

The court heard that an agreement between the smelter and the municipality concluded in 1990 stipulated that the municipality would supply electricity to the smelter at tariffs equal to those Eskom charges. It would, however, earn revenue from property rates and other services.

This was meant as an incentive to ensure the smelter’s sustainability and create more job opportunities in the municipal area.

As time passed, the municipal substations became so unreliable that one of the smelter’s six furnaces had to be permanently closed.

Listen/read: Eskom’s irregular supply impacting big energy users

Eskom took over one of the substations, invested considerable capital, and has since been supplying the operations through that substation. Eskom still presents the invoice to the municipality, and the municipality invoices the smelter on a pass-through basis.

Since 2014, the municipality has been trying to get a piece of the pie, but the smelter refused to pay a surcharge to it despite the fact that the service is delivered by Eskom.

Charge for what you supply

In 2019, the parties approached Nersa for mediation, but nothing came of that process, and the regulator decided recently to simply exclude the Rustenburg smelter from the negotiated pricing agreement until the dispute has been resolved.

The court made it very clear that a municipality is by law entitled to charge a resident or ratepayer only in exchange for services it has delivered.

Eskom is the electricity supplier for the smelter’s operations because the municipality could not provide a reliable service, and it would be inappropriate to allow the municipality to add a surcharge.

There was no evidence before the court about the electricity consumption from the second substation, which is still under municipal control. The court found that the municipality’s claim did not comply with the original agreement with the smelter.

There is no justification for the claim by the municipality.

It follows that there is no justification for Nersa’s exclusion of the Rustenburg smelter from the negotiated pricing agreement aimed at the survival of the group of smelters that process about half the country’s ferrochrome.

Abuse of power

The court criticised Nersa for failing to resolve the dispute and added that the municipality was abusing its power as a public entity by making its support for the application conditional.

“Both NERSA and the RLM [Rustenburg Local Municipality] should act as responsible citizens to ensure that the negotiations on the long-term NPA [Negotiated Pricing Agreement] in its current form are finalized,” the court stated.

Eskom did not oppose the application but indicated it would abide by the ruling.

Meanwhile …

Municipalities countrywide, with the support of the municipal association Salga, have been promoting the position that they have the exclusive function of distributing electricity countrywide.

They argue that Eskom must enter into service-level agreements with any municipality in whose jurisdiction it conducts distribution.

That would mean that municipal tariffs, which are much higher than those Eskom charges, apply, and the municipality gets the extra bit.

Salga earlier lodged an application for a declaratory order about this with the Constitutional Court, but the case seems to have stalled.

Read:
Municipalities want a piece of Eskom’s distribution pie [Jun 2020]
Municipalities want another slice of the pie, this time from IPPs [Mar 2021]
Municipalities seek exclusive right to distribute electricity, even in Eskom areas [Dec 2021]
Business grouping sides with Eskom against ‘municipal monopoly’ [Jan 2022]
Turf war over electricity distribution intensifies [May 2022]