Local Government Position Paper

Local Government Position Paper:

License Agreements with respect to Distribution of Electricity

Version: 02

Date: 08th May 2014

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Executive Summary

AMEU, representing the unified view of its members, is currently hampered in a number of ways (as described in this document) through the lack of formalised Service Delivery Agreements between Municipalities and Eskom where Eskom distributes electricity in the municipal area.

Engagement with Eskom in this regard by SALGA, AMEU and individual municipalities has failed to move the position forward despite stated agreement in principle by the CEO’s of Eskom and SALGA. Eskom has adopted the stance that it is licensed by NERSA to distribute in the areas and believes that that agreement overrides the requirements of the Municipal Systems Act in terms of an SDA.

Local Government’s opinion is that the provisions contained in the Constitution, Electricity Regulation Act, Municipal Systems Act and Municipal Fiscal Powers and Functions Act, demand the conclusion of SDA’s between municipalities and Eskom where Eskom distributes electricity in the municipal area.

The purpose of this document is to

· set out AMEUs viewpoint and desire to achieve both the constitutional and legislative requirements in terms of municipal service provision;

· propose that SALGA, on behalf of AMEU and all local municipalities, leads the process of engaging NERSA to recommend that an SDA between local authorities and electricity distributors be incorporated as a licensing condition for distributors, and Eskom in particular;

· propose a collaborative approach between SALGA, AMEU, Eskom, NERSA, DoE and DPE where a roadmap is agreed and put in place, that recognizes the development and signature of an SDA en route, and ultimately culminates in consolidation of supply rights.

AMEU is of the firm opinion that to provide legislative clarity and resolve the impasse between Eskom and the municipalities so as to be able to move forward is in the best interests of the industry, the economy and the country.

Acronyms

AMEU / Association of Municipal Electricity Utilities (Southern Africa)
DoE / Department of Energy
DPE / Department of Public Enterprises
EDI / Electricity Distribution Industry
MFMA / Municipal Financial Management Act
NERSA / National Energy Regulator of South Africa
NT / National Treasury
PFMA / Pubic Financial Management Act
SALGA / South African Local Government Association
SDA / Service Delivery Agreement

Executive summary 1

Acronyms 2

1 Background and purpose 1

2 Problem Statement 2

3 Discussion 3

4 Proposed way forward 5

5 Recommendations 6

AMEU-SALGA Licence Agreement Position Paper

1 Background and Purpose

Local government in South Africa is critical to the country’s developmental processes and delivery of services to communities. South Africa’s constitution mandates local authorities to ensure the provision of services to local communities in a sustainable manner.

Currently, South Africa’s electricity distribution sector is fragmented comprising a

large number of distributors throughout the country with varying tariff levels. They consist of Eskom, 174 licensed municipalities and about 13 private distributors. Eskom generates 95% of South Africa’s electricity and controls its high voltage transmission. 40% of the electricity consumers receive their electricity directly from Eskom, while the remaining 60% get their electricity from municipalities. Electricity trading services therefore provide a valuable source of income for many municipalities in South Africa.

The Municipal Systems Act (2000) defines how a municipality should provide municipal services to citizens. Under this Act municipalities can engage or contract external parties such as utilities, agencies and corporations to provide services on their behalf. This can only be done through a Service Delivery Agreement (SDA) between the municipality and a service provider.

During the 2011 SALGA National Conference, it was resolved that there is a need to engage NERSA to make concluding an SDA with a municipality, where Eskom is the electricity distributor and/or part of its electricity network is currently within the area of jurisdiction of municipality that operates an electricity service of its own, a license condition and disconnecting electricity as a means of Credit Control to be included in SDA’s between Eskom and municipalities.

Despite agreement in principle between the CEO’s (SALGA and Eskom), attempts to obtain Eskom’s agreement to entering into Service Delivery Agreements (SDA) with municipalities have not yielded positive results since the 2011 SALGA National Conference. To date, Eskom has resisted efforts to enter into SDA’s with municipalities on the basis that Eskom is licenced by NERSA to distribute in the areas specified and believes that this agreement overrides the requirements of the Municipal Systems Act. Eskom has stated that it is of the opinion that it is under no obligation to enter into an SDA with municipalities.

In light of the above the AMEU has adopted a two phase strategy to achieve the desired result of NERSA making an SDA a licence condition for electricity distributors (in the short term); a signed SDA with Eskom (medium term); and consolidation of supply rights in the long term.

/ Short term / Medium term / Long term /
1 / Present a Position Paper from AMEU to SALGA to request SALGA to engage NERSA to make an SDA a licence condition for electricity distributors. / Development of generic SDA for all local authorities and /or individual SDAs per local authority / Consolidation of supply rights:
1. doing a feasibility study with different streams
2. starting with metros and the rest of the municipalities
2 / Request further legal opinion on the legislative position of the SDA. Should NERSA decline to make the SDA a licence condition, to test the interpretation of existing legislation via the courts. / Signed SDA between Eskom (service provider and municipalities (service authorities)

The purpose of this paper is to

· set out AMEUs viewpoint and desire to achieve both the constitutional and legislative requirements in terms of municipal service provision; and

· propose a collaborative approach between SALGA, AMEU, Eskom, NERSA, DoE and DPE where a roadmap is agreed and put in place, that recognizes the development and signature of an SDA and ultimately culminates in consolidation of supply rights.

There is a need to provide legislative clarity and resolve the impasse between Eskom and the municipalities so as to be able to move forward in the best interests of the industry, the economy and the country.

2 Problem Statement

In areas where Eskom is the electricity distributor, there are no Service Delivery Agreements (SDAs) between Eskom, as a Service Provider, and municipalities, as Service Authorities, in terms of the Municipal Systems Act 32 of 1998. This has resulted in a situation where, in areas where Eskom is a licensed electricity distributor:

• The Service Authority of municipalities is rendered ineffective in these areas

• Municipalities are not able to use electricity as a Credit Control measure in such areas

• Municipalities do not receive any income from electricity distribution despite the fact that the Fiscal Framework of Local Government makes service charges, in particular electricity revenues, a key source of funding for municipalities

• Customers in the same municipal area experience disparate tariffs and service levels

• Potential economies of scale in terms of equipment and scarce resources are constrained

• Provision of Public Lighting is hindered

• Information sharing and reporting is inhibited

• IDP alignment and electrification priorities are hampered

3 Discussion

The problems listed above seriously constrain the ability of municipalities to ensure sustainable provision of services to local communities. AMEU has been mandated by its members to approach SALGA with the intention to jointly pursue a swift resolution to the issues.

The AMEU Legal and Statutory Committee has received and considered a Report on the SALGA/ESKOM engagements on the Draft Electricity Framework Agreement in areas where ESKOM is a Service Provider (12 February 2014). This document (attached hereto and to be read in conjunction with this paper) sets out and discusses the Constitutional and Legislative Provisions relevant to the governance of relationships between municipalities and service providers in the delivery of services, including those contained in

· The Constitution

· Electricity Regulation Act 28 of 2007

· Municipal Systems Act 32 of 1998

· Municipal Fiscal Powers and Functions Act 12 of 1997

Minutes of a meeting between Eskom and SALGA held on 14 February 2014 reflect that It was noted that both Eskom and SALGA had previously sought legal opinion on this matter, and there were fundamental differences in the interpretation of the legislative provisions.

AMEU are of the opinion that legislation and the constitution support the formalisation of an SDA with Eskom where Eskom distributes electricity in a municipal area.

The following has been extracted from the Report on the SALGA/ESKOM engagements on the Draft Electricity Framework Agreement in areas where ESKOM is a Service Provider (12 February 2014) in support of Local Government’s opinion that an SDA is required.

The Municipal Systems Act (2000) defines how a municipality should provide municipal services to citizens. Under this Act municipalities can engage or contract external parties such as utilities, agencies and corporations to provide services on their behalf. This can only be done through a Service Delivery Agreement (SDA) between the municipality and a service provider.

Section 78 of the Municipal Systems Act outlines criteria and a process for

deciding on institutional mechanisms to provide municipal services. In the

case of the electricity distribution sector, this process has not been followed and most municipalities inherited Eskom as a distributor. NERSA issues a distributor license to Eskom in a given area without a Municipal Council Section 78 decision regarding Service Delivery Mechanisms in the municipal area or entering into a Service Delivery Agreement (SDA) with the municipality. This implies that NERSA

seizes the powers of municipal councils of taking Section 78 decisions and

disregards the Systems Act criteria and process.

Constitutional Provisions provide municipalities with the authority to administer and govern electricity reticulation as well as the right of National and Provincial Government to oversee and regulate effective performance by the municipalities.[1]

Relevant legislation provides for ring fencing of EDI financial statements; the right to decide and appoint a suitable service provider to distribute electricity in its area in terms of a service level agreement; and defines and allows for a municipal surcharge.[2][i]

Service delivery institutional arrangements provides for a municipality to provide a service in its area through an internal mechanism OR an external mechanism. An external mechanism is facilitated by entering into a Service Delivery Agreement including a licensed service provider registered or recognised in terms of national legislation.[3]

4 Proposed way forward

It was agreed at a meeting of 25th March 2014 to move away from the the SALGA / Eskom Electricity Distribution Framework Agreement and Memorandum of Understanding whilst retaining the collaborative, roadmap approach and applying it directly to development of an SDA that can be signed by all parties. The proposed way forward now is

a) For SALGA to engage NERSA to make concluding an SDA with municipalities a license condition for Eskom;

b) In parallel to seek further legal opinion on the enforcement of an SDA and to test it in the courts if need be; and

c) Develop a collaborative approach between SALGA, AMEU, Eskom, NERSA, DoE and DPE where a roadmap is agreed and put in place, which results in consolidation of supply rights.

a) SALGA to engage NERSA to align the Licensing Agreement with legislation and regulations

It was resolved that there is a need for SALGA to engage NERSA to propose making concluding an SDA with a municipality, where Eskom is a distributor, a license condition thus providing clarity and aligning with legislation in this regard.

It is further requested that NERSA stipulate that an SDA should define and clarify, at a minimum, the following elements

i. information sharing;

ii. how debt management and credit control will be addressed by the parties;

iii. how service provision issues (eg public lighting) will be addressed;

iv. time-frames for concluding the necessary service delivery agreement processes; and

v. how tariff parity will be established (as per NERSA regulations)

The underlying strategy is to get the parties to the table and committed to addressing pressing constraints and service provision requirements, and developing an SDA which is able to cover all municipalities in the absence of individual signed SDA’s.

b) To seek legal opinion to clarify interpretation of the legal position with respect to a distributor’s requirement to sign an SDA with the municipality

In parallel with the approach to NERSA, to seek legal opinion to clarify interpretation of the legal position with respect to the requirement for a service provider to sign an SDA with a municipality, and particularly a licensed entity such as Eskom.

c) Roadmap approach for the SALGA/Eskom Electricity Distribution consolidation of supply rights engagement process

Towards achieving both the constitutional and legislative requirements in terms of municipal service provision, a collaborative approach between SALGA, AMEU, Eskom, NERSA, DoE and DPE, is proposed where a roadmap is put in place and on which the signing of an SDA is part of the process that will ultimately culminate in consolidation of supply rights that

· aligns with relevant legislation and regulations;

· protects the interests of consumers, municipalities and distributors; and

· stipulates the minimum obligations of municipalities as Service Authorities and distributors (including Eskom) as the Service Provider.

The underlying strategy is to get the parties to the table and committed to addressing pressing constraints and service provision requirements which will result in a signed SDA between local municipalities (service authorities) and distributors ( service providers) in line with existing legislation and regulations and culminate in consolidation of supply rights.