Court tells Eskom to explore all the options before cutting the lights to beleaguered municipalities on the brink of financial collapse

Eskom, on the horns of a dilemma of its spiralling debt must take urgent steps to recover costs for electricity supplied to ailing municipalities. We have heard the oft too repeated caution about the fiscal risk Eskom poses for the country’s economy. Two recent rounds of litigation highlight the devastating road to recovery that lies ahead of the nation’s power utility.

12 Jan 2021 3 min read Dispute Resolution Alert Article

At a glance

  • Eskom is facing a dilemma of spiraling debt and needs to take urgent steps to recover costs from ailing municipalities for electricity supplied.
  • Recent litigation cases highlight the challenges faced by Eskom in recovering debts, with significant consequences for businesses and households.
  • The Supreme Court of Appeal emphasized Eskom's constitutional duty to resolve disputes with municipalities amicably before interrupting electricity supply and outlined fair processes that should be followed, including considering representations from affected parties and providing notice before termination or interruption.

In October 2020, Pioneer Foods (Pioneer) sought to review and set aside Eskom’s decision to interrupt bulk electricity supplied to the Walter Sisulu Local Municipality (the Municipality). Despite some effort to recover the debt owed to it by the Municipality, Eskom resorted to coercive methods to induce payment from its chronic defaulter with huge consequences for businesses and households reliant on the Municipality for power.

In this article, we offer a few guidelines — based on our reading of the latest caselaw — as to what a fair process should include.

From the outside, Pioneer’s case appeared straightforward. One can sympathise with Pioneer, a dutiful paying customer now in the unenviable position of power cuts, while the Municipality and Eskom — both organs of state — fail to resolve the debt crisis between them; leaving businesses and households to suffer in the dark.

Curiously, however, the High Court dismissed Pioneer’s application in Pioneer Foods (Pty) Limited v Eskom Holdings SOC Limited [2020] JOL 48702 (GJ) (Gauteng Local Division, Johannesburg, Case no.: 2018/16). Examining the relationships between the parties, the court found that the “direct relationship” between the Municipality and Eskom, stemming from an electricity supply agreement whereby Eskom supplies electricity to the Municipality, which the latter purchases from Eskom and resells to the local community, excluded the ultimate consumers of that electricity. On this view, the court concluded that Pioneer lacked standing to bring the application because it has no “direct relationship” with Eskom.

The court emphasised the importance of parties seeking orders that are practically implementable, and rebuked Pioneer for requesting an order directing the Municipality to pay Eskom, despite it knowing that the Municipality lacked the funds to settle its debts. The application was dismissed with costs; and Pioneer’s hands were seemingly tied.

Yet, for all the emphasis placed on the importance of practicality in the judgment, it is unfortunate that the court did not advance practical solutions to a systemic problem and failed to address pertinent questions. For instance, is it lawful for a private entity to become collateral damage on the basis of a municipality’s failure to adhere to its payment obligations? And should Eskom be permitted to cut electricity supply to innocent third parties, especially when those parties diligently pay their electricity bills?

The recent Supreme Court of Appeal (SCA) judgment handed down on 29 December 2020 in Eskom Holdings SOC Ltd v Resilient Properties (Pty) Ltd and Others and two other matters [2020] ZASCA 185, involved facts that mirrored those in Pioneer. The case, which concerned a staggering debt of R400 million, seems to have answered much of these concerns.

Importantly, the SCA highlighted Eskom’s constitutional duty to ensure that municipalities are able to supply electricity to local communities, and accordingly not to take decisions that would “undermine” a municipality’s ability to “take all reasonable steps necessary” to resolve disputes with municipalities before interrupting electricity supply. This judgment is to be lauded. 

Its most significant effect is that organs of state must take all reasonable measures to resolve their disputes amicably and in the interests of the public before employing drastic measures that harm the public.

In our view, the appropriate and fair processes that should be taken prior to Eskom terminating or interrupting an electricity supply, as a result of a municipality’s failure to meet its payment obligations, would include Eskom inviting and considering representations from all parties that may be adversely affected, and providing affected parties at least 30 days’ notice of the planned termination or interruption.

Finally, and perhaps most importantly, Eskom must exhaust all available statutory and constitutional mechanisms designed to resolve disputes between organs of state, including working together with the National Energy Regulator of South Africa, the Treasury and relevant Premiers — in comity and in good faith — before plunging the rest of us into darkness for its failure to recover debts timeously.

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