Local Government Position Paper:
License Agreements with respect to Distribution of Electricity
Version:
Date:
02
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
Contents
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.
1
Short term
Present a Position Paper
from AMEU to SALGA to
request SALGA to engage
NERSA to make an SDA a
licence condition for
electricity distributors.
Medium term
Development of generic
SDA for all local
authorities and /or
individual SDAs per local
authority
Long term
Consolidation of
supply rights:
1. doing a feasibility
study with
different streams
2. starting with
metros and the
rest of the
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AMEU-SALGA Licence Agreement Position Paper
2
Short term
Medium term
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)
Long term
municipalities
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 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 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:
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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
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AMEU-SALGA Licence Agreement Position Paper
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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
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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.
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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.2i
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
1
• Sections 156 (1) and (2) assign municipalities executive authority and right to administer local
government functions laid out in Schedule 4 Part B which includes electricity reticulation
• Section 151(3) vests municipalities with the right to govern those matters on their own initiative,
subject to national and provincial legislation, as provided for in the Constitution
• Section 139(1) : When a municipality cannot or does not fulfil an executive obligation in terms of
legislation, the relevant provincial executive may intervene by taking any appropriate steps to ensure
fulfilment of that obligation …
• Section 155(7) National government…. and provincial government have the legislative and executive
authority to see to the effective performance by municipalities of their functions in respect of matters
listed in Schedules 4 and 5, by regulating the exercise by municipalities of their executive authority
• Electricity Regulation Act 28 of 2007 defines electricity reticulation as the “trading or distribution
of electricity and includes services associate therewith”. Empowers the Minister or regulator to establish
norms and standards, KPIs and for municipalities to ringfence their EDI financial statements
• Municipal Systems Act 32 of 1998 defines municipality as service authority with the right to decide
who will distribute electricity in its area and may appoint a suitable service provider in terms of a
service delivery agreement
• The Municipal Fiscal Powers and Functions Act12 of 2007 defines a
"municipal surcharge" as a charge in excess of the municipal base tariff that a municipality may
impose on fees for a municipal service provided by or on behalf of a municipality.
2
3
Section 76 of the Systems Act states that a municipality may provide a municipal service in its area or
a part of its area through
An internal mechanism, which may be(i) A department or other administrative unit within its administration;
(ii) Any business unit devised by the municipality, provided it operates within the municipality's
administration and under the control of the council in accordance with operational and
performance criteria determined by the council; or
(iii) Any other component of its administration; or
An external mechanism by entering into a Service Delivery Agreement with(i) A municipal entity;
(ii) Another municipality;
(iii) An organ of state, including
(bb) A licensed service provider registered or recognized in
terms of national legislation; and
(iv) A community based organisation or other non-governmental organisation legally competent
to enter into such an agreement, or
(v) Any other institution, entity or person legally competent to operate
a business activity
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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.
iv.
how service provision issues (eg public lighting) will be addressed;
time-frames for concluding the necessary service delivery agreement
processes; and
how tariff parity will be established (as per NERSA regulations)
v.
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.
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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
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

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.
5 Recommendations
This position paper is a reflection of the unified Local Government view that the
electricity distribution industry would benefit from formalising SDA’s with Eskom
(and any other distributor) in areas where Eskom (or any other distributor) is the
electricity distributor and proposes that

SALGA engages NERSA to make concluding an SDA with a municipality a
license condition, where Eskom (or any other distributor) is a distributor,
thus providing clarity and aligning with legislation in this regard;

In parallel to the above, to seek legal opinion to build on opinion gained
previously, that the Constitution and existing legislation and regulations
support the contention that local municipalities are service authorities and
must regulate their relationship with electricity distributors via a signed
SDA; and

Should no agreement be reached, as a last resort, to take other steps,
including but not limited to the legal route to request the courts to rule on
the requirement for an SDA.

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, which will culminate in consolidation of supply rights.
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The Municipal Fiscal Powers and Functions Act
The Municipal Fiscal Powers and Functions Act, 2007 (Act No 12 of 2007) defines a "municipal
surcharge" as a charge in excess of the municipal base tariff that a municipality may impose on fees
for a municipal service provided by or on behalf of a municipality, in terms of section 229(1 )(a) of the
Constitution.
Section 8 of the Act further stipulates that: (1) The Minister may prescribe compulsory national norms and
standards for imposing municipal surcharges, which may include,
amongst others, maximum municipal surcharges that may be
imposed by municipalities.
(2) The norms and standards contemplated in subsection (1) may
(a) in respect of maximum municipal surcharges—
(i) express the maximum municipal surcharge that may be
imposed as a ratio, a percentage of the municipal base tariff or a Rand value;
(ii) provide bands or ranges within which municipal surcharges may be imposed;
(b) differentiate between different—
(i) kinds of municipalities, which may be defined in relation to the capacity of a
municipality, a category, type or budgetary size of municipality;
(ii) types of municipal services;
(iii) levels of municipal services;
(iv) categories of users, debtors and customers;
(v) consumption levels; and
(vi) geographical areas;
(c) determine the basis upon and the intervals at which municipal
surcharges may be increased; and
(d) determine matters that must be assessed and considered by municipalities in imposing
municipal surcharges on fees.
Section 9 of the Municipal Fiscal Powers and Functions Act further confers the following obligations of a
municipality in respect of municipal surcharges: (1) (a) A municipality must, when imposing a surcharge on fees for services provided by it or
on its behalf, comply with any norms and standards contemplated in section 8.
(b) The Mister may, where practicalities impede strict compliance with the norms and standards
prescribed in terms of section 8, norms of his or her own accord or on application by a
municipality, or a group of municipalities or organised local government, by notice in the
Gazette exempt a municipality from complying with any norms and standards contemplated in
section 8 for a period and on the conditions determined in the notice.
(c) An exemption under paragraph (b) may—
(i) apply to municipalities generally; or
(ii) be limited in its application to a particular municipality or kind
of municipality, which may be defined in relation to the capacity of a municipality or
the category, type or budgetary size of municipality.
(2) Section 75A(2), (3) and (4) of the Local Government: Municipal
Systems Act, 2000 (Act No 32 of 2000), relating to the manner in
which fees, charges or tariffs are levied and how a resolution in that
respect must be made known, applies with the changes required by
the context to a municipal surcharge.
(3) A municipality must annually as part of its budget preparation
processes review any municipal surcharges.
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