Eskom: Municipal DAA Legal Hurdles Mount After Dr Beyers Naudé Court Order

• Eskom's municipal debt reached R119 billion by the end of June, identified as the biggest threat to its finances.
• The Dr Beyers Naudé municipality secured a court order preventing Eskom from cutting power until legally mandated outsourcing processes, including capacity investigation, tender, and feasibility study, are followed.
• A National Treasury deadline of September 1 for municipalities to appoint Eskom as an agent passed without any agreements being concluded.
• While a formal prepaid electricity agreement with Inxuba Yethemba municipality ultimately failed to materialize, Eskom implemented a bulk prepayment arrangement in May 2026.
• Government and Eskom have provided little clarity on the progress of lawful Distribution Agency Agreements or other solutions for municipal debt.

The Dr Beyers Naudé municipality court order underscores the importance of adhering to due legal process when attempting to outsource municipal services, preventing arbitrary actions that could leave communities without power.

Eskom is currently facing a significant and escalating challenge with municipal debt, which reached R119 billion by the close of June. The power utility has publicly identified this outstanding amount as the most substantial threat to its financial stability, a concern highlighted in its results for the year ending March 31. In an attempt to address this critical issue, Eskom issued warnings in March to 14 municipalities, indicating that their electricity supply could be disconnected if outstanding payments were not made. These municipalities included Ekurhuleni, Dr Beyers Naudé, Inxuba Yethemba, Nala, Nketoana, Masilonyana, Ngwathe, Mpofana, Govan Mbeki, Kgetlengrivier, Mamusa, Thembelihle, Kai !Garib, and Renosterberg, with Eskom also presenting them with alternative solutions to avoid power cuts.

By May, Eskom reported some progress in these negotiations. An agreement for payment was reached with Ekurhuleni, and Inxuba Yethemba initially committed to transitioning to a prepaid electricity system. Furthermore, under pressure from the National Treasury, nine municipalities passed council resolutions signaling their intention to implement Distribution Agency Agreements (DAAs) with Eskom. However, Dr Beyers Naudé, Kai !Garib, and Mamusa had not yet responded to Eskom's proposals, leading the utility to issue final notices to these three entities. Despite the initial optimism, the proposed prepaid arrangement with Inxuba Yethemba ultimately failed to materialize, with Eskom later confirming that no such formal agreement is currently active, although Eskom did move the municipality onto a bulk prepayment arrangement in May 2026.

The path to implementing Eskom municipal DAAs has been complicated by significant legal obstacles, most notably demonstrated by a recent court order secured by the Dr Beyers Naudé municipality. This judicial directive explicitly prohibits Eskom from cutting electricity supplies to towns within the municipality until all legally mandated procedures for outsourcing a municipal service have been rigorously followed. These crucial legal steps encompass an investigation to determine the municipality's own capacity to provide the service, followed by a formal tender process, and a comprehensive feasibility study. A key legal principle highlighted is that a municipal service cannot be simply transferred to Eskom without first providing other potential service providers an opportunity to secure the contract.

Such a thorough legal process is inherently time-consuming, often requiring several months to complete. This timeline presented a challenge to the National Treasury's deadline of September 1 for municipalities to appoint Eskom as an agent. Although the Department of Cooperative Governance and Traditional Affairs (Cogta) issued guidelines designed to expedite compliance with these legal requirements, the deadline passed without any of the affected municipalities successfully concluding an agency agreement with Eskom. A request for an extension from the South African Local Government Association (Salga) received no response from Treasury, and subsequent inquiries to both Treasury and Cogta regarding the completion of legal processes have remained unanswered, despite Cogta acknowledging receipt of questions on August 27.

The ongoing difficulties surrounding Eskom municipal DAA legal hurdles and the ultimate failure of proposed solutions, such as the Inxuba Yethemba prepaid electricity failure, underscore a significant deadlock in resolving South Africa electricity distribution agreements. The lack of clear information and transparency from both government bodies and Eskom regarding the progress of these solutions leaves numerous municipalities and their residents in a state of prolonged uncertainty. The Dr Beyers Naudé municipality court order serves as a critical precedent, emphasizing the imperative of adhering to due legal process when attempting to outsource municipal services, thereby preventing arbitrary actions that could potentially leave communities without power.

With Eskom's municipal debt reaching R119 billion and being identified as a primary financial risk, the inability to implement effective and legally sound solutions for debt recovery and service provision poses a substantial threat to the utility's overall stability and the consistent supply of electricity across the nation. The legal requirement for detailed investigations, competitive tender processes, and thorough feasibility studies before transferring services means that rapid, simple fixes are legally unfeasible, necessitating a more structured, and potentially lengthy, approach to address these intricate financial and operational challenges.

Lawyers advising municipalities should be aware of the legal requirements for outsourcing municipal services, as demonstrated by the Dr Beyers Naudé court order, which can be leveraged to challenge Eskom's attempts to impose Distribution Agency Agreements or cut electricity supply without following due process.

Source: Original reporting via Moneyweb