South Africa: Municipalities Fail Eskom DAA Deadline, Risk Power Cuts

• Fourteen South African municipalities missed a September 1st deadline to sign Distribution Agency Agreements (DAAs) with Eskom, risking electricity supply cut-offs.
• These municipalities collectively owe Eskom R119 billion, a debt threatening the power utility's sustainability.
• DAAs involve Eskom temporarily taking over municipal electricity distribution, with consumer payments going directly to Eskom.
• The legality and fairness of DAAs are under scrutiny, with AfriForum challenging an agreement due to alleged procedural irregularities, and Dr Beyers Naudé securing a court order to follow due process.
• While some municipalities have made progress or alternative payment arrangements, others, like Masilonyana, face severe internal governance issues hindering DAA implementation.

The widespread failure of municipalities to meet the deadline underscores the depth of the crisis.

A critical deadline for fourteen South African municipalities to finalize Distribution Agency Agreements (DAAs) with Eskom passed on September 1st, with none of the affected entities having signed the necessary accords. This failure leaves the future of electricity supply in these towns uncertain and raises the specter of potential power interruptions. The municipalities, collectively owing Eskom a substantial R119 billion, had been issued an ultimatum in March, warning that Eskom's patience had worn thin and that failure to comply could result in their electricity supply being cut off.

These agreements, known as Eskom Distribution Agency Agreements, are designed as a mechanism to prevent such drastic measures. Under a DAA, Eskom temporarily assumes full responsibility for electricity distribution within a municipality, operating for a predetermined fee. A key component of this arrangement is that consumer payments for electricity are directed straight into Eskom's bank account, bypassing the municipality. Eskom then deducts the cost of bulk electricity supplied and its operational expenses, remitting the remaining balance to the municipality. This model aims to secure Eskom's revenue stream while ensuring continued service delivery, but the widespread failure of municipalities to meet the deadline underscores the depth of the crisis.

The implementation of these DAAs has been fraught with controversy, prompting questions regarding their legality and fairness. National Treasury had previously identified Eskom's initial DAA contracts as being heavily skewed in the power utility's favor. Despite efforts to develop a more balanced standard agreement through a working group comprising representatives from Eskom, National Treasury, the South African Local Government Association (Salga), and relevant government departments, a revised contract has yet to materialize. Nevertheless, Eskom recently proceeded to conclude a new DAA with the Ditsobotla municipality.

Further complicating the landscape are ongoing legal challenges. The civil rights organization AfriForum has launched a court application to nullify an existing DAA with the Merafong municipality, alleging that the legally mandated process for outsourcing electricity distribution was not followed. This procedural oversight is reportedly a common issue, as the source indicates that this process was not adhered to in any of the four DAAs currently in effect. In a related development, the Dr Beyers Naudé municipality successfully obtained an Eskom court order to temporarily avert a supply cut-off, allowing it to properly follow the prescribed legal steps for outsourcing its electricity distribution function, highlighting the importance of due process in these agreements.

While fourteen municipalities failed to meet the September 1st deadline, other local authorities have taken varied approaches to address their Eskom debt and avoid supply interruptions. In May, Eskom announced that nine municipalities—Nketoana, Mpofana, Masilonyana, Nala, Ngwathe, Renosterberg, Thembelihle, Govan Mbeki, and Kgetlengrivier—had adopted the required council resolutions indicating their willingness to appoint Eskom as their distribution agent. Additionally, the Ekurhuleni metro municipality reached a payment agreement with Eskom, and the Inxuba Yethemba municipality opted for an upfront payment model, where Eskom supplies only the amount of electricity the municipality can afford. These two municipalities were subsequently removed from the list of those at risk of immediate supply cut-offs.

However, the situation in some municipalities remains dire. In Masilonyana municipality in the Free State, for instance, a Democratic Alliance councillor, Marieta Visser, reported no progress on the legal processes required before a DAA can be signed. This municipality is currently under administration, with both its municipal manager and chief financial officer suspended and challenging their suspensions in court. Compounding these administrative woes, municipal workers have been on strike since mid-June, leading to significant service delivery failures, including accumulating rubbish and dry taps. This complex web of governance failures, financial distress, and legal uncertainty underscores the systemic challenges contributing to South Africa municipal debt Eskom and the broader threat to Eskom's sustainability.

Lawyers should advise municipal clients on the immediate legal risks of failing to sign Distribution Agency Agreements with Eskom, including potential power supply interruptions. They should also monitor ongoing legal challenges to the legality and implementation of these DAAs, such as AfriForum's court application, which could set precedents for future agreements or disputes.

Source: Original reporting via Moneyweb