Glencore gets one over Nersa and municipality in surcharge on the price of electricity

The mineral-rich Rustenburg Local Municipality (RLM) abused its power and put hundreds of jobs at risk when it resolved to impose a surcharge on the price of electricity charged to a smelter owned by a Glencore and Merafe joint venture, the high court in Johannesburg has found.

The court did not spare the National Energy Regulator of SA (Nersa) for sitting by idly and not playing its role as a regulator when the dispute over the mooted surcharge emerged between the municipality and the joint venture.

RLM’s council earlier this year resolved to impose a 6.1% surcharge on the price of electricity supplied to the venture’s Rustenburg smelter, putting 700 jobs on the line, according to the companies and the National Union of Metalworkers of SA (Numsa).

Glencore, a Swiss multinational commodity trading and mining company, and Merafe Resources have been in a chrome joint venture for more than a decade, with the latter being the junior empowerment partner. The joint venture finds expression through a pooling and sharing venture (PSV).

The PSV, which has two other smelters in RLM’s jurisdiction, argued before court that should RLM be allowed to impose a 6.1% surcharge as resolved by the municipality’s council, it would cause the Rustenburg smelter to be economically unviable with the potential result of the closure of operations.

On the other hand, Nersa rejected the PSVs application for the long-term negotiated pricing agreement (NPA), which would include the Rustenburg smelter.

Nersa was initially of the view that it was not entitled to approve the 6.1% surcharge related to the Rustenburg smelter because the RLM was not supplying the electricity to the smelter.

However, after consultation with Eskom and the RLM, Nersa changed its tune and decided to exclude the smelter from the long-term NPA on the ground that the smelter and the RLM had not agreed on the surcharge.

Judge Marcus Senyatsi slammed the conduct of both the municipality and Nersa.

“It is also evident in my view that the insistence on the surcharge is motivated not by the fact that the RLM is expending any money for the provision of electricity but by the fact that the RLM may become a metro in the future. This is evident from the letter of support by RLM,” reads the judgment.

“Consequently, for the RLM to resolve and agree to give conditional support of the joint NPA for the imposition of a 6.1% surcharge was inappropriate … insisting on the surcharge on the basis that the RLM is the licensee of electricity even though it does not supply the Rustenburg smelter and passing a resolution to give effect thereto, knowing that no agreement had been reached, is grossly abusive of its power as an organ of state.”

The PSV produces about half of SA’s ferrochrome output, making it a significant consumer of electricity. It has two other smelters in Mpumalanga and Limpopo.

The government introduced the NPA in 2008 as an incentive to the smelters in SA through the Interim Framework for Long-Term Negotiated Pricing Agreement issued in terms of the Electricity Pricing Policy. The NPA’s objective is to achieve globally competitive electricity pricing to make ferrochrome smelters viable in SA.

Senyatsi said the government, in its wisdom, put the NPA in place to avoid the closure of local smelters due to the rampant increase in the cost of electricity, which has increased 722% over a decade.

He stressed that, absent the NPA, smelters would face closure given the continuous increase in electricity charges as a significant input cost to the ferrochrome smelter operations, and the ferrochrome would be exported as a raw material, resulting in obvious job losses in the value chain.

“As the electricity which the PSV’s smelters use currently is charged at Eskom Megaflex tariff (“the Eskom rate”), it is becoming increasingly unsustainable for the South African ferrochrome smelters. It is for this reason, in my considered view, that the Rustenburg smelter should not be excluded from the joint NPA application,” Senyatsi ruled.

He also called out the conduct of Nersa.

“It is unacceptable that only when seized with Eskom’s application incorporating five smelters from the PSV, Nersa decided to exclude the Rustenburg smelter. This is so especially when regard is had to the fact that Nersa had sent a letter confirming that the RLM was not supplying electricity to the Rustenburg smelter, only to change its stance after meeting both the RLM and Eskom.”

Nersa and RLM did not respond to requests to comment.

khumalok@businesslive.co.za