A Regulatory Wake-up Call

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Eight power distribution companies have been given 60 days by the Nigerian Electricity Regulatory Commission to show reasons why their operational licenses should not be withdrawn for reportedly breaking the industry’s law and conditions for which they were recently granted new tariffs. This according to experts have far-reaching impacts on the country’s struggling power market. Chineme Okafor writes

The Nigerian Electricity Regulatory Commission (NERC) recently disclosed its intention to cancel the licences it issued to eight electricity distribution companies (Discos), for allegedly breaching certain terms in the country’s power reform law. They comprise the Abuja Electricity Distribution Company Plc (AEDC); Benin Electricity Distribution Company Plc (BEDC); Enugu Electricity Distribution Company Plc (EEDC); Ikeja Electric Plc (IE); Kaduna Electricity Distribution Company Plc (KAEDCO); Kano Electricity Distribution Company Plc (KEDCO); Port Harcourt Electricity Distribution Company Plc (PHEDC) and Yola Electricity Distribution Company Plc (YEDC).

NERC, in a notice of its intent to cancel the licences of the Discos, which was obtained by THISDAY, explained that the terms of their licenses they breached bordered on their execution of the 2016 to 2018 minor review of the Multi Year Tariff Order (MYTO) and minimum remittance order for the year 2019.

The regulator said it had written to the Discos and was ready to give them up to 60 days to put up convincing thoughts or case against the potential withdrawal of their licenses.

Background to Regulatory Order

Coming when most electricity users in Nigeria have remained frustrated with the services of their respective Discos, as well as consistent stakeholders’ fight over issues in the sector, the NERC anchored its intention for the Discos on a sector of the country’s Electric Power Sector Reform Act (EPSRA) 2005.

The NERC explained that Section 74 of the EPSRA 2005 and the terms and conditions of Discos’ licenses indicated they breached the law and specifically failed to remit approved minimum amounts of the sector’s revenue to the market.

Section 74 of the EPSRA stated that the NERC upon: “(a) receiving a complaint from any consumer, eligible customer, consumer association, association of eligible customers or other licensee, or (b) on its own initiative, the commission may inquire into the conduct or functioning of any licensee in carrying out the licensee’s obligations under this Act, rules or regulations, codes of conduct, or the terms and conditions of the license.

“(2) Subject to this section, and after an inquiry, including an opportunity for the licensee to show cause as to why the license should not be cancelled, the commission may cancel any license if, in its opinion: (a) the license was issued through fraud or the misrepresentation or non-disclosure of a material fact by the licensee; or (b) the licensee has willfully or unreasonably contravened any provision of this Act that is applicable to the licensee; or (c) the licensee has failed to comply with any term or condition of the license, the breach of which is expressly declared by such license to render it liable to cancellation; or (d) the financial position of the licensee is such that he is unable to fully and efficiently discharge the duties and obligations imposed by the license.”

On the basis of this, the NERC explained that it has reasonable cause to believe that the affected Discos breached the provisions of the EPSRA, terms and conditions of their respective distribution licences, the 2016 to 2018 minor review of the MYTO, and the minimum remittance order for 2019.

“The commission considers the actions of the aforementioned Discos as manifest and flagrant breaches of EPSRA, terms and conditions of their respective distribution licences and the order; and therefore requires each of them to show cause in writing within 60 days from the date of receipt of this notice as to why their licences should not be cancelled in accordance with section 74 of EPSRA,” said the NERC in the notice.

According to the NERC, after years without cost-efficient tariffs, it approved a new tariff for the Discos which kicked off in July 2019, to enable them to operate efficiently but with conditions that included minimum monthly remittances to the market which they failed to meet up with, amongst others.

It equally noted that the Power Sector Reform Programme (PSRP) which the federal government initiated with the World Bank provided for a gradual transition to cost-reflective tariffs with safeguards for the less privileged in the society, and proposed that an intermediate review in end-user tariffs on January 1, 2020 and transition to full cost reflectivity shall be achieved by July 2020.

It said in the interim, the government under the PSRP, has committed to fund the revenue gap arising from the difference between cost reflective tariffs determined by it and the actual end-user tariffs, but that the waterfall of market revenues during the transitional period shall be such that all Discos are obligated to settle their market invoices in full as adjusted and netted off by applicable tariff shortfall approved by it.

Under this framework, the regulator explained that the minimum market remittance threshold for the Discos was determined after deducting the revenue deficit arising from tariff shortfall from the aggregate invoices of the Nigerian Bulk Electricity Trading Plc (NBET) and Market Operations (MO) department of the Transmission Company of Nigeria (TCN).

It, in this regard, stated that it approved that Discos must settle up to 100 per cent of their MO’s monthly invoice based on the tariffs applied by the MO in determining respective invoices prior to the new order, as well as full settlement of a specified percentage of NBET’s monthly invoices being the minimum remittance threshold prescribed in the order.

“The Discos are liable to relevant penalties/sanctions for failure to meet the minimum remittance requirement in any payment cycle in line with the provisions of its respective contracts with NBET, MO and the provisions of the Market Rules and Supplementary TEM (Transition Electricity Market) Order.

“The Discos shall maintain an adequate and unencumbered letter of credit covering three months based on the minimum payment obligations to NBET and the MO. The Discos shall comply with the minimum remittance thresholds specified in the order. The commencement date of the order was 1 July 2019,” NERC explained.

It highlighted that the objective of the order was to place the Discos on a path of meeting their contractual and performance obligations to the power market with the recognition of tariff shortfalls arising from revenue under-recovery and the exclusion of 2017 and 2018 as years of mutual non-performance in the performance agreement.

However, the NERC in putting their remittance failures under context, stated that Abuja Discos for instance achieved just 30 per cent, instead of 45 per cent minimum remittance approved for it; Benin did 18, instead of 30 per cent; Enugu did 10 as against 42 per cent; Ikeja did 40 as against 49 per cent, and Kano did 11 instead of 18 per cent.

Kaduna it explained did 24 and not 33 per cent approved for it; Port Harcourt did 10 instead of 24 per cent, while Yola remitted just 10 per cent instead of 13 per cent approved as its minimum revenue remittance to the power market.

It said in this regards: “The commission notes that the failure of the Discos to comply with expected minimum remittance thresholds in the order exposes NESI (Nigerian Electricity Supply Industry) to systemic risk that threatens the sustainability of other parts of the value chain; and the ability to improve service delivery to consumers.

“The commission notes further that the Discos failed to provide the minimum financial securitisation of their payment obligation to NBET i.e. an adequate and unencumbered letter of credit covering three months based on their minimum payment obligations to NBET and MO that would have addressed the compliance failure.”

Market Experts React

Following the release of the regulatory notice, industry experts such as a former commissioner for tariff and rates at the NERC, Mr. Eyo Ekpo, through his verified personal twitter handle @eyooekpo, stated that the move was perhaps an effort by the NERC to restore the credibility of the power market, which according to him, had declined in the last four years.

Ekpo, noted that defaults on statutory and contractual obligations have been endemic in the country’s power market, and that rebuilding trusts in the industry was inevitable.

“Seems innocuous, but it’s a very significant move. Defaults on both statutory and contractual obligations have been endemic across the electricity sector by various parties, so it will be interesting to understand NERC’s expected end game and where this will go,” said Ekpo.

He further stated: “The Discos are probably in default, but it is certain that they have a host of defences they will put out. It seems to me that the biggest single challenge confronting the sector today is the credibility of its various component market participants, sub-sectors and stakeholders; and thus, the credibility of the entire sector, which has suffered greatly during the past four years-plus. Hopefully, this latest move by @NERCNG will help to restore trust amongst all stakeholders in the Nigerian electricity sector and the credibility of the sector with its external stakeholders, including particularly customers, governments, financial institutions and @cenbank, which is its largest single creditor.”

However, another market expert who pleaded that his identity be kept anonymous in this report, stated that the NERC would be quite careful in implementing the order because it looked quite a difficult task to implement.

The expert maintained that the regulator and Discos may have to go the way of negotiating a resolution to the issue, adding that the power market at this point is distressed to withstand a potential license withdrawal.

“It will be an order that will be difficult to implement for several reasons. If they withdraw the licences, who will operate the Discos? Also, who will refund the Discos their investment especially now when the federal government is broke?

“If it reverts back to government’s hands, won’t financial performance become worse? All these issues mean implementation will be difficult. I think it is just a negotiation tactic to get the Discos to increase their remittances to the market.

“The Discos will try to negotiate with NERC behind the scenes. If those talks fail, then we could see the Discos approaching the courts for an injunction suspending the implementation of the order. They will do whatever they can to protect their investment,” said the source.

Also commenting, the Managing Director of ZKJ Energy Partners Limited, and one-time head of the NBET, Mr. Rumundaka Wonodi, explained that the regulator had done what as expected of it from the EPSRA. He however stated that the development was jolting because the industry perhaps did not expect that the regulator would resort to license withdrawal.

Wonodi stated that the NERC could have alternatively demanded the NBET to call up the security deposits of the Discos, but had to use regulatory measures in the absence of such.

He said: “At the end of the day, NERC had gone to the Act and chose what the Act allows it to do. They are not making up new laws because the Act is specific on what it should do in such situation.

“However, it is a jolting and jarring headline in the sense that if there were Discos that were looking for financing, this comes as a wake-up call to them.”

According to him, the approval of new tariffs for the Discos meant that the regulator would demand of them improvements in their operations and obligations to the market.

“Some of us have complained about subsidy in the market by the government and because of the lack of cost-reflective tariff, the NERC and BPE have not been able to demand performance upgrades from the Discos.

“Now that NERC has put a tariff in place, and the federal government is trying to bring in additional N600 billion into the market, they need to halt that because we cannot continue this way.”

“The instrument that NERC has chosen may not be what we want to hear, and the preference would have been that the Bulk Trader goes out and pull the (financial) securitisation of the Discos, but in the absence of that, the NERC has gone out to use a regulatory instrument to whip people into place.

“There are Discos that are trying to get better, and there are others that are flagrantly abusing the laws of the market. That cannot continue because it kills the viability of the market and there is nobody that will have confidence in the market. There is a need to begin to exert confidence in the market,” Wonodi added.

Consumers’ Network

Notwithstanding, electricity consumers under the umbrella of the Nigeria Consumer Protection Network (NCPN) stated their appreciation of the NERC’s decision to withdraw the licences of the Discos if after 60 days they fail to convince it otherwise.

In a letter sent to the Vice Chairman of NERC, Mr. Sanusi Garba, and signed by the president of NCPN, Mr. Kunle Olubiyo, the network stated that the step was unprecedented.

Olubiyo noted that a vast majority of Nigerians were overwhelmingly excited about the decision of the NERC.

He said: “Now that honeymoon is over, vast majority of electricity consumers in Nigeria cannot but expresses our profound appreciation to Nigerian Electricity Regulatory Commission for this unprecedented critical milestone of monumental step in the right direction.”

According to him, consumers would equally look out to see the NERC maintain the reported courage with which it initiated the licence withdrawal order.