Grid Electricity: Situating DISCOs in the Emerging Dispute

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Saleh Maman

As the odd regime of non-cost reflective electricity tariff structure and huge debts are stifling the crucial power sector, a seeming politicisation of the industry’s regulatory environment and breaches in terms of the sector’s privatisation are birthing inconsistences hamstringing Distribution Companies (Discos) – but they are fighting back. Louis Achi looks at the key issues

Early this year, the National Economic Council (NEC) rose from its monthly meeting with a resolution ordering a forensic audit of electricity distribution companies (Discos) since the privatisation of the power sector in 2013.

Briefing State House reporters in Abuja after the NEC meeting, Mr. Philip Shaibu, the Deputy Governor of Edo State, explained the resolution followed the submission of a report by the NEC Committee on Power, chaired by the Governor Nasir el-Rufai of Kaduna State.

According to him, the committee, saddled with the responsibility of ascertaining the status of the ownership structure of the Discos, came up with idea of forensic audit of their accounts, which was approved by the council and also alleged that the N1.7 trillion spent on the power sector in the last three years had yielded little tangible results.

It could be recalled that the Minister of Power Saleh Maman, speaking after a Federal Executive Council meeting, presided by President Muhammadu Buhari, in Abuja, way back in February, had stated that “Government will not continue to subside the sector. If they (DisCos) are not ready, they should tell us. We have a plan on willing seller, willing buyer.” The minister further said government was in talks with a German firm, Siemens, to be part of solutions it was seeking to address the challenges.

According to Maman, the nation had the capacity to generate 13,000 megawatts and could transmit 7,000MW and blamed DisCos saying they had the capacity to take between 3,000MW to 4,000MW only.

Significantly, access to energy remains low in Nigeria. With approximately 90 million citizens lacking access to grid electricity, Nigeria has the largest access-deficit in sub-Saharan Africa and second to India, globally. The switch from a publicly-owned to essentially privately-owned power sector has not yielded the expected outcomes, translating to extreme sectorial stress. High losses, low collections and lack of cost-effective recovery tariff regimes have spawned an annual financial deficit to the sector of approximately US$1 billion.

Regulatory Latitude

From THISDAY checks, Section 96 of the Electric Power Sector Reform Act, 2005 (EPSRA) gives the regulator latitude for investigative action as necessary to balance the interests of consumers and operators in a monopolistic sector.

This requirement, naturally, engenders ready hostility in any context in which the operator is seeking to create an imbalance by precluding or objecting to any means by which the regulator seeks to maintain this balance. This is more so in an environment in which the customer believes that the operators are shortchanging them, under-delivering and underperforming and, essentially, “preying” on them.

Furthermore, the prevailing message that has been and is being painted by government agencies and other NESI stakeholders is that the DisCos are holding back remittances that should go up the value chain, on the back of sharp practices of estimated billing, resulting in the current market liquidity challenges.  Additionally, DisCos have been labelled with bad governance that has resulted in poor procurement practices, improper financial transactions, nepotism, et cetera.

As Discos have opted to challenge the proposed forensic audit of their operations, the resultant perceptual reaction to the litigation will be that they are seeking to impede an activity that is expected to shed some light on their alleged malpractices and, more so, when the regulator is legitimately perceived to be seeking to meet its responsibility and conduct an exercise that seeks to protect the consumers from the Discos’ “sharp practices.”

An expectation associated with the implementation of the German Siemens project is a valuation of the Discos, as necessary to determine the basis of any potential share dilution that may result from the ability of the Disco investors to meet their counterpart funding or repay the resultant loan.

Of critical note is that the forensic audit has been identified as part of the process of determining the valuation of the DisCos, as indicated by Paragraph 1.d. of the State House correspondence dated May 21st, 2020, “National Economic Council (NEC) Ad Hoc Committee on Ownership Review and Analysis of Discos and Electricity Sector Review,” obtained by THISDAY. More, the International Finance Corporation (IFC) is expected to utilize the information “in developing the commercial structure of the intervention under this Presidential Power Initiative (PPI) and in undertaking an independent company valuation of the Discos” (Fact Sheet)

On the surface, a repudiation of the forensic audit by Discos would and could be construed as an attempt to undermine Mr. President’s Siemen’s initiative. There is more. The World Bank has indicated that the forensic audit is a pre-condition to the $500 million loan that it is seeking to lend to the Discos for capital investment. It posits that the audit is nothing more than an assessment to determine the DisCos’ areas of deficiencies, a precursor to identifying the areas of need and investment. Accordingly, it is partly financing the forensic audit (via the Transmission Company of Nigeria [TCN]), in tandem with the U.K. funded Nigerian Advisory Infrastructure Facility III (NIAF).

Against this background, holding up the forensic audit and highlighting the World Bank’s role in promoting same may undermine the implementation of the loan program.

The report of the National Economic Council highlights the objectives which include: a forensic audit; potential dilution of FGN and investor equity, with a resultant increase in state government equity and ownership; and Introduction of new investors. It also identifies issues associated with the Open Book Audit (OBA) audit of the Discos.

Creeping Politicisation

In effect, NEC’s politicization of the sector, its aspirations of encroaching on private investor equity, its illegitimate expansion of its mandate runs several risks some of which include: a concerted pushback by the governors, utilizing their significant resources; populist identification of the citizenry with their governor’s aspirations to maximize the value of their respective states’ investment in electricity infrastructure; and NEC’s reference to or highlighting of the issues of OBA specified in the NEC report as validation of why the forensic audit is vital.

Further, the proposed forensic audit apparently is being employed outside of context, for purposes that are not consistent with its utility and as a mischievous distraction from the root causes of NESI’s liquidity challenges.

DisCos’ Grouse

From THISDAY findings, in principle, DisCos are not opposed to forensic audits as they are required to provide audited financial reports to the regulator annually. The power distribution entities recognize the value of audits as a tool to maintain the balance in a monopolistic commercial environment and to establish a foundation for the correction of the liquidity challenges of NESI.

Nevertheless, they believe that the challenges of liquidity are not a “DisCo” only problem. As such, any sincere attempt directed at correcting the challenges of NESI must be one that is holistic and addresses all stakeholders along the value chain.  Consequently, DisCos, TCN, GenCos, gas-to-power and the Nigerian Bulk Electricity Trader (NBET) should all be subjected to forensic audits, rather than a selective persecution of a sub-sector.

More, DisCos believe that if there is to be value associated with any forensic audits, a forensic and technical audit of the entire NESI value chain must occur, for identification and alignment of the critical elements that will remedy the current dysfunctional state of the electricity market versus the vilification of the DisCos as the sole villains.

What’s more, from its modus operandi, the independence of the regulator clearly continues to be undermined and is, currently almost non-existent. A major factor in DisCo opposition to the forensic audit would appear to be the consistent third-party, seemingly, agenda-driven requests for forensic audits by the National Economic Council (NEC).

NEC’s multiple requests for the DisCos to be forensically audited and its related directives to NERC appear to be based on an interest to expand state government ownership into private investor interests, in violation of the terms of the privatization transaction terms. These compromise the sanctity of contract with a potential for negative outcomes, as associated with the recent cases of P&ID (Gas Supply) and Sunrise Power (Mambila).

It also undermines the DisCos ability to access urgently needed financing, due to the resultant uncertainty and further injects a disruptive political agenda into the business of the DisCos seeking to improve supply and service delivery to their customers.

Cut to the bone, it is this use of the forensic audit by NEC to illegally encroach upon the assets of the private investors that the DisCos are leery of and consequently oppose.  A potential back-door re-nationalization cannot be discounted here and this renders private sector investor subject to similar uncertainty and action.

Clearly, the sectorial challenges will not be corrected by completion of a forensic audit.  Indeed, while the DisCos are not opposed to the principle of a forensic audit or any other audit, the DisCos are opposed to a distraction from the core issues that have resulted in the illiquid situation of NESI.

It can easily be recalled that from the onset of the privatization, the federal government’s failure to the meet the four critical commitments of a cost-reflective tariff, that would enable DisCos make the capital investments required for addressing decades of historical government underinvestment in the sector; injection of N100 billion of subsidy to defer the effects of any tariff increases on electricity customers.

Instead, the DisCos financial books were encumbered with Nigerian Electricity markets Stabilization Facility (NEMSF) loan of N213 billion, of which only twenty-six (26) percent was associated with the DisCos, as money owed to the DisCos by the market and the balance,) and the rest, historical or legacy power and gas debts of the Power Holding Company of Nigeria (PHCN).

Then there is payment of MDA electricity debt, currently estimated in excess of N80 billion, a major leakage of DisCo revenues and debt-free financial books that would enable the DisCos to access the debt financing necessary to meet the magnitude of investment in the sub-sector, have emasculated the DisCos, directly deprived Nigerian’s of the envisioned improvement in electricity supply.

Eligible Customer Regulation

 Going forward, the premature introduction of the Eligible Customer Regulation by the regulator has created unnecessary risks and confusion in the industry that has not resolved the issue of stranded capacity.

To be also considered is that DisCos outstanding obligation to the market cannot occur without taking into cognizance the significant hole in monthly DisCo remittances caused by the government’s refusal or inability to meet its electricity consumption obligations. Hence, a forensic audit will not provide a cure for a NESI that has not been well-served by a regulator that is not independent, that is weak, politicized and responsible for a multitude of regulatory misadventures and missteps.

Flawed Forensic?

Significantly, not many Nigerians know that NERC has been sending auditors for the last six years to audit the DisCos. In effect, the current proposed forensic audit will represent double jeopardy and significant operational distraction in this challenging time.

A forensic audit will not correct regulatory misadventures of politically determined tariff design and rates; three years of lack of Minor Reviews; Poorly designed customer estimated billing methodology imposed on the DisCos; a virtually non-functional Meter Asset Provider (MAP) program; a tariff that precludes the DisCos from comprehensively metering customers and making the investment that is fundamental to improving power supply to customers.

DisCos have also dismissed allegations of load rejection and explained it is nothing more than TCN load dumping due to the limitations of the grid.  They maintain the load rejection allegation flies in the face of the fact that DisCos pay Capacity Charge, an estimated thirty (30) percent of their monthly energy billing, essentially, it would mean that the DisCos are rejecting energy that they and their customers have already paid for.  Capacity Charge continues to be a charge for energy that the customers pay for but do not receive, due to gas and grid limitations.

According to Mr. Allison Dayo, power analyst, “A forensic audit will not provide a cure for a NESI that has not been well-served by a regulator that is not independent, that is weak, politicised and responsible for a multitude of regulatory misadventures and missteps.

“A forensic audit will not correct regulatory misadventures of politically determined tariff design and rates; three years of lack of minor reviews; poorly designed customer estimated billing methodology imposed on the DisCos; a virtually non-functional Meter Asset Provid­er (MAP) programme; a tariff that precludes the DisCos from comprehensively metering customers and making the investment that is fundamental to improving power supply to customers’’