•Heavy consumers to pay exit fees as NERC releases new rules
By Chineme Okafor and Emmanuel Addeh
Ten out of the 11 electricity distribution companies (Discos) in Nigeria’s power sector have said that they will take part in a planned forensic audit of their operational activities by the federal government through the Nigerian Electricity Regulatory Commission (NERC) and the World Bank if certain conditions are guaranteed to them.
This is coming as the NERC at the weekend released guidelines for heavy electricity consumers who wish to exit the services of Discos to get supply directly from the Generation Companies (Gencos).
The Discos, excluding Yola, met with a team from the World Bank last week, and a copy of their deliberation was obtained by THISDAY.
In it, they insisted on the inclusion and execution of a comprehensive audit of the entire power sector as one of the conditions that must be met to guarantee their participation in the audit.
They equally told the World Bank, which intends to support Nigeria’s power sector with funds through the Power Sector Recovery Plan (PSRP) that the NERC miscalculated the total tariff shortfall in the sector by N53 billion.
According to them, the total tariff shortfall in the sector so far was N2.17 trillion and not N1.64 trillion as calculated by the NERC.
The Discos explained that the NERC did not consider the collection losses incurred from government’s Ministries, Departments and Agencies (MDAs) as well as exchange rate differentials.
The World Bank had noted that its board of directors approved $750 million in International Development Association (IDA) credit to improve the reliability of electricity supply, achieve financial and fiscal sustainability, and enhance accountability in the power sector in Nigeria. The approval was part of the PSRP.
In their meeting, the Discos noted that they were not, “averse to NERC’s audits, given that NERC periodically conducts annual and open book audits of their financial books,” but they were concerned with the intentions of the planned forensic audit.
“At a minimum, the definition of forensic audit conveys the following: A wide range of investigative activities that are conducted to prosecute a party for fraud, embezzlement, or other financial crimes.
“A process where an auditor may be called to serve as an expert witness during trial proceedings for financial fraud disputes related to bankruptcy filings and business closures.
“An examination and evaluation of a firm’s or individual’s financial records to derive evidence that can be used in a court of law or legal proceeding,” they told the Bank.
They added that the forensic audit implied that they had failed in their operations but that the financial troubles of Nigeria’s power market were directly related to historical policy and regulatory inconsistencies as well as commercial and technical misalignments.
In this regard, they stated that: “An audit of the Discos without a complete system audit of the value chain, would not necessarily yield the desired sector/market discipline, transparency and improved governance.”
“The PSRP financing plan and the distribution recovery operations are unlikely to succeed without a commercial and technical alignment of the NESI value chain. A forensic audit creates a criminal narrative against the Discos,” they added.
The Discos explained their preference for a holistic audit of the power sector, stating that regulation of the industry has been politicised with inconsistent tariff making and implementation; just as gas-to-power price has remained dollar-denominated as well as the pipeline network and commercial framework of the subsector inadequate to support the entire electricity industry.
They also said that questionable available generation capacity, opaque Power Purchase Agreements, the inconsistency of grid invoicing, frequent collapses of the transmission network as well as payment indiscipline, high Aggregate Technical Commercial and Collection (ATC&C) Losses and load rejection were the other reasons for their preference for a holistic audit.
“A forensic audit sends the wrong signal and perception of government’s scapegoating of the Discos’ investors and operators for the purpose of other malicious intent, (it) promotes perceived political bias against Discos investors and potentially worsens the lack of investment interest in the sector and ignores the fact that Discos are subject to annual audits, as well as periodic open book audits,” they further stated.
The Discos, therefore, noted that the “validity of any such audit must be based on the neutrality of auditors.
“We recommend a system audit for the entire power sector value chain. Clarification by the World Bank on the exact type of audit required for its intervention in the Nigerian power sector; exploration of alternative options of due diligence for the distribution sub-sector, relative to the World Bank’s potential loan to same.”
Heavy Consumers to Pay Exit Fees as NERC Releases New Rules
Meanwhile, NERC at the weekend released guidelines for heavy electricity consumers who wish to exit the services of Distribution Companies (Discos) to get supply directly from the Generation Companies (Gencos).
Signed by the Chairman of the commission, Prof. James Momoh, and Commissioner for Legal, Licensing and Compliance, Dr. Dafe Akpeneye, NERC said the new guide for the target group, expected to pay Discos a certain amount tagged: “Competition Transition Charge” was arrived at after findings from public hearings conducted by the commission last year.
In June 2019 the regulatory agency notified the public of a 21-day period in which it was soliciting contributions to a consultation paper on the CTC before the final rule was made.
It noted that the CTC shall enable the 11 Discos recover permitted revenue and returns on invested assets arising from the exit of eligible customers from their networks.
The regulation enables electricity users and Industrial consumers who are not satisfied with the services of the Discos to opt to buy power directly from the Gencos and have the energy transported to them by the Transmission Company of Nigeria (TCN).
The major target groups are members of the Manufacturers Association of Nigeria (MAN), who have needs for such bulk electricity and are now expected to pay the TCN or the Discos, depending on the ownership of the line used in delivering power.
Although some operators had already announced commencement, stakeholders had complained about the lack of clarity of the rules of engagement and how operators will file for claims of loss of revenue with the commission.
But in its latest guidelines, obtained by THISDAY, the commission clarified that the CTC is the additional revenue a distribution licensee is eligible to collect outside its normal tariff as compensation for loss of revenue to cover its “committed prudent expenditure and/or its inability to earn permitted rates of return on assets.”
It said that the exit of a customer from a network may lead to stranded costs and loss of revenue arising from stranded infrastructure, long term contractual commitments, deferred expenses, cross-subsidy to other customer classes and overhead transition costs.
On how the CTC shall be arrived at, NERC said that it shall be computed based on the stranded costs attributable to the eligible customer’s exit of Disco’s network by unbundling the Disco’s costs and determining the actual revenue loss per each cost item.
NERC listed the cost items as long term power purchase agreements and vesting contracts, regulatory assets and revenue shortfalls as well as legacy costs that are sector-wide or Disco specific.
It noted that the costs that may have been created by virtue of the privatisation transaction or other power sector reform agenda initiatives, including repayment of the Central Bank of Nigeria’s (CBN) N213 billion loan.
It also includes unamortised investments in networks and overhead transition costs, where the impact of a prospective customer would result in the restructuring of the business of the Disco.
It said: “A Disco shall file an application with the commission for applicable CTC clearly justifying that, despite its efficient management; the utility would be unable to meet its revenue requirement arising from the impact of an EC switching supplier.
“Such claim by Discos shall be made within 30 days of the receipt of the prospective EC’s notice of intention to exit network by the Disco. The commission shall accordingly process the application as follows:
“Commission shall review the claim of the Disco including further consultations on the matter with relevant stakeholders involved in the EC transaction.
“Where the Disco’s claim for loss of revenue is satisfactorily justified, the commission shall approve the charge through an open-book review process and issue an order for the payment of CTC by the EC.
“The CTC shall be invoiced by the Disco on the basis of the actual meter reading or fixed monthly charge derived from the current/long-run annualised capacity (kWh/h) and/or energy consumed by the EC”
NERC also disclosed that the CTC may be paid periodically over time or vide a single lump sum by the customer, adding that payments arising from cross-subsidies between tariff classes shall be capped at the rate of contribution paid by the customer at exit date and shall cease when tariffs are rebalanced.