THE EXCLUSIVITY DEBATE OF ELECTRICITY DISTRIBUTION COMPANIES (DISCOS) IN NESI AND THE ELIGIBLE CUSTOMER DECLARATION

“DISCO’S DON’T HAVE EXCLUSIVITY OVER DISTRIBUTION AREAS”

At one of the meetings with stakeholders in the power sector in Jos, Babatunde Fashola (the former Minister of Power, Works and Housing) said, "No Disco has exclusive rights over any area and its ability to retain an area must be consistent with the ability to provide service to the area," what does this mean in terms of off-grid investments in areas previously thought to be the exclusive preserve of DisCos. Does it contradict with the position of the law? What is your opinion?

By virtue of a Disco obtaining a license under the provisions of S.62 of ESPRA (except where the intended capacity for distribution does not exceed 100 KW in aggregate at a site, in which case a license need not be obtained) and in accordance with the terms of the license so obtained, the Disco is granted a license to distribute electricity at the authorised area for a term of 10 years.

The customers in the Discos authorised area make up the customer numbers which exists as one of the parameters that feed into the tariff assumptions used in the price setting process by NERC under the MYTO. The investment plans of the Discos are also formulated on the basis of the number of customers in the Discos franchise area.

This is an important consideration that must be factored into any reform agenda of the sector. Even with off-grid investments, specifically, mini-grid development, although the draft mini grid regulation recognises the exclusivity of a Discos franchise area via the stated benefits of Mini-Grid Operations to the Discos in the regulation which includes the development of the Discos licensing areas which are not being exploited pending when the Discos are ready to extend operations to such areas (i.e. unserved or underserved), the regulatory implications have not been thoroughly thought through.        

In addition, the regulation via the definition of an “Underserved Area” and an “Unserved Area” recognises those areas as falling within a Distribution Licensee’s Network whether poorly supplied or lacking a distribution system in its entirety. However, the gaps in the regulation can leave room for misguided interpretation of the intention of the regulation.

For example, the issue with regard to the interaction of the mini-grids with NERC/BPE customer number targets in the transaction documents and also the MYTO forecasts is very unclear, although the regulation details a registration/permitting/approval procedure for the operation of a mini grid by the mini grid operators depending on the intended scale of operation, i.e. Isolated or Interconnected mini-grids. It may however leave room for argument that the regulation also infringes the respective Disco licenses.

There are however workable solutions that can be explored for mini-grid development to favour all stakeholders including the Discos.

               ELIGIBLE CUSTOMER DECLARATION: ARE WE READY?

On the issue of eligibility declaration, whilst it is recognised and legally permissible for the Minister to make an eligibility declaration in line with Section 27 of EPSRA which would in effect allow an eligible customer as determined by the Minister to purchase power from a licensee other than a distribution licensee, the conditions for such a declaration as contained in the Act are tied to the state of the market in terms of its competitiveness and not to the ability of the Discos to service an area or the performance of the Discos which at present reflects the illiquid state of the market occasioned by a plethora of issues that have plagued the sector since handover some of which are: the inaccurate base line data that was fed into the MYTO to compute tariffs which resulted in non-cost reflective tariffs even till date.

Other factors are also contributory to the illiquid state of the market such as the low generation levels with average generation hovering between 2000-3500MW since handover, the in-built deficit in the current sculpted tariff structure, forex pass through costs in energy bills that cannot be recovered from retail tariffs, insufficient CAPEX provision in the MYTO when compared to the required level of investments, etc.

It may be premature to declare eligibility in NESI because a review of the conditions enumerated in EPSRA begs the question as to whether the Nigerian electricity supply industry at present has developed to a point where a more competitive market ought to be established thus necessitating eligibility declaration in the industry. Particularly, the conditions are as follows:

(a)   The degree of privatisation that has occurred;

(b)  The existence of a sufficiently large number of potential competitive entities, so as to avoid the likelihood of an abusive market power; and

(c)   The existence of other preconditions, including the necessary metering and information technology infrastructures, required for the operation of a more competitive electricity market.

Furthermore, beyond the premature state of the industry, there are pertinent issues that need to be considered before such a declaration is effected, one of which is the fact that the carve out of certain classes of customers as eligible customers will affect Discos customer numbers and occasion further losses. This will in turn affect the respective Disco targets as set out in the Performance Agreement (PA) thus necessitating the need to revisit tariffs and Discos commitments in the PA.

Rather than segregate the market, which will occasion more harm than good given the integrated nature of the value chain, it is important that a staged process of reform factoring market realities whilst accommodating the interest of all stakeholders in the value chain is explored.

The Nigerian electricity supply industry needs to be regulated as a developing sector, not as a fully developed sector. Reiterating the words of the former Minister of Power during the inaugural message to the Commissioners:

 “Be firm, but fair. Regulate but be business oriented. Remember that regulations are rules, and rules are made for us, we are not made for the rules. Regulate with the understanding that the industry is young, in transition and needs support.”