‘Let There be Light’: Implications of the COVID-19 Pandemic on Performance Obligations in the Nigerian Electricity Supply Industry

INTRODUCTION 

The outbreak of the Coronavirus (“COVID-19” or “the pandemic”) understandably necessitated the ‘stay-at-home’ order issued by the government, in addition to pre-existing social distancing recommendations, to curtail the spread of the virus. Considering the fundamental need for electricity, especially for healthcare providers and citizens restricted to their homes, electricity service providers have been designated in the Presidential Directive on Lockdown Protocol as essential service providers who are to continue operations during the lockdown.  While electricity access is particularly critical during this pandemic, there is the equally underlying issue regarding the implications of the pandemic on the performance of contractual obligations by Electricity Service Providers (ESPs) in the Nigerian Electricity Supply Industry (NESI) as it is clearly NO LONGER BUSINESS AS USUAL.

It is widely recognized that the pandemic has triggered unprecedented disruptions and far reaching implications to businesses globally and in Nigeria, with the Oil and Gas, Aviation, Manufacturing, Education and Service sectors, etc. being amongst the hardest hit. The electricity industry is not insulated from these disruptions as alluded to by Nigerian Electricity Regulatory Commission (NERC) in their recent Order on the Transition to Cost Reflective Tariffs in NESI (2020).

Specifically, the ESP directly impacted by the pandemic are the Electricity Distribution Companies (DisCos) as they are the frontline players in the electricity value chain with the responsibility of serving as the collection agent(s) for the sector. Though exempt from the lockdown restrictions, DisCos are still heavily exposed to a plethora of challenges that may impact their performance obligations, including but not limited to those highlighted by the Regulator in its recent order:

-         Suspension of tariff increase which will impair revenue projections and the implementation of performance improvement plans;

-         Disruptions or delays to metering activities due to supply chain disruptions and logistics challenges as a result of local and international travel restrictions;  

-         Fall in demand from key customers due to shut down or lean operational activities of the industrial and commercial customer segment which accounts for a significant portion of DisCos energy demand and cash collection;

-         Reduced collections as a result of late or non-payment of electricity bills by customers on estimated billing, reduced electricity vending by metered customers due to job or income loss, and / or difficulty accessing or transitioning to digital payment channels;

-         Disruption to revenue protection activities – difficulty enforcing payments, detecting electricity theft, etc.

-         Logistics issues – movement of staff and materials for operational activities may be challenging due to the lockdown;

-         Procurement challenges – contractors and service providers may struggle to fulfil existing or new orders of essential parts and accessories and compromise electricity service delivery etc.

With these identified issues, the emerging question is can COVID-19 serve as a reasonable justification or legally acceptable basis for non-performance of contractual obligations and compliance with regulatory orders by DisCos? Are there sufficient and available mitigants or remedial actions available to ESPs to cushion the impact of the pandemic on their operations, contract performance and regulatory compliance?

Based on the highlighted implications of the pandemic, the DisCos may struggle to fulfil performance obligations stipulated in the Performance Agreement (PA) and regulatory orders in the short term and possibly medium term. As a result, DisCos must explore available ‘contractual remedies’ and ‘alternative remedies’ to cushion the impact of the pandemic and forestall any legal and regulatory actions due to non-performance.

One contractual remedy that may be explored is the ‘Force Majeure’ cover.

Force Majeure is an event that prevents a party from performing or fulfilling contractual obligations for reasons outside the party's control for the duration of the event, on the basis that the event could not have been reasonably foreseen or avoided. Typically, contracting parties can seek relief / cover from performance defaults and contractual liabilities by invoking force majeure. However, each contract usually defines the specific events that constitute force majeure, therefore invoking force majeure is subject to the provisions of the applicable contract(s).

The primary contract that drives the financial viability of NESI is the Performance Agreement (PA) between DisCos and the Bureau of Public Enterprises (BPE) and the Ministry of Finance (MoF) on behalf of the Federal Government (FG). Under the PA, a Force Majeure Event is defined as any event or circumstance or combination of events or circumstances beyond the reasonable control of the party affected by it but only to the extent that:

 (1) such circumstance, event or condition despite the exercise of diligence cannot be prevented, reasonably anticipated, avoided or overcome by the affected party;

(2)  such circumstance, event or condition prevents the performance by the affected party of its obligations under or pursuant to this agreement (save for payment obligations);

(3)  where such circumstance, event or condition constitutes a force majeure event under an industry document (as defined in such industry document), it renders the affected part wholly or partially unable to carry out its obligations under this agreement;

(4)  the affected party has taken all reasonable precautions, due care and measures to prevent, avoid or overcome the effect of such circumstance, event or condition on its ability to perform its obligations under this agreement and to mitigate its consequences;

 (5) such circumstance, event or condition is not the direct or indirect result of a breach or failure by the affected party to perform an of its obligations under this agreement or any of the transaction documents;

(6)  such circumstance, event or condition has occurred without fault or negligence on the part of the affected party.

Applying the conditions as a defined in the PA, the following can be established:

1.      The pandemic and its effects could not have been prevented, reasonably anticipated or avoided;  

2.      The pandemic and its effects prevented the performance by DisCos of their obligations to a certain degree;

3.      Despite the pandemic and its effects, DisCos are still obligated to honour their payment obligations;

4.      It is difficult to establish with certainty at this time, if DisCos may or may not have

taken any reasonable precautions, due care and measures to prevent, avoid or overcome the effect of the pandemic on their ability to perform their respective obligations under the agreement and to mitigate its consequences;

5.      It is evident that the DisCos are not directly or indirectly responsible for the pandemic or its effects;

Based on the above, it is difficult to ascertain if a force majeure claim due to the COVID-19 pandemic will satisfy the legal basis and succeed in serving as a contractual remedy for DisCos.

WAY FORWARD

In the likely absence of a clear contractual remedy, it is advisable for the DisCos and other ESPs to engage their respective counterparties and the regulator in open and transparent dialogue while assessing ways and means to prevent performance defaults. Nevertheless, DisCos must urgently identify response strategies and take deliberate actions to mitigate the impact of the pandemic on their business operations as a means of demonstrating internal efforts to overcome the likely negative impact.

In addition, DisCos and ESPs may explore available Nigeria specific and international palliatives to cushion the effect of the pandemic on their business. However, proof of the revenue impact on the business is typically required to support such claims. There is also a need to review risk management strategies, especially insurance covers that the DisCos and other ESPs have procured or may procure, to ensure events such as business interruption, loss of revenue, pandemics etc. are adequately covered.

Finally, DisCos and the entire electricity value chain need to urgently review and refine their business models, in conjunction with specialist consulting firms and industry experts, with a view to establishing more robust business continuity plans and optimising for digital service delivery.

Jerry Ehanmo is an Energy Economist/Consultant with demonstrable experience providing multi-faceted solutions to organizations and institutions with a focus on the power value chain. He is a Commercial Director with Conlog, the world's leading smart meters and metering solutions provider to utilities and electricity service companies across over 4 continents and 20 countries. He possesses field based expertise and extensive experience across transaction advisory, strategy development, business transformation, loss reduction, revenue cycle management, commercial operations optimization and project management. [www.dhirubhai.net/in/jerryehanmo]

Ivie Ehanmo is an Energy Lawyer/Power Sector Legal and Regulatory Specialist. She is a Partner at the prestigious law firm- George Etomi & Partners where she manages the firm’s Energy and Infrastructure Projects and is also a Legal and Regulatory Expert for Energy Market and Regulatory Consultants (EMRC) (a member of the MRC Group), a leading consultancy working for power and utility companies, regulators, traders, power market operators and policy makers in electricity and gas around the world. [www.dhirubhai.net/in/ivieehanmo]

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