Matters Arising: Legal and Regulatory Focus Areas for the NERC Commissioners

Although the recent inauguration of the long awaited Commissioners of the Nigerian Electricity Regulatory Commission (NERC) has put an end to the board’s vacancy that lasted for about 14 months, it has also opened a large window of expectations from the new Commissioners in restoring hope to the Nigerian Electricity Supply Industry (NESI).

NERC plays a pivotal role to the success of the NESI in creating a stable, fair, reliable and predictable environment that would send a positive signal to private investors as to the viability of the sector in promoting bankable power projects, whilst at the same time balancing the interest of all stakeholders across the value chain.

In creating a balanced environment, the Commission must create fair but commercially oriented tariff methodologies that reflect true costs whilst monitoring the service delivery of operators based on their legal and regulatory commitments as enshrined in the laws, regulations, industry and transaction documents, etc. The Commission also plays a key role in resolving disputes expeditiously between key stakeholders, enlightening the legislative and judicial arm of government about the workings of the industry to avoid uninformed decisions and most importantly, it is the duty of the Commission to ensure safe operations by industry operators and curb the ongoing menace of electricity theft/vandalism.

The Commission also has a role in ensuring industry stability by initiating solution focused policy discussions to be undertaken at the level of the Ministry of Power and the Presidency.

The regulatory environment since handover has been fraught with instability which has resulted in huge investment losses across the entire value chain. Examples include: lack of cost reflective tariffs in place since handover, freezing of R2 customer class tariffs, removal of collection losses from ATC&C losses in April 2015, removal of fixed charges, delay in the implementation of minor reviews, inconsistency on pricing and cost recovery framework, etc.

The key focus areas for the newly constituted Commissioners from a legal and regulatory standpoint are as follows:

Review of existing legal and regulatory framework governing the sector: A sound legal and regulatory framework that is constantly updated to reflect evolving realities must be in place to achieve regulatory stability and improve overall industry performance. At present, the legal and regulatory framework governing NESI, whilst generally sound, requires a comprehensive review due to outdated, varying and contradictory provisions.

For example, the Electric Power Sector Reform Act (2005) (EPSRA) which created the legal framework for the reform of the power sector via the privatisation of the sector, fails to accommodate current and emerging post privatisation realties. Salient contradictory provisions from the Act in comparison with the current regulatory environment of the industry include:

o  Lack of provisions in the Act detailing competition factors post-privatisation. Whilst the Market Rules detail the rules guiding the market stages[1] alongside Orders[2] of the Commission, the Act does not stipulate measurable factors that will govern the respective stages of the Wholesale Electricity Market in terms of market conditions that need to exist to transit from one stage to the other and timelines for achieving same. This lacuna has occasioned legal actions instituted against the Commission challenging the validity of the current stage of the market, i.e. the Transitional Electricity Market (TEM).

Other legal and regulatory contradictions and mismatches in the industry that call for an urgent intervention include:

Resolving inconsistencies in power pricing and cost recovery (MYTO v PPA): There is a mismatch between the contractual terms of the Power Purchase Agreements (PPA’s) between the Gencos and the Nigerian Bulk Electricity Trader (NBET) and the operation of the Multi Year Tariff Order (MYTO) which determines customer tariffs. Generation costs are adjusted by NBET on a monthly basis as a result of the changes in indices and indexations as contained in the PPA’s (e.g. Forex, Inflation, fuel prices which affects energy and capacity prices), but MYTO only makes provision for bi-annual adjustments.. This mismatch further exacerbates the ongoing liquidity crisis in the sector as Discos are unable pass on the adjusted generation costs to customers until the bi-annual reviews have been implemented.

Metering Targets: The Performance Agreement stipulates a 5 year timeframe for Discos metering target which is sacrosanct based on the contractual nature of the relationship between parties. However, the MYTO 10 Year Order provides a one year timeframe for Discos to meter their customers by the 1st of February, 2017. Both targets are currently operationally unachievable or pragmatic given the limited CAPEX provisions under MYTO and low generation volumes. This needs to be reviewed and adjusted accordingly.

Interest on Late Payment: NBET applies NIBOR + 10% to Market Debts which is not recoverable from customers via retail tariffs. Section 8(a)(v.) of the Supplementary Order on TEM provides that: “…Financial shortfalls by Discos shall be repayable at NIBOR plus 10%”. On the other hand, Discos by virtue of S.76 (13) of the Act cannot pass through such penalty interest cost as levied and charge customers alike. There are no sanctions in place for late payment interest or a subseqent higher tariff; only the cost of reconnection in the event of disconnection.

The variance between late payment interest charges applied by NBET and the provisions contained in the Act regarding similar charges by Discos needs to be reviewed and resolved.

Undisputed Bills- The MYTO 10 Year Order by its provision allows a customer that disputes an electricity bill to make payment for the last undisputed bill pending when the issue is resolved. On the other hand and in contradiction, Discos that dispute their energy bills by the provisions of the market rules (Rule 43.3) are required to pay the disputed bills irrespective of the existence of a dispute, etc. The inconsistency between the provisions in the MYTO 10 Year Order and the Market Rules regarding disputed bills needs to be addressed.

Other regulatory gaps/areas that need to be addressed include:

Electricity Theft Regulation and the Designation of Special Courts to handle Electricity Related Offences: Implementation and enforcement of the draft Electricity Theft Regulation (Electricity Theft and Other Related Offences Regulations) formulated by NERC in 2013 in line with Section 94(3) of the Act. Any further delay in the implementation and enforcement of the regulation will encourage continuous incessant behaviour by the theft agents which will in effect hamper Discos businesses and their ability to meet performance targets as contained in the Performance Agreement. There is also an urgent need for the intervention of the Judiciary through speedy and efficient justice dispensation via the enforcement of existing legislations to help stem the unrelenting trend of electricity theft. This can be achieved by the designation of special courts to handle electricity related offences. There is a need for the Judiciary and power stakeholders to closely work together.

 Dispute Resolution and the Dispute Resolution Panel: There are currently numerous laws and regulations’ detailing the respective procedures for resolving disputes in the industry which creates a multiplicity of functions and an unnecessary administrative burden on the respective bodies responsible for resolving industry disputes. For example, the Distribution Code establishes a Panel administered with the function of formulating Rules that are to guide parties in resolving disputes that arise in connection with the Code. A harmonised regulation addressing the resolution of industry disputes would be better suited for the industry which is currently in its developmental stages. Furthermore, in addition to harmonising the regulatory process of resolving industry disputes, it is advisable for such disputes to be resolved by specialised expert panels given the highly technical nature of the industry and the attendant disputes that emanate. This panel given its expertise may replace the Dispute Resolution Panel (DRP) set up by the Commission (though yet to commence proceedings) which consists of professional arbitrators who may not have an in-depth understanding about the intricacies of the Nigerian power sector. Alternatively, the expert panel can complement the DRP in exercising its functions.

It is therefore important that the panel members as constituted are well versed with the workings of the power sector, otherwise, the essence of setting up such a panel will be defeated and will burden NERC with the responsibility of resolving market participant disputes rather than focusing on their core functions and objects as enshrined in EPSRA. The administrative process of the panel also needs to be at par with market realities and hence needs to be addressed and looked into.

Tariff Review Process: It is important for tariff reviews to follow due process in terms of the regulatory processes as enshrined in laws and regulations in order to send out the right signals to local and international stakeholders. This is a critical consideration that must be highlighted in order to avoid unwarranted and ill-informed litigious claims, etc.

The regulator has a key role to play in resolving the plethora of dichotomies that exist in the industry beyond the few examples given above. It is important that the integrity of the privatisation programme is maintained as it is sacrosanct and should be reflected in all regulation including tariffs while making balancing adjustments to reflect evolving realities. A rapid review of the legal and regulatory framework governing NESI is required to pragmatically reflect current operational realities and drive operational efficiency (metering, billing, connection and disconnection, customer service, complaints resolution, etc).

The Nigerian electricity supply industry needs to be regulated as a developing sector, not as a fully developed sector. Reiterating the words of the Minister of Power during his 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.”