Dealing with Infractions in Electricity Market

Chineme Okafor writes on efforts by the Nigerian Electricity Regulatory Commission to stamp out systemic abuse in the country’s electricity market

It was a watershed decision when the Nigerian Electricity Regulatory Commission (NERC) announced to Nigerians its intention to withdraw the operational licenses of eight power Discos over alleged abuses of the market processes.

In the regulatory announcement it made in October, the commission had stated that Abuja, Benin, Enugu, Ikeja, Kaduna, Kano, Port Harcourt and Yola Discos were guilty of various market abuses.

It had also stated that it had notified the Discos of its intention to cancel their licenses, but would give them opportunities to defend themselves.

According to the NERC, the eight Discos reportedly breached certain provisions of the Electric Power Reform Act (EPSRA) 2005, the terms and conditions of their respective distribution licences, and the 2016 to 2018 minor review of the Multi Year Tariff Order (MYTO) and Minimum Remittance Order for 2019.

It explained that Section 74 of the EPSRA and the terms and conditions of the Discos’ licences had indicated that they breached the law and failed to remit approved minimum amounts of the sector’s revenue to the market. It added that it recently approved new tariffs for the Discos on the basis of their commitment to a minimum remittance threshold which they reportedly failed to adhere to.

In defence of its intentions, NERC said it had reasonable cause to believe that the Discos breached these provisions, and it was going to sanction them to amongst other purposes, restore confidence in the country’s electricity market which is going through a lingering financial crisis.

NERC therefore wrote to the Discos to inform them that they would be given about 60 days to appeal the order seeking to revoke their licenses.

What the order requested

In the regulatory order, the NERC asked the Discos to explain why their licences should not be cancelled in accordance with section 74 of the EPSRA before December 7.

The NERC explained that it also wanted the Discos in their written responses, to address the issues of optimal utilisation of their resources and efficient operation imposed by sections 32 and 76 of EPSRA respectively.

Additionally, the commission asked the Discos to explain how well they had followed the principles of “prudence” and “used and useful” in their operations especially as the relate to customer enumeration progress; general procurement practices; related party transactions; directors’ fees and expenses as well as technical partners they had engaged from their takeover of the power distribution assets in 2013 to date.

Results of regulatory review

Following the Discos’ submissions, the NERC last Friday disclosed that it had concluded its review of their responses against its planned license withdrawals and subsequently found Enugu and Port Harcourt Discos wanting in the process.

It noted in a document that both Discos were still under threat of losing their licenses and that their managing directors would have to face a fresh regulatory panel to determine their absolute position in this regard.

In the document, the regulator explained that both Discos failed to meet up with the minimum revenue remittance thresholds which was the main reason for its intention to originally revoke the licenses of the eight Discos.

It added that Enugu and Port Harcourt Discos equally failed to give material reasons against their licenses withdrawals, and that the public hearing to be held on December 13 will further investigate their situations and how they could undermine the workings of the country’s electricity market.

On how it arrived at its decision which let six other Discos off the hook, NERC said that it resolved to consider all responses received in public hearings in accordance with section 24 of its Business Rules which provided that “the commission may hold a public hearing on any matter which it is empowered under the Act and which the commission determines to be of significant interest to the general Public.”

It added that it wrote to the Discos on November 20, 2019, to tell them that their compliance with the minor remittance directives of the order shall be considered by it as good faith in which case a public hearing shall no longer be necessary but rather, a meeting between it and them to address the issues raised in the cancellation notice.

“The period provided to the Discos within which to show cause in writing as to why their licences should not be cancelled in accordance with section 74 of the EPSRA ended on Saturday 7 December 2019 but was legally extended to Monday 9 December 2019 by virtue of the provisions of the Interpretation Act.

“All eight Discos met the deadline for the submission of written responses showing cause against the cancellation notice. These responses have been filed at the commission. The remittance to NBET by the Discos to date indicates that: six out of the eight Discos (AEDC, BEDC, IE, KEDCO, YEDC and KAEDCO) met the expected minimum remittance thresholds for the 3 months of July to September 2019.

“Two out of the eight Discos (EEDC and PHEDC) did not meet the expected minimum remittance thresholds for any of the three months of July to September 2019,” NERC said in the document.

The regulator stated that the failure of the Discos to comply with the expected minimum remittance threshold in the order exposed the power sector to systemic risk which threatened it sustainability, and as such, a public hearing shall be held for the two defaulting Discos on December 19.

According to it: “The Managing Director/ CEO of the Disco shall participate in the hearing in person and shall be responsible for making the presentation on behalf of the Disco and responding to questions raised by the hearing panel.”

Consumers’ Opinion

But providing a general thought on the status of the power sector, the President, Nigeria Consumer Protection Network, Mr. Kunle Olubiyo, alleged that the commission’s regulation of the sector has remained weak.

Olubiyo, also claimed that the NERC has done badly in its monitoring and evaluation of processes and initiatives to improve efficiency in the sector. He also requested for a comprehensive review of the sector’s operations.

“Last week, the whole nation was shut down by (the) National Union of Electricity Employees (NUEE) strike demanding amongst others unpaid arrears of severance packages of staff of the defunct PHCN who were traded off for the privatisation exercise to succeed.

“In the course of the strike electricity consumers nationwide were thrown into darkness primarily due to human factor and related shutdown by electricity workers. We also experienced systems collapses; about two to four times within the period.

“We have the issues of abysmal performances and non-implementation of a well-conceived NERC initiated Meter Asset Providers (MAP) that if implemented promises to be a gamechanger but for weak regulatory monitoring and dearth of M&E framework,” said Olubiyo.

He stated that the sector was challenged by market shortfalls from tariff shortfalls; settlement crises; load rejections and decline in power production.

“We have serious issues of decadence of power infrastructure… the non-adherences to minimum remittances order set by the regulatory institutions.

“NERC needed not go all out to threaten some electricity distribution companies with withdrawal of their operational licences when the commission knew that it lacked the courage to do so.

“By indulging in reckless rhetoric and regulatory grandstanding and later made a reversal of itself, NERC had simply diminished whatever that is left of its independence,” he added.

Expert’s reaction

While assessing the development, the former chairman of NERC, Dr. Sam Amadi, explained that the possibility of NERC cancelling the licences of the Discos was quite narrow.

Amadi, noted that the position of the NERC could get the Discos to remit more as requested of them. He added that regulatory functions were procedural, demanding NERC to be methodical in its decision.

According to him: “It is obvious that NERC will not just cancel licenses. There is no chance in the world that that will happen. It’s not the way regulators work. Regulatory work is a procedural work.

“Due process is the hallmark of regulatory work. So, what NERC did was to give notice that it would commence enforcement action against the delinquent or non-compliant Discos. Each of them will now show reasons why it should not be penalised.”

Amadi noted that, “in the present circumstances the issues are non-payment of bills,” and that any of the Discos that meet the request of the NERC would be free of its sanction.

“My guess is that many of the Discos will be moved to perform. So, the latest market report shows that payment has improved as a result of the threat. But now long should (we) expect cancellation of licenses because NERC is not in a position to guarantee continuity of electricity supply in the event of delicensing a Disco.”

When asked if the NERC may have considered political conditions in its regulatory decision in the license cancellation threat, Amadi said: “I don’t ever think decisions of NERC will ever be defined by political considerations. Never! That’s not the legacy we left. And the present commissioners have continued in that legacy of transparency and fidelity to law, rules and process.”

“It may be just circumstantial that only southern Discos fail to comply. Perhaps it’s a status report on the commerciality of their operations or the level of losses or even the quality of management to implement high quality revenue management and service delivery strategies.

“Several factors may be responsible. But definitely not partisan politics. I am sure before NERC take action against these Discos it will publish a statement of reason and justification for regulatory enforcement action,” he further explained.

On consumers’ perception of NERC’s regulatory functions, Amadi stated that consumers would be pleased to see NERC push the Discos to do better at customer satisfaction than just focusing on market remittances.

He noted that: “It is a fact and perhaps unfortunately could remain so for a long time. The reason is that in periods of acute scarcity of electricity, regulators conceive their job to be mostly stimulate investment through business-friendly regulation. We saw that in the history of UK privatisation of utilities especially electricity.

“The wisdom of this could be that in our present circumstances what the consumers need mostly is supply rather than even customer care as such. We want more power and worry less about the quality of power. But the regulator needs to work the trapeze and somehow protect consumers interest while promoting production of power.

“In theory this works fine. In practice the balance must tilt one side. Presently the operators are getting more attention with all the ‘bail-outs’ and focus on tariff regime. But we need to drive satisfaction for consumers by putting the Discos feet on the fire. I think the query to Discos should not just focus on failure to settle bills. It should include failure to serve customers well.”