DisCos consider returning power licences to FG,worsen regulatory risk perception in Nigeria
Large swaths of electricity consumers in Nigeria could see long spells of black-outs and a collapsed electricity market if Power Distribution Companies (DisCos) make good on their word to declare force majeure and return licenses to the government over the regulators threat to revoke their licences.
Sources close to the DisCos tell BusinessDay that the DisCos are raging over the recent threat by the Nigerian Electricity Regulatory Commission (NERC) to revoke the licences of eight DisCos for failing to meet remittance threshold set for July 2019 and the government’s decision to impose new members to their board.
The affected DisCos include the Abuja Electricity Distribution Company Plc, Benin Electricity Distribution Company Plc, Enugu Electricity Distribution Company Plc and Ikeja Electric Plc.
Others are Kaduna Electricity Distribution Company Plc, Kano Electricity Distribution Company Plc, Port Harcourt Electricity Distribution Company Plc and Yola Electricity Distribution Company Plc.
DisCos have held a flurry of meetings since the Bureau of Public Enterprise ordered the addition of two more representatives to their board. This brings the number of BPE board members on DisCos’ boards to three but the agency has not reviewed the shareholder agreement which gives BPE overriding powers based on the previously one member on the board.
Industry players say the government, by this action has strengthened its position on the board of the DisCos without conceding anything to them.
“While NERC has the power to cancel licenses of erring operators, doing it now could put the market into chaos,” warns Ayodele Oni, energy lawyer and partner at Bloomfield Lawfirm.
Some analysts say the action of the regulator sends a bad signal for investors as it worsens regulatory uncertainty which constrains new investments into Nigeria. Regulatory risks is considered the biggest risk facing businesses in Nigeria.
“This kind of power is wielded sparingly by a regulator otherwise you risk hurting new investments as investors will be scared of the country,” says Chuks Nwani energy lawyer and partner at PowerHouse International.
NERC has threatened to cancel the licences of these DisCos for failing to meet remittance thresholds that was a precondition for a tariff increase.
“The Commission has reasonable cause to believe that the DisCos… have breached the provisions of the Electric Power Sector Reform Act, terms and conditions of their respective distribution licences and the 2016 – 2018 Minor Review of the Multi Year Tariff Order (MYTO) and Minor Remittance Order for the year 2019” the regulator said.
The regulator said the affected DisCos have failed to meet the expected minimum remittance thresholds for the July 2019 billing cycle. Of the eight DisCos, Ikeja Electric which controls the largest franchise area and collected the most of any DisCo but recorded the poorest remittance failing by 49 percent.
If the regulator makes good its threat and cancel the licences of these DisCos, the assets will revert back to the government just like Yola DisCo.
In 2015, the core investors in Yola Disco, Integrated Energy and Distribution Marketing Company (IEDM), declared a force majeure and returned Yola Disco to the Federal Government on the grounds that it was impossible to operate and access the assets of the electricity distribution firm in the North-east due to the Boko Haram insurgency.
Following a joint evaluation of the electricity asset as provided under the terms of the share purchase agreement, the Bureau of Public Enterprises (BPE) and Ministry of Power, approved $186 million as the sum to be refunded to Integrated Energy before former President Jonathan left office.
President Buhari’s administration came in May and said the compensation amount was too high forcing a renegotiated settlement pay-out of $87.8 million. This compensation included 20 per cent of five years projected profit by the core investors.
However, Yola DisCo has not fared better under government’s management. The DisCo remitted a paltry 20 percent of collections to the market in the first quarter of 2019, the same offence of which the regulator is welding the big stick over other DisCos.
Only 21 percent of electricity customers have been metered by Yola DisCo, the worst of any DisCo. Yola DisCo is also the worst technically and commercially efficient DisCo with average aggregate, technical and commercial losses of 70 percent in the first quarter of 2019 according to NERC.
While industry analysts say DisCos have flouted market rules and behaved irresponsibly, they say the regulators threat to cancel their licence amounts to overkill as the government after collecting these assets lacks the capacity to manage them better.