NERC gives DISCOs ultimatum to settle debts, address breaches

The Nigerian Electricity Regulatory Commission (NERC) on Wednesday served notices to eight electricity distribution companies (DISCOs) of its intention to revoke their operational licences if they fail within 60 days to remedy alleged ‘breaches of the terms and conditions of their power purchase agreements’.

The affected DISCOs include the Abuja Electricity Distribution Company Plc (AEDC), Benin Electricity Distribution Company Plc (BEDC), Enugu Electricity Distribution Company Plc (EEDC) and Ikeja Electric Plc (IE).

The others are Kaduna Electricity Distribution Company Plc (KAEDCO), Kano Electricity Distribution Company Plc (KEDCO), Port Harcourt Electricity Distribution Company Plc (PHEDC) and Yola Electricity Distribution Company Plc (YEDC).

Alleged Breaches

The eight DISCOs were accused of breaching the terms and conditions of their electricity distribution licences stipulated in the Electric Power Sector Reform Act (EPSRA).

The commission said in a published advertorial signed by its Commissioner on Compliance, Dafe Akpeneye, that the breaches are in respect of their failure to comply with the directives on the 2016 – 2018 Minor Review of Multi Year Tariff Order (MYTO) and the Minimum Remittance Order for the Year 2019.

AEDC was accused of not remitting over N5 billion out of over N7 billion owed NBET for gas supplies, while BEDC was said to be owing over N3.6 billion out of N4.39 billion. EEDC’s indebtedness to NBET is put at N112.6 million; Ikeja (N4.42 billion out of N7.37 billion); KAEDCO (N3.42 billion out of N3.8billion); KEDCO (N2.53 billion out of N3.33 billion); PHEDC (N3.32 billion out of N3.65 billion and YEDC (N1.76 billion out of N1.95 billion).

DisCo	NBET Invoice	Remittance	Actual Performance	Expected Minimum Remittance
	(NGN)	(NGN)
AEDC	7173686088.29	2152105826.49	0.3	0.45
BEDC	4368336242.22	771681330.79	0.18	0.3
EEDC	4112552587.51	400000000	0.1	0.42
IE	7372945102.62	2,949,178.041.04	0.4	0.49
KAEDCO	3834686472.61	407774917.81	0.11	0.18
KEDCO	3329653653.09	800000000	0.24	0.33
PHEDC	3647290100.67	382965460.56	0.1	0.21
YEDC	1946338517.03	194633851.71	0.1	0.13

MYTO is a document issued by the regulatory authority in the electricity sector setting tariffs that are allowed as revenues by various operators across the entire value chain, from distributors to the fuel-to-power suppliers.

Such tariffs are always arrived at after due consideration of the prevailing economic conditions, including inflation and other variables in line with the operators’ terms of the agreement.

MYTO regime

Pursuant to its mandate stipulated in sections 32 and 76 of EPSRA, NERC, in December 2015, issued the MYTO – 2015 Tariff Order aimed at establishing cost-reflective tariffs in the power sector.

Under the order, DISCOs were directed to ensure the electricity prices they charge were not only “fair to consumers”, but “sufficient to allow them (licensees) operate efficiently to recover the full cost of their activities, including a reasonable return on the capital invested in the business.”

NERC said the Order considered the actual changes in relevant macroeconomic variables and available generation capacity, with projections for the variables for the year 2019 and beyond.

The order was subject to biannual minor review after taking into consideration changes in variables outside the control of DISCOs but in line with the requirement of the MYTO methodology.

These variables are the prevailing inflation rates, the exchange rate of the naira to the dollar and other foreign currencies, gas prices and available generation capacity.

The NERC said the 2016 – 2018 minor tariff review was to determine the impact of the cost-reflective tariffs for the relevant years; and to ascertain revenue shortfalls in view of the differential between such tariffs and allowed tariffs in the electricity market.

Survival framework

Following observed challenges, which resulted in huge tariff deficits, NERC developed and implemented a framework to manage revenue shortfalls.

The framework included a minimum threshold the DISCOs were expected to remit to account for the differentials between cost-reflective tariffs and allowed tariffs in the settlement of invoices issued by the Nigerian Bulk Electricity Trading Plc (NBET) and the Market Operator (MO).

NERC also established interim payment arrangements which set the payment securitisation requirement and flow of funds from DISCos to NBET and the MO.

The review, the commission, said was based on inflation rates of 15.6 per cent, 16.5 per cent and 12.1 per cent which were projected for the years 2016, 2017 and 2018 respectively, with 2019 estimate based on the average of the period January to June 2019.

Since the beginning of the year, inflation has moved from 11.37 per cent in January this year to 11.02 per cent in August.

The exchange rate of the naira to dollar, according to the Central Bank of Nigeria, has averaged N255.90, N308.80 and N309.14 for the corresponding years, with a premium of 1 per cent above the CBN rate as a transaction cost.

Also, gas price was kept at about $2.50/MMBTU and gas transportation cost at $0.80/MMBTU.

Allegations

But, the NERC accused the power generation companies of contracting different gas prices outside the regulated rates stipulated under their individual gas sales and purchase agreements.

Under the order, the DISCOs were saddled with the responsibility of debt recovery from consumers, including ministries, departments and agencies of the states and the federal government.

To realise that objective, DISCOs were mandated to meter all MDAs with appropriate meters of their choice within 60 days from the effective date of this Order.

Regardless, the situation has remained largely unaddressed, with most consumers still waiting for their meters years after they paid for them, while others are being subjected to estimated billing.

NBET, DISCOs at daggers drawn

Nigerian Bulk Electricity Trader has been on daggers drawn with the DISCOs over alleged unsettled invoices to gas suppliers.

Recently, the NBET said it was directed to take over the payment of DISCOs gas invoices to supplier following allegations of huge indebtedness.

“The Commission notes that the failure of the DisCos to comply with expected minimum remittance thresholds in the Order exposes NESI to systemic risk that threatens the sustainability of other parts of the value chain; and the ability to improve service delivery to consumers.”

The commission said the DISCos failed to provide the minimum financial ‘securitisation’ of their payment obligation to NBET i.e. “an adequate and unencumbered letter of credit covering three months based on their minimum payment obligations to NBET and MO”.

Consequently, the commission ordered the DISCOs to show cause in writing within 60 days from the date of receipt of the notice why their operational licences should not be revoked in accordance with section 74 of EPSRA.

The commission said it considers the actions DISCos as “manifest and flagrant breaches” of EPSRA, terms and conditions of their respective distribution licences and the Order.

End-user tariffs review

Meanwhile, the commission has proposed an intermediate review in end-user tariffs effective January 1, 2020, with full cost-reflective levels to be achieved by July 2020.

In the interim, NERC said the government has agreed to fund the revenue gap arising from the difference between cost-reflective tariffs determined by the commission and the actual end-user tariffs.

The GENCOS have put the revenue shortfall at over N1 trillion.

Reaction

The Director of Research and Advocacy of the Association of Nigerian Electricity Distributors (ANED), Sunday Oduntan, did not respond to several calls to his telephone when our reporter contacted him for his reaction to the development.

He did not also respond to the text message sent to him on Wednesday night.

The Executive Secretary, Association of Power Generating Companies (APGC), Joy Ogaji, hailed NERC for the decision against the DISCOs, saying its members are waiting to see what outcome of the ultimatum will be.

“Kudos to NERC. At least for the first time, we will see whether NERC can bark and bite. If they can start bringing discipline to the market, then everybody will sit up. It is interesting to know that what NERC is asking the DISCOs to pay is so small compared to what they are owing on their invoices.

“How do you expect the industry to survive? Will the DISCOs allow any consumer to owe them and they still supply electricity to them? We are waiting to see what NERC is going to do for the first time,” Mrs Ogaji said.