Furore Deepens Over Eligible Customers’ Regime in Power Sector

Electric power lines located between I-35 and Riverside Blvd,  near downtown Dallas, on Jan 22, 2013.   (Michael Ainsworth/The Dallas Morning News) // Electricity, power, grid, transmission lines //

There seems to be no end in sight to the hindrances besetting power supply in the country four years after the Federal Government handed over the successor companies of the defunct Power Holding Company of Nigeria (PHCN) to the new investors.

The latest row which was due to the declaration of eligible power consumers status by the Federal Government is of course one controversy, too many, leading to hues and cries by the Distribution Companies (DisCos) in the troubled power sector, which  is yet to deliver the requisite dividends to Nigerians as envisaged in the privatisation objectives.

Specifically, the new regulation confers on the eligible power consumers’ liberty to purchase electricity directly from power generation companies.

The Eligible Customer declaration permits electricity customers to buy power directly from the generation companies, in line with the provisions of Section 27 of the Electric Power Sector Reform Act 2005 where eligible customers may buy power from a licensee other than electricity distribution companies.

The directive presents an opportunity for existing captive or off-grid power plants to supply power to single eligible customers, especially in the manufacturing sector and groups of customers who may be within commercial, residential or industrial clusters.

However, operators in the ailing sector say the regulation would impact negatively on their revenue and ability to pay back over N400 billion exposures to the banking sector.

Already, the Distribution Companies (DisCos) have issued a notice to declare force majeure, a term relating to the law of insurance and frequently used in construction contracts to protect parties when a segment of the contract cannot be performed due to emergencies, including natural disasters.

The DisCos, however, claimed that the new policy resulted in a change of law that prevents them from fulfilling their obligations under the Performance Agreement.

It was gathered by Sunday INDEPENDENT that although the country’s transmission network has been upgraded to wheel over 7,000MW of electricity, the DisCos continue rejecting load, due to their inability to build more distribution infrastructure.

But the Nigeria Electricity Regulatory Commission (NERC) insists that the new policy directive would bring into play new and stranded generation capacities, which might be contracted between the generation companies and eligible customers.

According to the regulator, the declaration further provides that at least 20 percent of the generation capacity added by the existing or prospective generation licensees to supply eligible customers must be above the requirement of the eligible customers. NERC noted that the supply shall be under a contract with a distribution or trading licensee at a price not exceeding the average wholesale price being charged electricity distribution companies by the Nigerian Bulk Electricity Trader Limited.

Power Distributors’ Grouse

But the spokesperson for the Association of Nigerian Electricity Distributors, Sunday Oduntan, argued that eligible customers can be declared by the minister only when a competitive market exists in the Nigerian electricity supply industry.

Admitting  that the minister, under Section 27 of the EPSR Act, 2005, had the authority to determine end-user customers, who then constitute eligible customers, Oduntan  insisted that Section 28 of the Act required that the DisCos must be compensated for any reduction in their ability to “earn permitted rates of return on their assets,” or any inadequacy in their revenues as a result of such determination.

His words: ‘’While we do not question the legitimacy of the Honourable Minister of Power, Works and Housing’s right to declare Eligible Customers, we believe that the declaration is premature and is inconsistent with the pre-conditions established under the Electric Power Sector Reform Act (EPSRA), 2005. In particular, the level of competition envisaged for such declaration, that should be in tandem with the sufficiency of power supply, does not currently exist. Nor has there been an implementation of the Competition Transition Charge that is specified under the Act.

‘’Why is the issue of Competition Transition Charge important?  Eligible Customers are the premium customers that cross-subsidize the cost of providing electricity to the residential class of customers.  Such cross-subsidization, for some DisCos, is based on a ratio of N10/kWh of Eligible Customer consumption to N1/kWh of residential class consumption.  The same class of Eligible Customers also contributes an average of 60 percent to DisCo revenues.

‘’With the removal of Eligible Customers from the DisCo network, the huge revenue gap that is left is expected to be imposed on the residential class of customers by an increase in their tariffs, under the Competition Transition Charge. An initial analysis of the impact of the Eligible Customer regulation indicates the need for a minimum tariff increase of N4 per kWh on the residential class customers. In other words, residential customers, some of whom are already dealing with issues of affordability, will have to bear the burden of the premature implementation of the Eligible Customer regulation.

‘’While there may be policy announcements that try to counter this fact by stating that such increases will not be imposed on the consumers, the question must be, “How will the gap be addressed?” If the answer is via a subsidy, it is then important to highlight that the current market shortfall of N892 billion (through August 2017) is a product of similar commitments that have not been met – a) Debt free books; b) Cost reflective tariff; c) Payment of N100 billion of subsidy; d) Payment of MDA debt; and e) Commitment to return of; and return on investment for the investors’’.

Oduntan added that the eligible customer regulation will further contribute to the DisCos’ inability to recover the revenues that will enable them to make the capital investment that is critical to injecting efficiency into the supply of electricity to their customers.

According to him, the notice of Force Majeure submitted by the DisCos, in itself, is not a declaration of Force Majeure, is standard to any commercial agreement, and is predicated on the concern that the DisCos, already on the verge of bankruptcy, will be further constrained in meeting the obligations of their Performance Agreements with BPE –  no difference from a previous situation in which the regulator, arbitrarily, removed Collection Losses from the DisCos’ tariff in April 2015, a contributor to the current market shortfall.

‘’Unless we begin to see a consistency of sector governance, a critical requirement for the viability and sustainability of the Nigerian Electricity Supply Industry (NESI), it is unlikely that we will achieve the objective of 24/7 power supply, an outcome that all Nigerians deserve’’, he added.

BPE Picks Hole

The Bureau of Public Enterprises (BPE) challenged the position of the DisCos that there has been a change in the law which prevents them from fulfilling their obligations under the performance agreement the core investors signed with the organization.

It explained that under the electric power sector reform act 2005, the minister of power is empowered to issue the policy directive specifying the class or classes of end-use customers that shall constitute eligible customers.

“As you are aware, this is the same Act which begot the process whereby the power assets were privatized to the core investors. Given that the Declaration and the Regulations were lawfully and validly issued by the Minister and NERC, and that there has been no change in the law giving rise to a political force majeure event, we are unable to see the basis for the issuance of the notice,” the agency said in a letter written to the power distribution companies.

GenCos’ Buffer

Joy Ogaji, Executive Secretary, Association of Power Generating Companies (APGC), said in a statement that the refusal by the DisCos to accept the eligible customer regulation and their force majeure declaration notice is not in the interest of the power sector.

She said, “Reacting to the declaration of eligible customers on the 19th of May, 2017, pursuant to section 27 of the Electric Power Sector Reform Act, 2005, as well as the recently issued regulation by NERC to guide its implementation, there has been trending news for the right and wrong reasons.

“This calls for clarity and further elucidation of the discourse. The need for clarity was necessitated by the fact that the media is awash by several publications justifying why the declaration was ill-fated for the market and that it will lead to its eventual collapse.

“This has also led to the declaration of force majeure by the DisCos. The generation companies whose product it is that is being jeopardized can no longer keep quiet while its hair is been shaved, hence this response.”

She added that the declaration of eligible customers was the first among many steps that needed to be taken if the nation’s privatization in the power sector would succeed.

“The load rejection phenomenon by the DisCos has remained a major bottleneck in the operations of the GenCos and seriously threatens the survival of the Nigerian power sector,” Ogaji added.

She spoke on arguments by the DisCos that the eligible customer declaration is premature and that the market is not ripe for it, noting that the EPSR Act did not portend that the market should first be competitive, rather the declaration was intended to initiate or commence a competitive market.

“With stranded generation capacity in the electricity market and poor market liquidity, the declaration of an eligible customer is the brilliant way to liberate the electricity sector from current monopoly,” Ogaji noted.

The GenCos stated that if there was anyone sitting on a force majeure event, it was the legacy generating companies suffering from the lackluster performance of relevant agencies with accumulating debts and an unrecognized deemed capacity.

New Regulations Will Benefit DisCos -Stakeholders

Stakeholders in Nigeria’s electricity sector said the DisCos would benefit more in the new regulations provided they worked hard to meet the competition that would arise from the declaration.

Former CEO of the Nigerian Electricity Bulk Trading Company (NBET), Rumundaka Woondi, expressed shock at the threat over the declaration of force majeure by the power distribution companies, adding that it was an unforeseen development from a purely legal provision made under the Power Sector Reform Act.

Woondi said his shock came mainly from the fact that the declaration was something that took time to put in place by the Minister, who, according to him, made the pronouncement in consultation with and advice by the Nigerian Electricity Regulatory Commission (NERC) as provided by the Act.

Explaining the concept of who qualifies as Eligible Customer, the Energy Expert added that although this was a category for the Minister to determine, an Eligible Customer was someone who could go out and contract to buy power directly from a generation company GenCo or a power marketer.

On the perceived fears of the DisCos and the TCN about commensurate payment for wheeling the power to the Eligible Customer, the expert said the regulation that would take care of the payment system was already out there remaining to work out the details, adding, “One of the things that are required is there has to be an open access on the network. DisCos can no longer stop you from buying power by frustrating it”.

He explained further that the other intent of the Eligible Customer declaration was also to improve the revenue in the system by giving the GenCos, who had not been paid in full, the opportunity to sell directly to customers who would pay them adding that another aim was also to “tap into bringing out unutilized capacities.”

On the fear of banks saying they could lose over N466Billion as a result of the provision and the DisCos as well saying they might not be able to pay the loans they got from their bankers, Wonodi said although there could be a threat on the loans in the sector but, according to him, “It is not because of the Eligible Customer provision. The DisCos just have to sit up and do some work and that is the truth”.

The Chief Executive Officer of Wavelength Integrated Power Services Limited, O’Neal Lajuwomi, also condemned the threat of force majeure by the distribution companies as untenable, adding that they held back the power value chain from moving forward.

Lajuwomi, who cited  the inability of the DisCos to provide meters for their customers, wondered how the DisCos could recoup their investments with the absence of meters, which he described as “the only fair way the customer can pay for what he consumed” adding that the DisCos did not do enough due diligence before they took over the industry.

An energy expert, Dipo Adesanya, also condemned the threat of force majeure by the power distributors, adding that the nation’s power sector must be receptive to policies that would drive growth therein as well as make the sector haven for investment.

Source: IWIN

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