The Nigerian Electricity Regulatory Commission (NERC) has developed new rules that could lead to the unbundling of Nigeria’s poorly performing electricity distribution companies (DisCos) barely 15 months to when they are expected to have delivered their sales and performance agreement targets.
Titled the ‘Business Continuity for the Nigerian Electricity Supply Industry (NESI)’, the draft regulations sets out actions the regulator will take when it gets to a point where the licensees exceed tolerance levels in meeting critical obligations as defined by NERC.
Meanwhile, informed sources tell BusinessDay that the DisCos are prepared to challenge the matter in the court of law.
“We have been on it with the commission (NERC) since they first published the draft and all options are on the table, including going to court over the matter,” said a source in one of the DisCos, who craved anonymity.
According to the document obtained from NERC’s website, five business failure events are envisaged to trigger a liquidation and possible license withdrawal. They are failure in meeting performance, compliance, licensing, financial and contractual obligations.
Performance agreement failure occurs when the targets are not met. “Except for safety or emergency reasons, as permitted under the relevant Industry Agreements and/or the Relevant Network Code, where a DisCo fails to purchase and/or accept delivery of Dependable Capacity and Gross Energy Output; continuous failure of a DisCo to supply electricity to customers, including diversion of electricity supply amongst customers, or customer classes,” will lead to liquidation, according to NERC.
In the case of a compliance obligation, failure occurs where a Licensee continuously fails to obtain or maintain valid insurance policies, as required under the regulations, or where the Licensee’s assets are destroyed and the Licensee is unable to replace or reinstate such assets, due to failure to insure or inadequacy of Insurance coverage.
License obligation failure events, are those related to contravention of a licensees terms and conditions. Failure to meet financial obligations occurs, “Where a DisCo fails to provide or maintain its Financial Security in favour of the Market Operator and/or the Nigerian Bulk Electricity Trader (NBET).
“Where a DisCo fails to pay 100% of its invoices to the Market Operator or NBET as and when due, for a continuous period of (2) months (regardless of whether or not the Financial Security provided by the DisCo has not been drawn); Where a DisCo’s Financial Security has been called by the Market Operator on more than one (1) occasion within a four (4) month period, or on more than three (3) occasions within a 12 month period.”
Analysts have called for several options to rescue the floundering power sector privatisation process, including dilution of core investor shares in the DisCos below 60 percent, declaring the DisCos bankrupt and appointing a liquidator to run them.
Other options are that the Bureau of Public Enterprises could terminate the Performance Agreement and call the shares of the DisCos or to wait for the five years performance period for the DisCos to achieve their ATC&C losses.
“Each of these options is fraught with challenges because while the DisCos have been inefficient, the Federal Government has not done all that it is required to do in the engagement with the DisCos,” said Chuks Nwani, an energy lawyer.
The Business Continuity for the Nigerian Electricity Supply Industry (NESI) regulation presents the challenge of legal entanglements.
“A practical way to force Discos into bankruptcy and eventual receivership, is for NBET to trigger the activation and drawdown of the Discos’ payment security to NBET in the form of three (3) months Letters of Credit (LIC),” says Odion Omonfoman, an energy consultant and CEO of New Hampshire Capital Ltd
Omonfoman further says, “This option would however require legal expertise and the filing of court processes, for which outcome may or may not favour the Federal Government. This option may likely do more harm to the electricity industry.”
A more pragmatic approach, according to Omonfoman, is the dilution of the shareholding of core investors which will allow the Federal Government revisit the privatisation process and take control of the Discos.
“The funding clause in the performance agreement with DisCos, allows the BPE as a 40% shareholder in the Disco, to inject capital into the Discos in the event that there is a requirement for further funding which the Core Investor is unable to provide. The clause allows the BPE to dilute Core Investor’s equity in the Disco by such funding,” says Omonfoman.
ISAAC ANYAOGU
