| Temple Ezebuike | Articles | ,

NERC’S Proposed Franchising Of Discos and Attendant Problems

Since the commencement of Power Sector Reforms in 2005, the Distribution Companies (DisCos) have been unable to satisfactorily meet stakeholders’ expectations in the provision of reliable electricity services to all customers within their coverage areas. DisCos have had little or limited expansion of their networks as such unable to satisfactorily supply electricity to consumers who are connected to their networks. Troubled by this problem, the Nigerian Electricity Regulatory Commission (NERC) has considered a new Regulation to allow third-party investors take up and maintain parts of the vast electricity distribution networks currently owned by the Discos. Premised on that, the NERC has drawn up a Consultation paper titled: “Distribution Franchising in Nigeria,” which, while calling for inputs from stakeholders in the Nigerian Electricity Supply Industry (NESI), explained that by sub-franchising, the DisCos would authorize third-parties to provide electricity distribution (and other utility services) on behalf of the DisCos, within the Disco’s coverage areas. This franchising arrangement can either be initiated by the DisCos or customer groups within the DisCos’ coverage areas.

OVERVIEW OF THE CONSULTATION PAPER

The Consultation Paper has been positioned to take advantage of evolving technologies and new business models in overcoming challenges inhibiting DisCos from providing access to reliable power services. The Paper seeks to –

  1. Provide industry stakeholders with information about the proposed regulatory framework for distribution franchising.
  2. Solicit for stakeholders’ views and comments on the proposed framework for regulating distribution franchising.
  3. Propose areas of concern in the development of the proposed regulations.

The implementation of the Distribution Franchising is expected to provide the following contributions:

  1. Improved Investments in the Networks –“… stimulate the desired prudent investments in filling the funding and infrastructure gap in the distribution subsector of the NESI.”
  2. Bridging of Power Supply Deficit –“… To bridge this supply deficit, the Franchisee may procure from other sources of power outside the contracted capacity with NBET on a bilateral arrangement through the national grid or from embedded generation sources.”
  3. Improved Customer Satisfaction –“… improved customer satisfaction in terms of availability, quality of electricity supply and customer services.”
  4. Technological Improvements –“Facilitate adoption of advanced technologies in the design and operations of modern grid systems that can offer cheaper and flexible alternatives to customers.”
  5. Better Service –“To avail opportunities for underserved customer groups desirous of better services by prompting the Distribution Company to engage Franchisee(s) for the provision of the desired services in the respective area(s).”

Features of the Distribution Franchise

From the Consultation Document, the main elements of a typical Franchising arrangement may include –

  1. The DisCo supplying electricity to the Franchisee metered at some injection point at a pre-determined price as per the Franchise Agreement.
  2. The Franchisee supplying electricity to consumers of the DisCo in the allocated area, per the tariffs approved by NERC.
  3. The Franchisee operating under the overall guidance of the DisCo’s License and the Disco remaining responsible to NERC for compliance with its licensing terms and conditions.
  4. The Franchisee shall pay in full the cost of bulk energy to the DisCo in line with the terms and conditions of the Franchise Agreement. The Franchisee shall retain a portion of the revenue collection from consumers after deducting amount payable/paid to the DisCo as defined in the Franchise Agreement.
  5. The Franchisee may also procure additional generation from bilateral sources (outside capacities contracted with NBET) through the transmission grid and/or from embedded generation through distribution network to supplement the existing supply but procured in compliance with existing regulations of NERC.
  6. In the event that the Franchisee has surplus power, arrangement could be made for the sale of such surplus power to the existing distribution network (as embedded generation), to supply neighboring areas, or it can be exported to other off-takers outside the resident DisCo, through the transmission grid.

Franchisee Models

The Consultation Document proposed the under-listed models, depending on the payment structure, risk allocation and securitization, and as may be defined in the Franchise Agreement.

  1. Metering, Billing and Collection (MBC) –This understates the outsourcing of the distribution function of metering, billing and collection to a third party; specifically for a more efficient supply of electricity to rural, semi-urban or urban areas.
  2. Total Management of Electricity Distribution Function – Under this arrangement, the Franchisee is responsible for maintaining the electricity distribution system (e.g., HT/LT lines, meters, distribution transformers, breakers). The Franchisee thus undertakes the rehabilitation and upgrading of the distribution system, by investing its funds and recoveringsame through a Project Agreement with the Distribution Licensee.
  3. Distributed Generation (DG) based Electricity Distribution Franchisee–The Franchisee may also undertake to procure more energy either through bilateral arrangements over the transmission network (TCN grid) or through embedded generation at local distribution networks; to meet electricity deficit within the franchise area.

 

PROBLEMS ATTENDANT TO NERC’S PROPOSED FRACHISING

The Mini-Grid Developers Conundrum

The NERC Regulation for Mini-Grids recognizes two types of Mini-Grids: Isolated Mini-Grids and Interconnected Mini-Grids. While Isolated Mini-Grids are not connected to a Distribution Network (and eligible for deployment) in Unserved Areas[1], the Interconnected Mini-Grids are connected to an existing Distribution Licensee’s Network, and thus eligible for deployment in Underserved Areas[2].

The Regulation for Mini-Grid mandates Isolated Mini-Grid developers to obtain permit from the NERC.  To obtain such permit, the developer is required to have satisfied–

  • That the intended geographic location to be served is an Unserved Area, which has not been assigned to an Embedded Independent Electricity Network or any other Mini-Grid developer.
  • Confirmation that the Mini-Grid will not interfere with NERC-approved expansion plans (of the Licensee DisCo) in the designated Unserved Area.
  • The written consent of the DisCo in the designated unserved area.

No permit is required for developers of Interconnected Mini-Grids, as such, the Interconnected Mini-Grid developer is required to enter into a Tripartite Contract with the Community and the relevant DisCo for the construction, operation and maintenance of an Interconnected Mini-Grid in an Underserved Area within a specific geographic location, subject, however, to the approval of NERC.

Drawing from the above, it is probable that the services of Mini-Grids in both Unserved and Underserved areas within the designated areas of DisCos may cause operational friction with proposed Franchisees operating in the same designated areas. One wonders what monetary value would be projected from investment from both Mini-grid developers and Franchisees, given that these separate power stakeholders would likely contend for the same power consumers.

If this problem is not resolved with better delineated operational functions, it would lead to overlapping power services by separate government-approved investors. This portends a discombobulation of operations, which actively may derail the presently sought improvement in the NESI. 

Exclusivity of DisCos

One of the drawbacks from the Privatization exercise is the monopoly enjoyed by the DisCos in their coverage areas. By the terms of their Distribution Licenses, each Disco has exclusive rights and some form of monopoly to cover electricity distribution and marketing in their coverage areas.  The NERC Mini-Grid Regulation provides that a Mini-Grid developer and the Community may agree to set an exclusivity period to investigate the feasibility of implementing a Mini-Grid within the Community. Despite this provision in the Mini-Grid Regulation, and due to the exclusive nature of its Distribution License, a DisCo may still supply power to Unserved and Underserved areas. This is attributable to a DisCo’s right to expand its network to any Unserved or Underserved Community– subject to payment of compensation[3].

This stated provision, which presently affects Mini-Grid developers poses difficulty to franchise arrangements, seeing that a DisCo, regardless of any franchise arrangement, may still have legal capacity to perform the same services as defined in the Franchise agreement; that is, legal capacity to erode customer base of proposed Franchisees. It is hoped that this problem will be addressed in NERC’s forthcoming Regulation for Franchising of DisCos.

Transmission capacity

On May 1st, 2019 (Workers Day), the Transmission Company of Nigeria (TCN) staff celebrated the improved 8,100 megawatt (MW) electricity transmission capacity of the TCN.  It was stated that the TCN had moved beyond being the weakest link in the electricity power value chain, although it had merely increased its capacity from 7000MW to 8,100MW. In comparison, the GenCos have a combined installed capacity of 12,522MW, and due to maintenance, gas and transmission constraints, combined operational capacity is about half of installed capacity.

Nigeria needs about 180,000MW for there to be adequate power supply[4]. South African, with 67 million people, generates 48,0000MW and are working towards increasing generation to 79,000MW.

The 8,1000MW transmission capacity is extremely poor for the economy. Where there is projected north of 10,000MW combined generation (inclusive of generation investment by Franchisees), it stands apparent that there always will be under-transmission of generated power, regardless of innovative policies in the NESI.

Procurement Process

The more the bureaucracy, the less the transparency. Despite the airtight bureaucracy during the Privatization exercise, the DisCos were given Distribution Licences notwithstanding their non-feasible aggregate technical, commercial and collection loss (ATC & C) projections. The non-feasibility of the projections contributed majorly to the present liquidity crunch in the DisCos.

From the Consultation Paper, the procurement process was proposed as the route towards a franchise arrangement. Given the antecedent of procurement processes in the NESI, it is submitted that the procurement process be phased out for DisCos, as this will allow DisCos privately evaluate technical and financial capacities of intending Franchisees. Given that the franchise primarily involves a private arrangement between DisCos and the Franchisees, procurement will not be an enabler but a clog in the wheel.

CONCLUSION

The liquidity crunch in the DisCos necessitated NERC’s proposed franchising of DisCos. While this is a good arrangement, projected difficulties should be buffered against, otherwise it appears a mere policy pat.

Solving the power problem is not essentiallyhinged on creating new sub-contracting models. It is almost like painting a broken generator instead of fixing it. Although NERC’s proposed franchising is commendable, it is instructive to note that neither franchising, nor increased power generation by Independent Power Producers (IPPs), nor embedded generation would produce any significant improvement unless the TCN’s capacity is significantly fixed upward, and the liquidity problem resolved.

[1] Unserved Areas are defined as areas within a Distribution Licensee’s Network without an existing distribution system otherwise called Offgrid. See Reg, 3 of the Mini-Grid Regulation.

[2] Underserved Areas are described as areas within distribution licensee’s network with an existing but poorly supplied or non-functional distribution system.

[3]Section 71(6) of Electric Power Sector Reform Act (EPSRA) provides that unless expressly stated in the license, the grant of a license shall not hinder the grant of a license to another person for a like purpose, and in the absence of such express indication; the licensee shall not claim exclusivity.

[4] See also “Nigeria Needs 180,000MW of Electricity- ANED”, available online at www.energymixreport.com/nigeria-needs-180000mw-of-electricity-aned/ (accessed at November 4, 2019).

The opinions in the articles are for general information purposes only and do not form a legal relationship or be taken as legal advice. To explore legal advice, please consult your solicitor or feel free to get in touch with us directly.