Tuesday, June 18, 2019

Legality Of Competition Transition Charges In NESI

By Idowu Oyebanjo
The declaration of Eligible Customers (EC) in the Nigerian Electricity Supply Industry (NESI) in 2017 has sent the right signals to investors that the NESI is progressing towards retail competition. However, it seems the Nigerian Electricity Regulatory Commission (NERC) is yet again trying to walk before it crawls by introducing competition transition charges (CTC) that may discourage potential eligible customers (PEC) and investors from taking advantage of the business opportunities presented by the recent declaration.
This is not the first time we have seen how the timing and implementation of policy directives can make or mar the chances of the power sector surviving turbulent and stormy periods. It is against this backdrop that we analyse the current plans of NERC to introduce CTC in the NESI as it can potentially lead to an increase in the cost of electricity supply (tariffs) to all consumers.

Whereas section 27 of the Electric Power Sector Reform Act (EPSRA) of 2005 establishes ministerial directives respecting eligible customers, section 28 provides for CTC as one of the charges payable by EC and other consumers in the NESI. Section 27 of the Act states: “The Minister may issue a directive to the Commission specifying the class or classes of end-use customers that, from time to time, shall constitute eligible customers under this Act”. 

Furthermore, Section 28 of the Act establishes the compensation that may be available to distribution companies (DisCos) and other trading licensees when it states: “ If the Minister determines, following consultation with the President, that a directive given under section 27 will result in decreasing electricity prices to such an extent that a trading licensee or a distribution licensee would have inadequate revenue to enable payment for its committed expenditure or is unable to earn permitted rates of return on its assets, despite its efficient management, the Minister may issue further directives to the Commission on the collection of a competition transition charges from customers and eligible customers, the distribution of the funds collected to the trading licensee described in section 25(a) and to distribution licensees, and the duration of the competition transition charge.

To avoid some of the misunderstandings that trailed earlier declarations in the NESI such as the Transitional Electricity Market (TEM) in 2015, and the EC Regulation in 2017, it has to be clarified by NERC on this occasion that the Minister of Power, pursuant to section 28 of the Act, actually consulted with the President, obtained approval, and conveyed a directive to NERC (the Commission) to introduce CTC. Also, section 28 clearly states that the pre-condition for the introduction of CTC is that the declaration in section 27 results “in decreasing electricity prices”. Clearly, with talks about increasing electricity tariff and not its preferred reduction, it stands to reason that the declaration of customer eligibility has not led to decreasing electricity prices in the NESI. 

Apart from the responsibility to determine the tenor, NERC has the responsibility to establish the amount, the arrangements for collection and distribution of the competition transition charges to relevant parties in accordance with sections 28 and 29 of the EPSRA. Prior to all of these, section 30 of the ACT requires that NERC shall hold a public hearing to obtain the views of any interested parties. The objectives of the CTC can therefore be summed up as to ensure the introduction of the EC Regulation does not adversely impact on an efficiently operated distribution licensee’s ability to generate adequate revenue to enable payment of their committed expenditure and also earn permitted rates of return.

The notion of CTC hinges on concerns related to “stranded costs” incurred in providing services to customers exiting the DisCos’ networks and how to compensate them in line with the provisions of the EPSRA. Stranded costs largely refer to investments in infrastructure by network operators that may not be recovered within the earlier projected life span of the financed assets arising from the transition from the traditional regulatory model being operated since the enactment of the EPSRA in 2005 and the recent introduction of competition which now provides a window for eligible customers to switch supply from the DisCos to trading and generation license holders. Some of the main components of stranded costs include costs associated with long-term Power Purchase Agreements (PPAs) and Vesting Contracts (VCs) commitments, Regulatory Assets/Tariff Shortfalls, Unamortized Investments in Networks, Overhead, Cross Subsidy and other legacy commitments.

The introduction of competition transition charges (CTC) will impact on potential eligible customers, DisCos, Transmission Service Provider (a.k.a TCN), other network operators, generators, trading licensees, government, and retail electricity consumers. In view of this, NERC has recently published a consultation paper with a view to seeking inputs from all stakeholders in the NESI.

There are a number of question that the introduction of CTC in the NESI at this time will raise and they include: Should CTC be a one off charge payable by exiting customers to cover for all the identified stranded costs or should it be tied to the life span of the assets and liabilities? Should a potential EC who chose to set up a captive plant and exit the DisCo network be exempted from defraying the costs and liabilities attributed to him while in the network and the burden thus taken over by other customer or must he like other ECs that exited to licensed traders and generators also bear the costs attributed to him? Since Section 28 of the EPSR Act provides that consumers and ECs bear the burden caused by the exit of ECs by being charged CTC, who should be the other consumers outside the EC that should be responsible for paying CTC? Should independent power producers (IPPs), other wholesale electricity providers, state and federal governments be involved? 

Does payment of CTC reward the DisCos for past lack of Investment in Networks and bad management decisions? Does payment of CTC act as a barrier to entry and exit of other participants in the market place? Does the payment of CTC apply to customers who do not have a written contract in place with DisCos? Does a customer have to pay for CTC if it physically leaves the DisCo’s network franchise area? Will there be a reversal of approved CTC within the transition period by change in policies? Does the proposal consider the possibility of negative transition charges when the book values of assets are below market prices? Are there other considerations aside those listed above that should be considered for the determination of “stranded cost” and subsequent computation of CTC? The answers to these and many more questions will be the subject of future industry debates and speculations.
*Engineer Idowu Oyebanjo, MNSE CEng MIET, is a UK Chartered Power System Protection Engineer

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