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Money awaits investors as NERC moves to split DisCos’ franchise areas

NERC, which regulates the electricity sector in Nigeria, has since the past two weeks called for comments from the general public on a consultation paper to elicit comments from stakeholders in the Nigerian Electricity Supply Industry. The call expires Monday and stakeholders say there is a strong indication that the Commission will enforce the regulation as the sector is excited about it.

According to NERC, proposals for the franchising arrangement can either be initiated by DisCos or customer groups (community) within a specified geographical boundary and franchisee selected through a competitive procurement process.

“The community, through a registered association, may formally approach the DisCo to declare its interest and initiate franchising arrangements in the areas of supply, metering, billing and collection including additional investment in the distribution networks where appropriate,” NERC said.

Additionally, any unserved or underserved community has the option of exploring the provisions of NERC’s Regulation on Independent Electricity Distribution Network (IEDN) in ending its supply challenges as may be applicable, NERC said.

The Multi-Year Tariff Order (MYTO) will govern contracts but where a franchisee makes capital investments in order to provide additional power at a premium cost, he is allowed a return on such investment, through the provision of a surcharge payable to the franchisee.

“By this regulation, NERC is opening the power sector for investments as customers in any community can decide to form their own DisCo, provide their own meters and invest to improve their own network,” said Chuks Nwani, an energy lawyer.

The framework of the proposed Franchising Regulation seeks to allow the DisCos to grant franchises to third parties (franchisees) to undertake specific roles such as supply of electricity, procurement of additional electricity from embedded generators, management of metering, billing and collection activities, maintenance, and upgrade and strengthening of the distribution system within the respective licensed coverage areas of the DisCos.

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As for the franchisee, it confers on it a right to retain a portion of the revenue collected from consumers after deducting amounts payable to the DisCo.

According to the proposed rules, ownership of all distribution networks shall remain with the DisCo but it does not explicitly include upgraded assets and investment of the franchisee in the distribution network.

Analysts say this may prove knotty as it may be argued that such upgraded assets and investment form part of the distribution network, and may be considered as a DisCo’s assets.

While the implementation of the proposed Franchising Regulation affords a potential solution to the liquidity and operational challenges currently faced by the DisCos, it requires clarity on important areas, analysts at Olaniwun Ajayi, a commercial law firm, said in a review.

For example, there is no clarity on the interplay between the proposed franchising arrangement and the obligations of the DisCo to the Bureau of Public Enterprise (BPE) under the Performance Agreement; their obligation to NERC under the Distribution Licence, and to the Nigerian Bulk Electricity Trading Plc. (NBET) under the Vesting Contract.

“It does not fully address the bankability concerns that the lenders to the franchisee would have in terms of ownership of assets and assurance that default by the DisCo under any of the documents/instruments listed above will not impact the rights of the franchisee,” the analysts, led by Wolemi Esan, partner, said.

“It does not provide guidance on the minimum/maximum duration of the proposed franchise arrangement and it does not provide for a grandfathering regime for franchise arrangements concluded with NERC’s approval prior to the implementation of the Proposed Franchising Regulation,” they said.

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The analysts further said that the proposed regulation is unclear on whether an Independent Electricity Distribution Network (IEDN) can also appoint a franchisee, and it does impose on the franchisee a mandatory obligation to reduce ATC&C losses.

“Strikingly, this differs from the position in India where similar franchising arrangements have been implemented. Worthy of note in this regard is the position in India, where prospective sub-franchisees are expected to demonstrate a capacity to reduce ATC&C Losses, a factor which is often a central objective to franchising arrangements in that jurisdiction,” analysts at Olaniwun Ajayi said.

The concept borrowed from India is based on three models. The first is Metering, Billing and Collection of 33kV or 11kV feeder or a cluster of feeders in rural, semi-urban or urban areas.

The second model is Total Management of Electricity Distribution Function where in addition to collections, the franchisee will be responsible for maintaining the electricity distribution system (comprising high tension and low tension lines, meters, distribution transformers, breakers), in addition to undertaking the rehabilitation and upgrade of the distribution system.

The Distributed Generation (DG)-based Electricity Distribution Franchise model allows the franchisee access to procure additional energy either through bilateral arrangements over the transmission network or embedded at the local distribution networks level to meet the electricity deficit (or peak demand deficit) of customers within the franchise area.


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