NERC moves to split DisCos’ franchise areas

There is strong indication that the Nigerian Electricity Regulatory Commission (NERC) is making moves to split Electricity Distribution Companies for better efficiency.

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.

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.

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.

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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.

“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.

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.