In letter to NERC, DisCos exonerate selves from poor electricity market

In a letter to the Nigerian Electricity Regulatory Commission (NERC) dated June 29, distribution companies (DisCos) noted that COVID-19, debt-laden balance sheet, stringent rules on remittance and the introduction of an untested tariff model further weakened electricity market, but was silent on their own role.

According to the DisCos, implementing a cap on estimated billing when about 60 percent of customers have no meters would negatively impact on the market. “DisCos collect over 75 percent of bills issued to metered customers and 25 percent from unmetered customers. This is an indication that DisCos suffer more losses from estimated billing. Therefore, metering is the only means of revenue assurance,” they said in the letter.

But DisCos were largely responsible for scuttling previous attempts to meter the sector, former NERC chairman, Anthony Akah, in a 2016 press release, said.

DisCos had performed below expectation since they deployed about 500,000 meters between November 2013 and June 2016, which led to the cancellation of the programme by former minister of power, works and housing, Babatunde Fashola.

Meter rollout was part of the Performance Agreement DisCos were supposed to honour, including investing to improve their network. But the DisCos did little to meter their customers until the naira was devalued in 2016, providing the excuse that the devaluation increased the cost of metering.

In the letter, they also said ordering a tariff increase when their books were filled with debts caused by tariffs that did not ensure viable returns, would further impair the market and affect the implementation of the service reflective tariff initially planned to take effect July 1.

The huge debts in the electricity market, over N1 trillion, are not only due to a lack of cost-reflective tariff. There are market shortfalls caused too by DisCos inefficiency at collecting and making full remittance to the market according to agreed remittance threshold.

The DisCos also kicked against capping estimated billing. “The impact of the continued implementation of the Capping Order may constitute a bottleneck to the inflow of about N41 billion monthly of legitimate industry revenue, thereby compounding market liquidity challenges,” the DisCos said.

However, capping of estimated billing by NERC was in response to rampant abuse by DisCos after excessive billing emerged the most controversial complaints by customers.

NERC’s order capping estimated bills was with the objective of compelling DisCos to meter their customers.

According to data from the Commission, 52 percent of over 10 million electricity customers do not have meters.

At first, it set up the 2007 Meter Reading, Cash Collections and Credit Management regulation, to enable DisCos bill customers when they are unable to gain access to the premises. But this has become so abused that it is now the single most painful source of frustration for customers, accounting for 65 percent of all complaints lodged at DisCos offices across Nigeria, according to NERC’s data.

Meanwhile, the DisCos further noted that their financial books remain encumbered with N1.7 trillion of tariff shortfalls (subsidies to customers), as well as the liabilities associated with the Nigerian Electricity Market Stabilisation Facility (NEMSF), advanced in 2015 to liquidate legacy gas debts and tariff shortfalls resulting from adjusting Aggregate Technical, Commercial and Collection (ATC&C) baseline losses.

“If left unaddressed, these financial encumbrances will continue to inhibit the DisCos’ ability to access the financing that is critical to supporting the remittance and the contract-based,” they said.

“We prayed the Commission for the implementation and completion of the balance sheet clean-up exercise prior to the increase of tariffs, to enable positive signalling that attracts new investors and lenders to the DisCos,” the DisCos wrote.

However, debts only are not the only factor discouraging investments, as the DisCos also reported administrative cost of over 40 percent in their books.

Analysts say this cost pattern does not point to a viable business that can attract investments.
Another significant concern for the DisCos is the Minimum Remittance Order, which they said used unrealistic parameters. This includes lack of market rates for foreign exchange, selection of 2017 and 2018 as years of Mutual Non-Compliance as against 2015 and 2016, as requested by DisCos.

“The projected energy and capacity delivered being used by NERC for the calculation is always ambitious and allocates upstream transmission, generation and gas risks to the DisCos, in view of the service-based structure of the new tariff.

“The losses used in the computation following the removal of the MDA debt loss component is (are) contrary to the ATC&C loss regime envisaged by the Performance Agreement (PA). The basis of the investors bid and ultimately the Loss levels considered in the PA are inclusive of all Technical, Commercial and Collection Losses,” they noted.

A good faith negotiation with the regulator would make a compelling case, but the DisCos are neither trusted by their regulator, their fellow market participants and even the consumers, according to analysts.