Can FG suspend transfer of electricity regulatory functions from NERC to states?

Introduction:

At the most recent edition of the Africa Energy Market Place (“AEMP”), which took place on Thursday and Friday, the 16th and 17th of May 2024 (i.e., last week), the Nigerian Minister of Power (the “Minister”) was reported to have stated that “the Nigerian (federal) government had suspended the issuance of regulatory autonomy to state governments.”

While the writer thinks he was misquoted and some of the newspaper headlines are click baits, he is of the view that it may be worthwhile to analyse a few issues connected with the Electricity Act, 2023 (as amended) (EA”) in relation to the transfer of regulatory functions from the Nigerian Electricity Regulatory Commission (“NERC), the federal regulator, to state governments.

“The Electricity Act makes it clear that once the transfer is completed, NERC will no longer have any regulatory responsibilities for electricity market activities carried out solely within the state to which regulatory responsibility has been transferred.”

A number of questions become apparent, some of which include:

1. Whether state governments have the right to request that NERC transfer regulatory powers over electricity operations within such state territory to the state government or whether the provisions of the EA grant a mere privilege that the federal government can grant or deny at its discretion?
2. If there is a legal process (whether or not the same is a right or privilege) for the transfer of regulatory functions to state governments?

In addressing the above-highlighted queries, a number of points may be worth considering.

What the Minister may be saying

What the minister might be saying in the writer’s view, and rightly so, is that some states do not fully understand the extent of the obligations they are taking on when they establish or seek to establish a state electricity market before they embark on such a venture.

If the above captures the perception of the Minister, then he is indeed accurate, because establishing an electricity market goes beyond building electric power plants and/or providing irrevocable standing payment orders, which certain states have done in the past in support of power plant developers to encourage the development of such independent power plants. It is a more elaborate process that will comprise both wholesale and retail markets.

Position of the Law

By virtue of Section 230(2) of the Electricity Act, a state may at any time enact a law by whatever appellation to provide for the establishment of a state electricity market. Additionally, the state may establish a state electricity regulatory authority for the state (“the state regulator”) and appoint a governing body and staff for the said entity. It is expected that the State Regulator would be established by virtue of the law enacted by the relevant state.

Upon completing the foregoing, the state may deliver a formal notification of the events above and request that the NERC transfer regulatory authority over electricity operations in the state to the state regulator.

The State is then required to deliver a formal notification of the foregoing events to the relevant successor electricity distribution licensee (“the successor company”), with a copy to the National Council on Privatisation (“NCP”) through the Bureau of Public Enterprise (“BPE”) requesting them both to ensure that the successor company carries out the steps set out herein.

Within forty-five (45) days of receiving formal notification of the enactment of the law mentioned above, the Commission is mandated to develop and provide the State Regulator with a draft order outlining a plan and timeline for the transfer of regulatory responsibilities from the Commission to the State Regulator. This transfer is required to be completed within six (6) months from the date the formal notification was delivered to NERC.

The Electricity Act makes it clear that once the transfer is completed, NERC will no longer have any regulatory responsibilities for electricity market activities carried out solely within the state to which regulatory responsibility has been transferred. These regulatory responsibilities will now rest with the State Regulator and the additional successor company, including the assets, liabilities, employees, rights, and obligations associated with the transferred operations.

In fact, with respect to the forty-five (45) day notice, the Electricity Act uses the term “shall” (which in law generally makes an action mandatory). Thus, NERC has no other option but to comply with the provisions of the law. Similarly, this is the case with the six-month transition period for the completion of the transition period. NERC, in both instances, cannot stop a state from regulating electricity operations within its territory once it complies with the required procedure.

The beginning of everything

For many years, there have been debates around energy federalism and the desire of state governments to run their electricity markets, as it was opined that the federal (largely) centralised arrangement was ineffective in ensuring a functional energy supply industry.

While electric power issues could be regulated by both the federal and state governments, as provided in the concurrent legislative list, the powers of state governments were limited to areas not covered by the national grid system.

On Friday, March 17, 2023, the erstwhile President Muhammadu Buhari assented to 16 Constitutional Amendment bills. One of the bills was the Fifth Alteration (No. 17), which sought to alter the Constitution of the Federal Republic of Nigeria, 1999, to allow Nigerian States to legislate on issues covering the generation, transmission, and distribution of electricity in areas covered by the national grid and related matters.

The Constitutional Amendment empowered the states of the federation to make laws regarding the generation, transmission, and distribution of electricity, even if those areas were or are covered by the national transmission network. In other words, Nigerian states have the authority to shape their own electricity systems.

Doctrine of covering the field

The Nigerian National Assembly has the authority to enact laws on certain subjects, as do the State Houses of Assembly. This can lead to a situation where conflicting laws are in place, leaving citizens unsure about which laws to follow.

In federal constitutions like Nigeria’s, it is established that if there is a conflict between a law passed by the National Assembly and a law passed by a State House of Assembly on the same subject, the state law is considered void to the extent of the inconsistency. This is known as the doctrine of ‘covering the field,’ signifying that the federal law takes precedence in such cases as having covered the field.

Therefore, when there are conflicting laws between the National Assembly and a State House of Assembly on a matter listed in the concurrent list, the National Assembly’s law holds authority over the subject, rendering the state law void where it conflicts. According to Section 4(5) of the Nigerian Constitution, if a law made by a State House of Assembly contradicts a law passed by the National Assembly, the National Assembly’s law prevails, while the state law is void to the extent of the inconsistency.

This is, however, inapplicable with respect to the powers of the state to enact laws regulating electricity operations within its state, as the Constitution clearly grants this power to the State House of Assembly.

Thus, NERC and the EA will govern electricity operations in states that have not exercised the powers provided by the Constitutional Amendment outlined above and according to the process outlined in the EA.

Other factors

In order for a state to assume control over the regulation of its electricity market, it should first formulate a comprehensive electricity policy addressing various aspects such as its energy goals, power requirements, regulatory framework, financial mechanisms, and appeal to potential investors.

It is also appropriate that the state carry out feasibility studies on all aspects of electricity operations in its state to give a holistic view of its needs, capacity, and possible gaps in establishing its electricity market.

Subsequently, the state is to enact legislation that not only establishes an electricity market but also serves as the legal foundation for implementing the aforementioned policy since policies, on their own, are not legally binding and enforceable.

Furthermore, the state would need to establish regulatory bodies and other pertinent institutions, including an independent system operator (ISO) and potentially relevant commercial entities, as per the proposed market structure. The state ought to also create support structures to complement these institutions, which could involve emergency response systems, technological infrastructure, and other necessary components. The state must adhere to the procedures delineated in the Electricity Act during this process.

It is essential to underscore the importance of human resources, whether sourced within or outside the relevant state, to assist in crafting policies, regulatory frameworks, and market design. Additionally, acquiring a substantial amount of foundational data is critical for sound policy development, including information relating to demographics, socioeconomic factors, and the existing state of electricity infrastructure.

Conclusion

Neither the Minister nor NERC can inhibit (and I do not believe they intend to) the transfer of regulatory functions to states that have followed the process set out in the Electricity Act.

In fact, the Electricity Act obligates NERC to hand over such functions within six (6) months, upon the state following the process in the EA (including giving the requisite notification). Thus, unless the law is modified by the National Assembly or states fail to follow the process in the Electricity Act, the Federal Government of Nigeria cannot suspend the transfer of electricity regulatory functions from NERC, the Federal Regulator, to states.

Ayodele Oni, a lawyer, specialises in international energy (oil, gas, power, mining, and renewables) investment law and policy and provides transactional and project advice.