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Electric Power Sector Reform Act: Amending a law to make it worse

The Electric Power Sector Reform Act (EPSRA) was passed by the National Assembly and signed into law by President Olusegun Obasanjo, GCFR in 2005. The EPSRA is the extant law underpinning the regulations and operations of the Nigeria Electricity Supply Industry (NESI) as we know it today. At the time it was passed into law, it was heralded as a defining piece of legislation that would transform the power sector and lead to a competitive electricity market.

Fifteen years after the passage of the EPSRA, there have been numerous attempts at amending the Act to align it with present-day realities and challenges in the NESI. There have also been attempts to introduce new legislation in the electricity sector. One such new legislation proposed as an amendment to the EPSRA is the bill to provide “for the reservation of 5% of revenues of all power generation companies (GenCos) for the development of their host communities and other related matters”. The bill sponsored by Babajimi Benson, representing Ikorodu Federal Constituency, has passed second reading. If passed, the bill will further increase the cost of wholesale electricity.

Besides the above bill, in September 2021, the House of Representatives passed another EPSRA amendment bill for second reading. The amendment bill is to “provide the legal and institutional framework for the implementation and coordination of Rural Electrification projects, the establishment of the National Power Training Institute and regulatory provisions to strengthen the Sector for efficient service delivery”. The amendment bill, sponsored by 52 Members, has bi-partisan support across party lines.

No doubt, the EPSRA needs to be amended. However, there are significant concerns about several of the proposed amendments in the above-mentioned amendment bill. Overall, should the amendment bill sail through and become law, it would add to the conundrum in the NESI by increasing regulatory risks, further increase both wholesale and retail electricity costs, stifle investments in the power sector, with the end result of worsening electricity supply and decline in service delivery to electricity customers. The first part of this paper highlights some of the proposed amendments to the existing regulatory framework in the EPSRA and our concerns.

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The bill in clause 24, seeks to put all agencies and parastatals operating in the power sector under the supervisory control of the Federal Ministry of Power (FMoP). Agencies like the Nigeria Bulk Electricity Trading Plc (NBET), Niger Delta Power Holding Corporation (NDPHC), FGN Power Company Ltd (the project vehicle set up to implement the $2.3 billion Presidential Power Initiative (PPI) with Siemens), Rural Electrification Agency, etc, would become agencies under the FMoP. We think this is the right thing to do so as to enable the Federal Government to achieve better policy articulation, harmonization, coordination and implementation within the NESI. Effectively, the Minister for Power would now be held responsible for delivering on set policy goals of government in the power sector. By the way, this proposed amendment is no different from what obtains in other ministries; for instance in the petroleum sector, or telecoms sector, respective agencies of government in these sectors, including the NNPC, operate under the jurisdictions of their supervisory federal ministries and Ministers.

The bill also introduces new clauses to give power to the Nigerian Electricity Regulatory Commission (NERC) to sanction electricity distribution companies (DisCos) and other licensees of NERC for acts of default or non-compliance. Specifically, the bill proposes to give NERC broad powers to either suspend and/or revoke the licenses issued to DisCos for infractions. While this is a most welcome development that would hopefully curb the widespread market indiscipline that has sadly characterized the NESI, the clauses are rather subjective in our opinion, and could potentially increase regulatory risks within the sector. If the bill is passed as-is, we foresee court processes seeking legal interpretations, particularly with the proposed new clause 67, clause 74, clause 75 and clause 76. From an investment perspective, the regulatory risks associated with these new provisions are such that they could discourage much-needed investments in the NESI.

For instance, the proposed clause 67 gives NERC the powers to suspend a DisCo’s license for one year if, in the opinion of NERC, the DisCo has “persistently failed to maintain an uninterrupted supply of electricity”, or has “persistently defaulted in complying with any direction given by NERC”. A DisCo’s license can also be suspended “if circumstances exist which render it necessary for the Commission to suspend the license in the public interest”. Under the proposed amendment, NERC has the power to appoint an Administrator for the DisCo if the license of the DisCo is suspended. The proposed amendment is not specific on how the Administrator would be appointed, or which individual(s) and/or entities can be appointed as the Administrator.

Where the suspended license is eventually revoked by NERC, the proposed amendment gives NERC the powers to sell the distribution company (the amendment bill uses the word “utility”) within one year from the date of revocation of the license. Clauses 74,75 and 76 deal further with the revocation of licenses and re-issuance of such revoked licenses by NERC. In our opinion, the proposed powers given to NERC to sell a utility company upon revocation of its license is flawed and clearly cannot stand. NERC as a sector regulator holds the license in trust on behalf of the Nigerian government, thus only has the right to issue and/or revoke the issuance of its license to a utility company. NERC is not a shareholder in the utility/ licensee, which is a duly incorporated company under Nigerian laws, thus cannot sell the shares of the utility/licensee, nor mandate the utility company to sell its shares to another party. Drawing from the telecoms industry, it is clearly unimaginable that the Nigerian Communications Commission (NCC) would revoke the license of MTN Nigeria for whatever reasons, and also proceed to sell the shares of MTN Nigeria or mandate MTN Nigeria to sell its entire shares to another party! What NCC can do is to re-allocate MTN Nigeria’s license to another company.

Interestingly, clause 71 of the proposed amendment gives powers to the Federal High Court to renew the license of a DisCo, where NERC refuses to renew a license. This puts the regulatory powers of NERC to renew or not renew licenses under the supervision of the Federal High Court.

Another area of concern is section 71, subsection 6 of the amendment bill, which provides that DisCos are licensed to operate within their franchise areas on an exclusive basis, except where stated in the license terms as being non-exclusive. In other words, the proposed amendment, if it passes, will grant monopoly rights to DisCos to operate exclusively within their franchise areas, and also outlaw any form of market competition within the DisCos’ franchise areas. In our opinion, this proposed provision is very retrogressive in a market that requires market competition to promote electricity access and enhance service delivery. In addition, this proposed amendment of the EPSRA reinforces the failed single market structure of the NESI. Rather than grant exclusivity to DisCos, it is our considered view that any proposed amendment to the EPSRA in this regard, must open up the electricity distribution segment to further market competition and innovation so as to improve electricity access and service delivery to Nigerians.

The importance of enabling market competition in the NESI cannot be over-emphasized. Market competition is what drives service delivery and innovation in any industry. The emergence of Zenith Bank, Guaranty Trust Bank, Standard Trust Bank and other “new generation” banks led to improved service delivery and innovation in the banking sector. The licensing of MTN, ECONET (now Airtel) and Glo led to a revolution in the telecoms industry and all the innovations we enjoy today, including per second billing for calls. The emergence of competition in the aviation industry has greatly improved service delivery in that sector. Very few may remember those days when passengers ran to the tarmac to secure seats on a plane that had not yet landed!

In our opinion, improved service delivery and market innovation in the power sector is stunted because of zero competition in the transmission and distribution segments of the value chain. Consequently, any proposed amendment to the EPSRA must focus on enabling greater market competition in the transmission and distribution segment, as well as the elimination of the existing dominant market monopoly status and exclusivity rights to DisCos, which in turn, leads to continuing market abuse and inefficiencies by DisCos.

In this regard, we strongly appeal that state governments who are seeking to make their own electricity laws to empower their citizens and stimulate their state economies should ensure their Representatives in the National Assembly kill this particular provision in the amendment bill. In addition, state governments should also study clause 77 of the existing Act, which seems to violate the Land Use Act that vests powers over land resources to state governments. The proposed amendment bill should expunge such provisions that vest the assignment of land for power projects to NERC.

Conclusion of Part 1:

The NESI needs a radical redesign as the single market structure operated since the passage of the EPSRA in 2005 has thus far failed to deliver stable, reliable and affordable electricity to millions of Nigerians. Thus the a compelling need to amend the EPSRA. In our opinion, several provisions of the EPSRA amendment bills being considered by the House of Representatives, are rather retrogressive and will not improve the power sector, nor lead to further investments in the NESI.

In our opinion, the EPSRA amendment bill should focus on opening up the electricity market to effective market competition, particularly in the electricity distribution segment. The amendment bill should also empower States to make their own electricity laws in accordance with the provisions of the 1999 Constitution (as amended).

In the second part of this article, we shall dissect Part IX of the EPSRA amendment bill, which is the most controversial section of the EPSRA amendment bill.

Odion Omonfoman is an energy consultant and the Founder/CEO of New Hampshire Capital Ltd. He can be reached at orionomon@outlook.com

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