DisCos reject NERC capex order, warn of investor fallout

Nigeria’s electricity distribution companies (DisCos) have rejected a new regulatory directive issued by the Nigerian Electricity Regulatory Commission (NERC), describing it as an unprecedented intrusion into the internal administration of privately owned utilities and warning that it could undermine investor confidence in the country’s power sector.

The opposition follows the implementation of Order No. NERC/2026/062, which took effect on July 1, 2026, requiring DisCos to establish dedicated Capital Expenditure (CapEx) Provision Accounts into which a significant portion of their residual revenues must be paid after settling upstream market obligations and administrative operating expenses.

While NERC said the measure is intended to strengthen investment in distribution infrastructure, improve service delivery and promote financial discipline, the DisCos insist it effectively hands the regulator control over how they deploy their earnings.

How the new revenue allocation formula works

Under the new framework, DisCos without outstanding market debts are required to remit 70 percent of their earned non-administrative operating expenditure into the dedicated CapEx Provision Account, retaining only 30 percent for operational use.

For DisCos with outstanding market debts, the requirements are stricter. According to the order, 25 percent of residual revenues must be paid to the Nigerian Bulk Electricity Trading Plc (NBET) to offset outstanding obligations, another 25 percent to the Market Operator (MO), while 35 percent must be transferred into the CapEx Provision Account, leaving only 15 percent available for operations.

Where a DisCo owes only one of either NBET or the Market Operator, the share that would otherwise have gone to the other institution is also to be transferred into the CapEx account.

“NERC is, in effect, taking control of how DisCos spend their surplus revenue. The Order leaves a DisCo with market debts only 15 percent of residual revenue for its own operations and even a DisCo without debts retains only 30 percent. Everything else is either owed to market participants or locked in a NERC-controlled account,” one utility executive said.

DisCos say regulation has become administration

The controversy extends beyond revenue allocation.

The order stipulated that funds lodged in the CapEx Provision Account can only be utilised for projects contained in NERC-approved Performance Improvement Plans (PIPs).

Before any expenditure can be made, DisCos must obtain a “No Objection” from the commission for eligible projects, secure approval before contract awards and obtain fresh approval before each payment milestone throughout project execution.

Operators argue that the arrangement shifts the regulator’s role from oversight to operational management.

“This Order does not regulate; it manages. It assumes control and takes over the role of the boards of DisCos. There is a fundamental difference,” a northern-based electricity distributor said.

“By mandating exactly where a DisCo’s earned revenue must go, in what percentages, into what specific accounts, and with regulatory approval required before a single naira of it can be spent, NERC has stepped out of its regulatory role and into the role of a financial controller of private companies.”

The utility argued that while regulators can impose investment obligations and performance targets, decisions regarding capital allocation remain the responsibility of company boards and management teams.

“The DisCos were privatised. Their revenues are private earnings, not public funds held in trust for NERC. A regulator can say, ‘you must invest a certain amount in your network’; that is legitimate regulation.

“But a regulator that says, ‘we will decide which account your money sits in and you must ask us for permission before you spend it,’ has crossed from regulation into administration of the business.”

Fears over investor confidence and financing

Some operators warned that by becoming involved in project approvals and contract implementation, the commission risks creating opportunities for rent-seeking and administrative bottlenecks.

“By attempting to get involved in the award of contracts, NERC is opening the door for rent-seeking because contractors will simply flood regulatory offices to influence who gets what job in the DisCos,” another utility executive said.

The companies further argued that the directive could discourage new investment in the sector at a time Nigeria desperately needs private capital to improve distribution infrastructure.

Some operators warned that locking between 70 percent and 85 percent of residual revenues into restricted accounts could weaken operational flexibility, impair emergency response capabilities and make it more difficult to attract commercial financing as lenders reassess regulatory risks.

One utility compared the arrangement to a scenario where the Central Bank of Nigeria directly controls how commercial banks deploy their profits.

“Imagine if the CBN, rather than setting prudential ratios and capital adequacy requirements, directed that 70 percent of each bank’s net profit be paid into a CBN-controlled account and could only be accessed with CBN approval for CBN-approved purposes.

“No one would describe that as banking regulation. It would be recognised immediately as the state taking de facto control of private institutions without going through the legal process of nationalisation.”

NERC defends directive

NERC has defended the order, citing findings from its review of DisCos’ utilisation of earned non-administrative operating expenditure during the 2025 market cycle.

According to the commission, although several DisCos generated sufficient revenues to cover administrative expenses and recover portions of approved tariff components, many continued to struggle to meet upstream market obligations while underinvesting in network infrastructure.

The regulator argued that, given the persistent challenges faced by DisCos in accessing external financing, it had become necessary to ensure that available resources were channelled towards feeder rehabilitation, network expansion and improved service reliability.

NERC said the directive derives its authority from Sections 34(1) and 116(2) of the Electricity Act, 2023, which empower the commission to promote an efficient electricity industry, ensure prudent utilisation of sector resources and guarantee that tariffs remain sufficient to support prudent investment.

The commission added that the order would help enforce capital investment obligations embedded in tariff orders, accelerate feeder rehabilitation projects and complement interventions under the World Bank-funded Distribution Sector Recovery Programme (DISREP) and the Presidential Metering Initiative (PMI).

Industry voices back NERC

Not everyone in the sector agrees with the DisCos’ position.

A senior manager at a power company, who requested anonymity because of the sensitivity of the issue, said the order addresses one of the longest-standing criticisms levelled against the DisCos since privatisation.

“It is obvious that the DisCos are not serious,” the official said.

“One of the major allegations against them has been that they do not invest in the network and that it is consumers who end up buying transformers and other equipment required to keep the network running.”

The executive also pointed to the country’s metering gap as evidence of inadequate investment by electricity distributors.

“It is also because they have not been able to demonstrate sufficient capacity that consumers pay for meters, while the Federal Government has continued to provide support, palliatives and intervention programmes to the companies.”

According to the source, a requirement to improve transparency around capital expenditure should not be controversial if the objective is to improve electricity supply.

“So why should it now be difficult for them to be transparent in their capital expenditure?” the official asked.

“Their opposition to such regulation only shows they are not ready and willing to invest in distribution network improvements in their respective franchise areas.”

Legal questions emerge

Beyond the commercial implications, legal concerns have also been raised over the process leading to the issuance of the order.

Some stakeholders argue that Section 48(1) of the Electricity Act, as well as Sections 7(3) and 24 of NERC’s Business Rules, require consultation with licensees, affected parties or the public before decisions materially affecting them are taken.

They also point to Section 36 of the Constitution, which guarantees the right to fair hearing in matters affecting civil rights and obligations.

According to the utilities, the commission issued the order without prior consultation with affected operators, potentially exposing the directive to legal challenge.

“The consequence of failure to observe the rules of fair hearing is that any decision or order issued is null and void,” one DisCo official said.

A defining test for Nigeria’s Power market

The dispute comes at a critical period for Nigeria’s electricity industry as regulators seek to improve investment in distribution infrastructure while preserving private sector participation in a market still grappling with liquidity constraints, weak collections and ageing assets.

The outcome could shape the future relationship between regulators and investors in Nigeria’s post-Electricity Act electricity market and define the boundaries between regulatory oversight and corporate governance in a privatised power sector.