Introduction
On 28 January 2020, the Nigerian Electricity Regulatory Commission (NERC or the Commission) issued the “Order on the Transitional Accounting Treatment of Tariff Related Liabilities in the Financial Records of Participants in the Nigerian Electricity Supply Industry” (the Order). The Order was made in furtherance of NERC’s overarching mandate under section 32(1) of the Electric Power Sector Reform Act (ESPRA), to maximize access to electricity services; and for this purpose, to develop a financially stable electricity market that is attractive to private investors.
The Order recognizes the fact that private sector investment in the Nigerian Electricity Sector Industry (NESI) has, over the years, been frustrated by the incidence of tariff shortfalls – which have occasioned the accretion of tariff related liabilities in the financial records of licensed electricity distribution companies (the DisCos) and concomitantly affected their ability to raise the capital required for investments in their distribution infrastructure.
Ultimately, the Order seeks to resolve the continued accumulation of future tariff related shortfalls during the transition to a cost-reflective tariff, as it acknowledges the significant mismatch between the current retail tariffs approved by Commission (under the Multi Year Tariff Order 2015 and the NERC Minor Review Orders issued in 2019) and the truly cost-reflective tariff.
Ostensibly, the Order is made for the purpose of: (i) providing a guideline for the transitional accounting treatment of tariff- related liabilities1 in the financial records of the market participants; (ii) ensuring that no new tariff-related liabilities accrue in the financial records of the DisCos; and (iii) maintaining the creditworthiness of the balance sheet of DisCos for the purpose of raising capital towards the improvement of electricity networks and service delivery. The transitional accounting treatment prescribed by the Order takes effect from the market settlement cycle of January 2020 and will cease to have effect upon the issuance of an order of NERC directing the DisCos to settle their market invoices in full.
The NBET remittance model
In the main, the Order prescribes a “transition regime” for the invoicing and payment of amounts due from the DisCos to the Nigerian Bulk Electricity Trading Plc. (NBET); a critical feature of which is the payment of the unpaid tariff-related portion of the NBET invoices from the Payment Assurance Facility2 and other funding sources in the Power Sector Recovery Program (PSRP). Thus, in effect, the Order establishes a transitional “subsidy” regime under which the tariff-related portion of the NBET invoices which does not form part of the DisCos’ required remittance amount to NBET under the December 2019 Minor Review of Multi Year Tariff Order (“MYTO”) 2015 and Minimum Remittance Order for the Year 2020 (the MRO) is paid by the Federal Government of Nigeria (FGN) from PSRP funding sources. In terms of its operational features, the Order provides that this transitional regime is to take effect as follows:
1. each NBET invoice must clearly indicate: (i) the amount to be paid by the DisCos in line with the MRO; and (ii) the amount to be paid by the by FGN from multiple funding Sources in the PSRP financing plan.
2. the amount designated in the NBET invoices to be immediately payable by the DisCos are to be promptly settled by the DisCos, while the portion of the NBET invoices designated to be payable by FGN is to tentatively remain in the financial records of the DisCos, as a liability, until the sum is paid to the GenCos from the Central Bank of Nigeria (CBN)’s Payment Assurance Facility (the PAF) or other financing sources in the PSRP financing. Pending its settlement by FGN, the unpaid sum designated in the NBET invoice as payable by FGN shall not accrue any interest.
3. NBET must apportion the funds drawn from the funding sources in the PSRP financing Plan to the DisCos in accordance with the minimum remittance thresholds approved by the Commission; and issue credit notes to the DisCos, confirming the liability that has been defrayed (by FGN).
4. any unpaid portions of the NBET invoice that is not directly attributable to the tariff deficit shall be recovered by NBET through the DisCo payment guarantees.
5. Finally, the Order provides that settlement of NBET’s liability to the Central Bank of Nigeria (CBN) by the Federal Ministry of Finance, Budget and National Planning for the principal and interest on PAF and its supplementary funding under PAF-X is to have a commensurate impact on NBET’s associated indebtedness. Related News
Areas of uncertainty
Whilst the Order is a step in the right direction, in that it proffers what a appears to be a workable solution to the DisCos’ challenges in meeting their NBET remittance thresholds, there are as yet a number of grey areas; notably:
1. The Order focuses exclusively on NBET remittances, which represent just one of several other market remittances that the DisCos are required to make on a monthly basis. For example, the Order is silent on the treatment of Market Operator (MO) remittances, which, per the MRO, the DisCos are required to settle in full each month. Given that the MRO envisages that FGN intervention funds provided for under the PSRP will be applied to both NBET and MO invoices, to ensure their full settlement, the expectation was that the Order would treat all the remittances to the DisCos’ various creditors on a consolidated basis. Not only is the Order silent on the treatment of MO invoices, it also does not discuss any form of FGN intervention to support monthly remittances to other DisCo creditors, such as the CBN (under the CBN-NEMSF) facility on a consolidated basis.
2. The MRO provides that NERC will consider verified receivables from MDAs and the DisCos’ collection efficiency for MDAs in determining their compliance with their respective minimum remittance thresholds. However, the MRO does not provide clarity as to the manner in which these factors will be evaluated to excuse the non-attainment of minimum remittance thresholds by the DisCos; whether penalties will be waived, relaxed or postponed if the DisCos are able to demonstrate that their non-compliance was fully or partly as a result of MDA indebtedness.
The Order is also silent on this point, and in fact, it does not address the issue of MDA Debts at all. Critically, there is a lack of clarity as to what exactly would constitute the “unpaid tariff-related portion” of the NBET invoices which FGN is supposed to take responsibility for; and whether MDA Debts would qualify as liabilities falling within this category.
The Order is also silent on this point, and in fact, it does not address the issue of MDA Debts at all. Critically, there is a lack of clarity as to what exactly would constitute the “unpaid tariff-related portion” of the NBET invoices which FGN is supposed to take responsibility for; and whether MDA Debts would qualify as liabilities falling within this category.
3. The DisCos were required by the MRO to provide irrevocable standby letters of credit (SBLCs) which cover 3 months of invoiced payments from NBET and MO. In this wise, given that the SBLC’s currently provide payment security for the full NBET invoiced amounts (without a carve out for the “DisCo invoiced amounts” as distinct from the “FGN invoiced amounts”), there is some uncertainty as to whether NBET will be permitted to call on the SBLCs, in the event that FGN defaults in settling its portion of the NBET invoices as at when it falls due; which the current terms of the SBLC’s envisage. Although NBET’s right to enforce the SBLCs in such circumstances appears doubtful, given that the MRO varies the actual payment obligation of the DisCos so that it only covers their MRO remittance thresholds; the treatment and enforcement of the NBET SBLC’s henceforth will be interesting to observe.
4. The Order is silent on the implications (if any) of the new accounting regime on the Meter Assets Provider (MAP) scheme. If successfully implemented, the accounting regime prescribed by the Order, coupled with the tariff increment introduced by theMRO, will significantly improve the financial position of the DisCos, therefore making them more attractive to prospective investors (both debt and equity). As such, the DisCos may be better placed to meet their metering obligations independently; that is, without the support of MAPs.
5. Whilst the Order is envisaged to provide some comfort to the GenCos, and improve investor confidence in the generation subsector (in view of its guaranteee of full payments to NBET, and in turn the GenCos), there remains some uncertainty around the payment sources to be utilized in settling FGN’s portion of the NBET invoices. Notably, the only known PSRP funding source that has been established and utilized for this purpose is PAF, and the CBN has has a track record of delaying disbursements under the PAF facility.
Conclusion
The Order seeks to implement a critical aspect of the PSRP, in addressing the issues pertaining to the DisCo market remittances, which go to the heart of the current liquidity issues in the NESI. As previously observed, whilst there are a number of questions surrounding its implementation and practical implications, the Order certainly puts into motion the FGN’s commitment to bridge the funding gap created by the tariff shortfall, and is as such, a welcome development for not only the DisCos but also for the NESI as a whole.
This piece is from the legal firm of Olaniwun Ajayi.
