Post-Privatisation conflicts & disputes in Nigerian electricity supply industry
The frailties of the nascent Nigerian Electricity Supply Industry (NESI) is gradually coming to the fore with the recent lawsuit filed by the power generating companies (Gencos) against the Federal Government and the regulator Nigeria Electricity Regulatory Commission (NERC) alleging discriminatory practices and the ever looming threat of force majeure declaration by the successor distribution companies (Discos) in the face of increased or new regulation.
Conflicts and disputes and the need for re-negotiation of long-term energy contracts are not uncommon particularly where there is a dearth of institutions that can credibly enforce such contracts. In the electricity sector, this situation can be further exacerbated where the market design is inadequate or regulation is incomplete as can be said of the NESI. There is therefore need for the redesigning of the NESI to create robust institutional and regulatory framework that will stem the tide of conflicts and disputes and avoid the collapse of the sector.
Regulation in the electricity sector is usually complex both from a technical and economic stand point and for the NESI it is no different. The ongoing challenges of the NESI can be attributed to the fact that some aspects of the regulatory framework were either not in place at the time of privatization or lacked sufficient detail. This lack of clarity or omission have become potential sources of conflict and disputes amongst market participants in the NESI. Below are some of the areas of potential conflict and disputes.
Market Structure Issues
Eligible Customers: In 2017, The Federal Government issued a directive to the NERC permitting certain categories of customers (“Eligible Customers”) to purchase power directly from a licensee other than a Disco.
Following this directive the Discos issued notices of force majeure, claiming that the declaration was premature and inconsistent with the pre-conditions established by the EPSRA. They were also of the view that regulation and governance of the sector had become inconsistent.
Discrimination against Generating Companies: The successor Gencos recently filed a suit at the Federal High Court against the major institutions governing the sector including but not limited to the Federal Ministry of Power, Works and Housing (FMPWH), Nigerian Bulk Electricity Trading Company (NBET), Bureau of Public Enterprises (BPE), the Central Bank of Nigeria (CBN) and two new entrants to the NESI, Azura IPP and Accugas, alleging discriminatory practices based on the World Bank Partial Risk Guarantees (PRG) backed by a Federal Government sovereign guarantee granted to the new entrants. The PRG and sovereign guarantee ensures that the new participants are fully paid for services rendered to the NESI irrespective of ongoing market liquidity issues while, the NESI continues to owe debts to gas suppliers and Gencos who are paid irregularly and in an indeterminable manner.
Exclusivity of Concession Areas: The privatization of the Distcos was along geographical or franchise areas which hitherto the Distcos thought were exclusive to them. However with the introduction of the Eligible Customer regime, the regulator has categorically stated that the franchise areas are not exclusive and given that different regulatory treatment may be applicable (e.g. Eligible Customer Regime, Independent Distribution Network Operators and differential regulated prices) in the franchise areas, there exists the likelihood of conflicts and disputes amongst the participants operating in the franchise area.
Regulatory issues
Tarrifs: The NESI pricing framework is governed by the Multi-year-Tariff Order (MYTO) system introduced to set tariffs for consumers over a 15 year period (2008 – 2023). This system is to be subject to minor reviews twice a year based on factors such as the rate of inflation, gas prices, foreign exchange rates and daily generation capacity. Major reviews of the tariff system are to be conducted every five (5) years to reassess the methodology and add further inputs to the existing model.
Post privatization in 2014, there was a minor review based on the major changes in the variables used for tariff assessment. This resulted in the introduction of MYTO 2.1 for the period 2015 – 2018. Further amendment was made by NERC to MYTO 2.1 to increase the price of electricity by an average of 43 percent across all Discos franchises. Since its introduction in 2016, the amended MYTO Rule has remained unchanged despite the devaluation of the Naira which ordinarily should form the basis for a minor review. This potentially is an area of conflict and/or dispute for the Discos as it threatens the financial viability of the Discos.
Given the number of potential areas of conflict, the institutional framework for the prompt settlement of conflicts and dispute is required. The following are the institutions charged with conflict and dispute resolution for the NESI:
Conflict resolution institutions in NESI
NERC: Under the EPSRA, NERC is mandated to act as a quasi-judicial body to hear any dispute between market participants save for where the dispute relates to a question of law, which then has to be reserved for the decision of the High Court as is evident with the suit of the Gencos discussed above. In furtherance to this provision, and pursuant to the Market Rules, NERC has set up a Dispute Resolution Panel (DRP) made up of engineers, economists and legal practitioners to resolve disputes amongst market participants.
The DRP resolves disputes arising out of the operations of the Market Rules and the Grid Code between and amongst market participants in the NESI and the modes of dispute resolution employed includes mediation conciliation and arbitration. Whilst mediation and conciliation are effective in the resolution of conflicts in the NESI, a review of the ESPRA does not provide comfort as to arbitration being an effective tool for dispute resolution in the sector. It is not clear from the reading of s.49 and 50 of the Act whether or not a review of the final decision of an arbitral panel can be undertaken by the courts particularly, if the basis for the review ispremised on one of the grounds on which an arbitral award may be challenged under the Arbitration and Conciliation Act (i.e. allegation of fraud). Furthermore, it is also unclear how arbitral awards issued by a NERC appointed arbitral panel can be enforced particularly, where such awards have a monetary element without need for recourse to the courts.
High Court: The High court’s role in the resolution of disputes in NESI is meant to be supervisory to that of NERC allowing for market participants dissatisfied with NERC’s resolution of a matter on a point of law to approach the court for a review. The proceedings before the High Court are adversarial in nature allowing each litigant to lead evidence before a single judge.
The ESPRA does not stipulate whether the court with jurisdiction is the State High Court or the Federal High Court and neither is it clear under the ESPRA whether a right of appeal exists from the decision of the High court to the Court of Appeal and in turn the Supreme Court or whether the decision of the High Court in reviewing such point of law is final and binding on NERC and the participants. Disputes in the electricity sector are often extremely technical in nature, and therefore require an independent and well-trained judiciary to provide fair and technically balanced decisions. Nigerian judges may not be versed in economics or engineering and their formal education may be restricted to the field of law and any training in economics or engineering is likely to have been informal and thus limited. The lack of clarity in the law and the likely lack of knowledge of all the requisite components of the sector, coupled with the slow pace at which cases are processed and resolved, allows for opportunistic behavior by sector participants which ultimately leads to conflicts and disputes thereby creating an inefficient sector.
With the potential sources of conflicts and disputes and the weaknesses of conflict resolution institutions, there is a dire need to strengthen the institutional framework for the sector which is one of the objectives of the Power Sector Reform Programme (PSRP) that will hopefully ensure the swift resolution of disputes. To this end, the PSRP must address the limitations of the Nigerian Judicial System (duration in concluding matters and lack of adequate knowledge of the technicalities of the power sector) by designing and implementing entities (i.e. Conciliation & Arbitration Commissions) that can dispense with disputes and renegotiations in the sector within a reasonable time frame. These entities should be able to deal with contractual disputes between licencees and the government/regulator within a relatively short time frame. Membership of any conciliation commission should be limited to appointed members of the disputing parties with a jointly chosen third member as opposed to any imposed member by NERC. This would inhibit any incentive to renegotiate by the parties as any settlement reached would have been based on the agreement of the parties representatives. The Arbitration Commission’s award should be final and binding on the parties and not be subject to the possibility of a review by the High Court or Federal High Court. In addition, the membership of both conciliation and arbitration commissions must not overlap as the qualities required of members of each commission are markedly different.
In conclusion without the reformation of the institutional frameworks for conflict resolution in the NESI, the sector will continue to be beleaguered with the calls for renegotiation of contracts and disputes amongst market participants.
OLA ALOKOLARO works at Advocaat Law Practice. E-mail: ola.alokolaro@advocaat-law.com