Resolution of disputes in the power sector: Are there alternatives to achieving a win-win for the industry?

With the sporadic emanation of disputes in the power sector coupled with the infancy of the Nigerian legal system in handling the dynamics and intricacies of issues within the sector and the slow paced nature of litigation in Nigeria, the question that begs for thought is what other mechanism can be employed to effectively resolve disputes within the sector without compromising stakeholder interests?

Arriving at an answer first entails an understanding of the nature of disputes that arise within the power sector and then allocating the resolution of such disputes to the agency/institution best able to handle the dispute(s). This is a critical consideration as a lack of appropriate and tailored dispute resolution mechanisms in the sector will deter investments in the sector based on the legal and regulatory uncertainty that will ensue from the plethora of disputes plaguing the sector.

Disputes in the Nigerian Power Sector

Disputes in the power sector can best be described when viewed across the entire value chain based on the interplay of issues that cut across the value chain (Gas Supplier, Generation, Transmission, Distribution, End Users). The typical nature of disputes that arise in the power sector amongst the key participants starting from the lower end of the value chain includes:

Customers/End-Users

The biggest backlash from customers is resistance to any form of tariff increases especially given the low generation levels resulting in low power supply. The industry in recent times has witnessed an array of litigious claims instituted by customers of varying tariff classes. The impacts of these cases are dire for the industry in terms of the resulting financial implications for market participants. For example, the Manufacturers Association of Nigeria (MAN) having instituted an action against the Discos are paying the MYTO 2.1 tariffs as opposed to the MYTO 10 Year tariffs which are the tariffs that came into force from 1^st February, 2016. This has resulted in huge losses accruing to the Discos from that segment of Industrial Customers. Settlement talks have however been initiated between the Discos and MAN, however, key issues remain to be resolved.

Another contentious issue is with regard to metering which the Discos are mandated to undertake under the Performance Agreement. The CAPEX provisions in the MYTO is insufficient to enable Discos undertake metering within the stipulated timelines.

Distribution Companies (Discos)

Disco tariffs have in their view been far from cost reflective which in effect hinders their ability to meet their performance targets and their respective business objectives. For example, the MYTO projected generation is 5465MW. This level as projected is at variance with the average actual generation level which is 3632MW (3 months rolling average). The implication of this variance is that generation companies are unable to wheel enough power to the Discos who in turn are unable to earn their allowed revenue as stipulated in the MYTO which is turn affects their ability to settle market obligations and make the necessary investments required to meet key performance targets. This issue is further heightened by the removal of fixed charges with their revenues based solely on the charge they levy for the energy received which is difficult to collect from customers due to rampant energy theft, inadequate customer metering based on the insufficient CAPEX provisions in the MYTO, and payment resistance due to low power supply and frequent outages hinged on low generation levels among other factors. Discos have recently initiated a suit against NERC and NBET on several grounds including non-cost reflective tariffs and on the wider ground challenging the legality of the current Transitional Electricity Market (TEM).

Transmission Company of Nigeria (TCN)

Although TCN is still under government control, the main areas of contention as raised by the Discos and Gencos against TCN include- imbalance charges due to Discos, energy sent out by the Gencos and energy received by the Discos, network and system rehabilitation, etc.

Generation Companies (Gencos) and Gas Suppliers

The major contention raised by the Gencos is the monies owed by the Nigerian Bulk Electricity Trader (NBET) who are in turn owed by the Distribution Companies (Discos). Gencos are also faced with issues relating to gas shortages, lack of a cost reflective tariff hinged particularly on floating exchange rates that took effect following CBN’s directive as at the end of April. These sporadic rates are not reflected in the tariffs and the attendant costs cannot be passed down the value chain except via a tariff review. The Gencos have recently released several publications conveying their inability to continue bearing the accrued debt burden which currently stands at N156 billion and warning the general public of a likely imminent shut down.

Mechanisms of Resolving Power Sector Disputes

With the plethora and variety of disputes in the sector, how best can the disputes be resolved? It is important to state beforehand that parties must make all efforts to amicably resolve disputes on their own before resorting to employ dispute resolution mechanisms such as arbitration, mediation, conciliation, negotiation among others.

Dispute Resolution Offices (DRO)

The heart of every Discos business is hinged on interaction with customers with disputes occurring on a recurring basis based on the complaints raised by customers in line with Section 3(5) of the Customer Complaints Handling: Standards and Procedures Regulation (2006) which mandates that all complaints must be lodged firstly in writing with the Customer Complaints Unit of the Distribution Licensee. To maintain independence of the process and in order to leave room for the Discos to focus on their key objective of attaining loss reduction targets as stipulated in the Performance Agreement, It is critical for the Discos to create Dispute Resolution Offices and employ the services of reputable law firms who have a deep knowledge and understanding of the dynamics of the power sector to effectively handle, manage and arbitrate customer disputes that are not resolved via the customer service/complaints unit. This would provide customers with the assurance of fair hearing and resolution without the cost implication and complication of litigation. It will also ensure that the process is independent and ethical standards are maintained which if breached can be raised in line with Section 8(3)(a) of the Arbitration and Conciliation Act, Cap 18, Laws of the Federation of Nigeria, 2004.

Dispute Resolution Panel (DRP)

In line with Section 42.1.3 of the Market Rules, the DRP was constituted by NERC as part of the conditions precedent for the declaration of the Transitional Electricity Market (TEM) to resolve disputes among market participants in the sector. The Panel though constituted has not commenced the hearing and resolution of disputes.

Due to the infancy of the sector, it is questionable as to whether the constituted panel are well versed about the intricacies of the power sector especially as it relates to disputes between market participants to effectively resolve such disputes as they are submitted before the panel.

To overcome this hurdle, it is critical for the panel members to be provided with capacity building and technical assistance in order to bring them up to speed with the workings of the sector which is a prerequisite for their appointment according to Section 42.3.10(b) of the Market Rules. In the initial stages once proceedings commence, experts (local or foreign) can provide shadow guidance to the panel members and also review the decisions of the panel pending when they become fully acquainted with the issues surrounding the disputes between market participants.

NERC/Customer Complaints Forum

The Forum was set up by NERC to hear and resolve customer complaints in the operational area of every Disco by virtue of the Customer Complaints Handling: Standards and Procedures Regulation (2006). Though a commendable initiative at the time, several flaws exist with the constitution of the forum that if not properly addressed, will result in the initiation of complaints with the forum being a mere academic exercise without the effective resolution of disputes. Firstly, the constitution of the forum is fraught with issues. In line with Section 4(4)((i)-(v) of the Customer Complaints Regulation, the membership of the forum is as follows:

One representative of Industrial Customers to be nominated by the Manufacturers Association of Nigeria;
One representative of Commercial Customers to be nominated by the Nigerian Association of Chambers of Commerce, Industry, Mining and Agriculture;
One representative of Household Customers to be nominated by the Consumer Protection Council;
One representative of an NGO based in the Distribution Licensee’s operating area nominated by the Commission;
One nominee based in the Distribution Licensee’s operating area who has electrical engineering background nominated by the Commission.

In order to avoid possible conflicts of interest and enshrine independence, it is recommended that the constitution and nomination process of forum members be reviewed. With the current composition of the forum, it would be impossible for a forum member that falls within the customer class raising the complaint to be unbiased and absolutely independent in judgment. It is therefore important for the constitution of the forum to be made up of independent experts to instil confidence and trust in the process.

Furthermore, the appeal process within the Regulation throws up questions as to the regulators independence in light of the fact that complainants can appeal the decision of the forum to NERC based on the provisions of Sections 9(8) and 12 of the Regulation. It is critical for there to be an independent appeal process outside the NERC, the same agency that established the forum (Section 4 (1) of the Regulation).

Best Practice in resolving Power Sector Disputes

The effective resolution of disputes in the sector is critical for the survival of the industry. The highly technical nature of the sector creates the need for sector disputes to be carefully resolved by a panel of experts with significant understanding of the workings of the industry and expertise in employing alternative dispute resolution mechanisms. To bolster the existing mechanisms in place as highlighted, there is a need for capacity building and technical assistance to be sought and provided to existing members of the DRP and the Customer Complaints Forum. However, in order to ensure that customer complaints are sufficiently given fair hearing and satisfactory resolved as well as to maintain independence from the process, the Discos should consider outsourcing the resolution of customer disputes to firms that possess the requisite expertise and experience as a first line of action, leaving these Discos to focus on their key performance targets as enshrined in the Performance Agreement.

IVIE EHANMO

Ivie Ehanmo is a Senior Legal and Regulatory Consultant for Energy Markets and Rates Consultants (EMRC) (Formerly Mercados EMI).