LEGAL ANALYSIS OF THE LAGOS STATE ELECTRICITY BILL 2024 – AN EXAMINATION OF THE NOTABLE PROVISIONS, OPPORTUNITIES AND THREATS INHERENT FROM THE DISTRIBUTION VALUE CHAIN STANDPOINT.
Introduction
With the passage of the Electricity Act, 2023 (as amended) [the “Act”] and the amendment of the 1999 Constitution of the Federal Republic of Nigeria, the opportunity to create State Electricity Market (“SEM”) became pronounced. In line with this, States have resorted to enacting their respective electricity laws, paving way for the creation of their respective SEM. The Lagos State has also commenced the process to form its SEM. It has done so by developing the State Electricity Bill (the “Bill”) and has progressed with the legislative process to ensure that the Bill becomes Law.
Given the notable role that Distribution Companies (“DisCos”) play in the Nigerian Electricity Supply Industry, the need to appraise the notable provisions of the Bill as well as identify the opportunities and threats inherent is paramount.
The below therefore gives an insight on the notable provisions of the Bill, as well as an appraisal of the opportunities and threats inherent.
Notable Provisions
a. Preservation of the Term of License of Existing Licensees
The Bill has acknowledged the need to ensure consistency in the electricity market despite that it seeks to create the Lagos State electricity market. As such, rather than compelling existing licensees to re-apply for new licenses under the SEM, the Bill has recognised that the subsisting term of license of existing licensees will be preserved. However, there may be a need for existing licensees to undergo certain registration process that will be set up by the State Electricity Regulatory Commission (“SERC”). Further, any renewal of the license will be under the terms of the SERC rules.
The foregoing underscores the certainty that the Bill seeks to preserve and assure investors of the unlikelihood of any disruption to their investment projection, in terms of the guaranteed number of years expected to remain in business.
Accordingly, it is expected that the entity that will assume the functions of a successor DisCo after the transition as contemplated by the Act will retain the remaining term of years existing under the said DisCos’ license.
b. Preservation of Existing Laws Guiding the Licenses of Existing Licensees.
As is applicable to the term of years, the Bill has shown similar understanding regarding ensuring that the rules and regulations applicable to existing licensees whose license terms subsists is preserved. As such, rather than applying the rules and regulations made by the SERC to existing licensees, the Nigerian Electricity Regulatory Commission’s (“NERC”) rules and regulations will continue to apply until the expiration of the license term of years of such licensee. In this regard, the SERC will be deemed to have adopted those rules and regulations as having full force and effect under the SEM.
This therefore provides some level of comfort to investors regarding certainty in the legal and regulatory function in the SEM in the short to midterm. Consequently, the new entity that will assume a successor DisCos’ function as a distribution licensee will operate under the NERC rules until the subsisting term of the distribution license lapses.
c. Preservation of Tariff Mechanism and Applicable Tariff
The Bill has also ensured that investors revenue projection is not disturbed by recognising that existing tariff mechanism and the applicable tariff occurring under the NERC dispensation will be preserved.
What this has done, especially for successor DisCos, is to eliminate concerns regarding a possible decline in revenue that may be associated with any change in the tariff mechanism to be introduced by the SERC.
d. Robust Scope in Electricity Offences
As against what is obtainable in the Act, the Bill has curated a plethora of activities and practices, which hitherto now were not codified as offences under electricity statute books.
Under the Bill, practices such as tampering of meters, vandalism, refusal to be metered, tampering of distribution infrastructure, illegal use of electricity, theft of electricity materials (whether by an individual or a corporate entity) have been recognised as offences. This will ultimately assure DisCos of an immediate judicial recourse to deter infringing practices that has continued to ravage their network and impede the growth of the bottom line.
e. Establishment of the Host Community Development Fund
Like what is obtainable under the Act, the Bill did also recognise the creation of a Host Community Development Fund (“Fund”) to cater for development needs in host communities where power generation companies operate. In the Bill, power generation companies are to set aside two percent (2%) of their annual operating revenue as contribution to the Fund.
While this provision has no direct impact on DisCos, from an investor standpoint, especially where power generation activities is sought to be explored by affiliates of DisCos, it becomes crucial to consider the impact this provision will have on the bottom line of the Company. It is also good to mention that the application of this levy may correspondingly lead to increased tariff given the need to recover increased cost of doing business.
f. Requirement for Consent to Transfer or Acquire License or Merge with another Licensee.
The Bill has towed similar path as the Act to recognise that the transfer of license of a utility or the acquisition of the license of a utility by another licensee or the merger of licensees must require the prior approval of the Commission.
This provision, which appears to be standard practice, seeks to emphasise the regulatory prowess of the SERC to enforce market discipline and ensure fair competition. What is however missing is that the Bill did not specify any requirements to be fulfilled by a licensee seeking to undertake the stated activities requiring consent. This is to guard against exerting regulatory indiscretions when licensees or entities make these applications. While a regulation or guideline will close this gap, it is important for the SERC to have the same in place to provide the desired comfort to investors.
Further, it is important to highlight that the Bill recognises that licensees may choose to undertake varying licensed activities in the SEM. Where this is the case, the Bill acknowledges the powers of the SERC to direct licensees to restructure their business into segments to clearly delineate the respective business lines. In our opinion, this accord with best practices, especially from an accounting standpoint to assure that co-mingling of resources is hugely eliminated.
g. Enforcement for Likely Contravention
The Bill appears to have assumed the constitutional principles regarding enforcing fundamental rights of citizens. Under the Bill, where the SERC believes that there is a likelihood to contravene the conditions of a license term, a rule, regulation, code, directives or any law, it could deploy certain measures to compel compliance including directing the doing of certain actions, putting a security in place and ultimately, imposing a penalty.
It is expected that where the Bill is made a law, the SERC will from time to time utilise this provision to compel the doing of certain acts by a licensee, a DisCo or the eventual subsidiary of the DisCo as the test of the likelihood of a breach occurring is discretionary to the Commission.
h. Supply of Electricity without a Meter
The Bill envisages that supplying electricity without a meter will be deemed an offence. As such, where a DisCo or a supply licensee supply electricity without a meter, a penalty as fixed by the Bill becomes applicable.
The import of this is that DisCos can capitalize on this provision to intensify the metering of customers so as not to be indicted by this stipulation. Specifically, DisCos can take advantage of the current metering roll out project to hugely bridge the gap that currently exists in metering and very well avoid the sanctions this provision portends.
i. Restriction on use of Distribution Infrastructure by Third Parties
Despite that the ownership of electrical assets would ordinarily reside with a licensee, the Bill has recognised that the use of the same by third parties in terms of leasing, franchising, license to use or of such other nature would require the consent of the SERC.
While it is understood that the SERC would need to ensure that business objectives of licensees do not impact on their ability to perform their core obligation, it would appear as though a request to seek approval for those transactions, especially the license to use the infrastructure is an overstretch of regulatory functions – dictating how and when licensee should conduct its business.
It is therefore crucial, particularly if the wording is retained in the Law as is, that the Commission finds a balance by adopting the reasonability and expediency approach in ensuring that these applications are not unnecessarily declined or delayed.
Opportunities
a. Exclusivity of License
Despite acknowledging the non-existence of exclusivity, in certain circumstance, an exclusive license can be granted to a licensee. The Bill recognises the grant of an exclusive license for a period five (5) years provided that a public consultation is done and the licensee requiring the exclusivity satisfies the SERC that the exclusivity is in the interest of the public.
While these pre-conditions may appear herculean, there is a huge opportunity prevalent especially considering the array of underserved and unserved areas in Nigeria. Collaborating with these cluster of communities or areas to deploy targeted energy solutions will, in our opinion, serve as a foundation towards satisfying this condition and compel the SERC to grant an exclusive license to operate the licensed activity requested.
b. Opportunity to Incorporate a Subsidiary to undertake Supply License Activities
The Bill has recognised that existing DisCos will, after the transfer scheme has been implemented by the SERC, transfer those aspect of their activities which a supply licensee should undertake to a subsidiary that will assume the functions of a supply licensee. The transfer scheme is expected to be put in place within 18 months of the passage of the Bill to a Law. While the Bill is not entirely clear on whether it is the DisCo that will incorporate the subsidiary, it is our opinion that the use of the term subsidiary denotes that there must be a holding company and, in this instance, especially considering the nature of the distribution business and the language of the Bill, it would be the existing DisCo that will incorporate a subsidiary.
Where the foregoing is the case, there is an opportunity and a huge incentive for investors to incorporate the said subsidiary that will assume the functions of a supply licensee. This will further enable investors strengthen operations to ensure that any perceived threat that is envisaged as a result of the disaggregation of the distribution licensee’s function is mitigated.
To this end, DisCos can rightly position itself by preparing structures to see to the streamlining of their operations to incorporate the supply licensee business through a subsidiary.
c. Opportunity to expand Bilateral Transactions with Customers
The Bill has catered for situations where licensees can enter contracts for the supply of electricity on terms agreed on a bilateral basis, even though the price is above the regulated tariff. As such, it becomes very open for distribution and or supply licensees to enter such contracts to ensure efficiency of service and charge a premium.
Despite this opportunity, the approval of the SERC will be required. However, we do not expect that the SERC will be unwilling to approve a transaction anchored on providing reliable and efficient service in consideration for charging a premium, especially when the parties agree.
d. Franchising and Renewable Opportunities
Part of the fulcrum for the Bill is to encourage and promote renewable energy opportunities. As such, the Bill has recognised the creation of an agency that will drive the renewable energy initiative of Lagos State and as well create an enabling environment for investors to consider deploying renewable energy solution to further deepen energy access.
In addition, franchising opportunities have now been statutorily recognised. This also presents another opportunity for licensees and investors to explore in driving efficiency of service to customers. DisCos can as well explore these frameworks in its expansion plans.
Threats
a. Revocation of License of Failing Licensee
As part of its tools to ensure performance, the Bill has recognised that the SERC shall have the powers to revoke the license of failing licensees where (i) the licensee is unable to discharge its obligations (ii) there is a prolonged default of the obligation of the licensee (iii) the licensee is plagued by a protracted management crisis that it has become detrimental to shareholders, consumers and the interest of the licensee (iv) the licensee has insufficient asset to cover its liabilities and there is an imminent risk of receivership.
While these conditions are disjunctive, it appears that certain conditions, particularly (ii), (iii) leaves a room of discretion for the SERC. Given the severity of the actions that is available for the SERC to exercise in this regard, it becomes crucial that an objective test is put in place to ensure that licensees, including DisCos are guided and that there is clarity. Nonetheless, licensees can take comfort in the fact that prior to revoking a license, the SERC will have to follow the procedure stated in the Bill which will include issuing notice and allowing the licensee to make a representation.
b. Non-Exclusivity of License
It has been made abundantly glaring in the Bill that the SERC can grant a license to two or more entities within a given area to eliminate monopoly and drive competition. While the intention for this provision is understood, it would seem as though that there may be an apparent conflict in the application of the provisions, especially with respect to existing licensees, including DisCos.
The basis for this conflict is in the preservation of existing laws, codes, rules and regulations that had hitherto to the Bill, applied to existing licensees. As of date, despite that the terms of license of distribution companies did not recognise the license as exclusive, certain measures exists to ensure that in areas where DisCos operate, another licensee is not allowed to operate there so as not to frustrate the existing investment.
Clearly, the Bill has not taken the foregoing into account and the same would be inimical to investment of existing licensees if the measures which NERC considers in granting a license within an area is not followed.
While the document remains a Bill, it is expected that this concern will be cured in the licensing regulations to be issued by the SERC.
c. Disaggregation of Distribution License
The Bill envisages that at some point, the portfolio of distribution licensees will exclude the supply of electricity to domestic and non-domestic customers, billing and collections. These functions will now be carried out by a new entity to be licensed – the supply licensee.
Whilst this provision is also notable in the Act, it remains a threat to distribution licensees as it alters the status quo upon which the business is currently run. Of mention is the fact that successor distribution companies have pending market and financial obligations which are all premised on the current market design and their ability to earn revenue that caters for these obligations. Arrogating those functions to a supply licensee without correspondingly attributing the portion of the liability covering the aspect of the supply licensee’s function to supply licensee would alter the status quo.
Even though it may seem that the transfer scheme to be implemented for the devolvement of the identified functions of the distribution licensee to the supply licensee should cater for this, there still appears to be some sort of uncertainty as a clear structure has not been shown to be in place to resolve any difficulties that should surface.
d. Limitation of Action Against the SERC or an Agency established under the Bill
It is now a requirement to not only issue 30 days pre-action notice of an intention to institute an action against the SERC or an agency created under the Bill, but also to ensure that the said action is brought within a twelve (12) months period otherwise the subject suit will be statute barred.
Given that this is a mandatory stipulation, the need to ensure that any cause of action against the SERC or an agency is brought within the stated timeline is indeed crucial.
Conclusion
Whilst it is largely agreed that the operation of a state electricity market will bring about new methods in the operationalisation of the Nigerian Electricity Supply Industry, particularly from the standpoint of DisCos operating in Lagos State and potential investors, it becomes crucial keenly explore the opportunities and threats discussed and deploy strategies on how to explore and mitigate them respectively.