An overview of the potential effects of the Federal Government of Nigeria's declaration on customer eligibility in the Nigerian Electricity Supply Industry.

1. 1
Potential Effects of the Eligible Custom Declaration on the Nigerian Electricity Supply
Industry
The privatization of the Nigerian Electricity Supply Industry (“NESI”) as envisioned by the
Electric Power Sector Reform Act1
(“EPSRA”) is to meet the mandate of its antecedent
legislative enactments which is quite simply to provide electricity to Nigerians. Years of
insufficient investment and mismanagement have left the country susceptible to blackouts
despite huge financial outlays to meet underserved and unserved demand. The robust and
historically complex nature of the NESI is such that a multifaceted approach is required to
overcome the legislative and financial obstacles bedevilling the sector.
As part of progressive steps to transform the NESI into a more competitive market, the
Nigerian Electricity Regulatory Commission (“NERC” or “the Commission”) on the directive2
of the Honourable Minister of Power (“the Minister”) has issued the Eligible Customers
Regulations3
(“Regulations”) whereby Eligible Customers (“Customer” or “EC”) are permitted
to purchase power from a licensee other than electricity distribution companies (“DisCos”). The
Regulations recognize four classes of eligible customers;
a. A customer or group of end use customers registered with the Commission for the
purpose whose consumption is more than 2MWh/h over the course of one month, that
is connected to a metered 11kV or 33kV delivery point on the distribution network of a
distribution licensee under a distribution use of system agreement with such distribution
licensee for the connection and for the delivery of electrical energy;
b. A customer or group end use customers registered with the Commission for the
purpose, that is connected directly to a metered 132kV or 330kV delivery point on the
transmission network under a transmission use of system agreement for the connection
and for the delivery of electrical energy;
c. A customer or group of end-use customers registered with the Commission for the
purpose, whose consumption is more than 2 MWh/h iver the course of one month, that
is connected directly to a metered 33kV delivery point on the transmission network
under a transmission use of system agreement, and has entered into a bilateral agreement
for the construction, installation and operation of the distribution system used to
connect the customer to the 33kV delivery point, with the distribution licensee licensed
to operate in the location where the customer and the 33kV delivery point are located;
d. A customer or group of end-use customers registered with the Commission for the
purpose, whose consumption is more than 2 MWh/h over the course of one month, that
is directly connected through a metered delivery point, to the generation facility of a
generation licensee it intends to purchase electrical energy from and has entered into a
bilateral agreement for the construction, installation and operation of the distribution
system used to connect the customer to the generation facility with the distribution
licensee licensed to operate in the location where the generation facility and the customer
are located.
1
Electric Power Sector Reform Act 2005
2
Nigerian Electricity Regulatory Commission. (2017) FG Declares Eligibility in Power Sector [Press Release.]
Retrieved from http://www.nercng.org/index.php/media-library/press-releases/506-fg-declares-eligibility-in-
the-power-sector
3
Eligible Customer Regulations, NERC-R-111 (2017)

2. 2
Impact of the Regulations
By permitting the purchase of electricity from licensees other than DisCos, the
Regulations have brought EC’s closer to Generation Companies (“GenCos”) creating a
framework for them to transact directly. This has widened the dynamic of the electricity
value chain by creating a more competitive regime because electricity buyers are not
constrained to purchase from a single class of market providers. This has the potential to
divergently impact the various stakeholders with each benefit accruing to one possibly
posing negative ramifications for others.
An Opportunity for GenCos
The mutable and rigid remittance structure that exists between DisCos, GenCos and the
Nigerian Bulk Electricity Trading company (“NBET”) has resulted in a liquidity squeeze
that is an operational concern for all involved. Power generation by GenCos is sorely
constrained by the limited distribution networks of DisCos who are unable to meet their
financial obligations. DisCos have in turn blamed this on a myriad of issues ranging from
non-reflective tariffs, vandalism and low power generation among others. This equally
leaves NBET unable to make payments to GenCos. The declaration on EC’s is a
welcome development for GenCos as it allows them to supply power directly to Eligible
Customers thereby making them less reliant on the profitability of DisCos as well
providing a means to sell stranded power .
The Regulations provide for the pricing methodology to be used by GenCo’s and
Eligible Customers, which is expressly that in addition to capacity and energy charges
negotiated in the Power Purchase Agreement between the GenCo and the EC; the price
at which a market supplier delivers power to an Eligible Customer may include;
Transmission Use of System Charges 4
(“TUoS”) and Distribution Use of System
Charges5
(“DUoS”), regulatory fees, ancillary service charges and market administration
& system operation charges as may be approved by the Commission and in line with the
operative Tariff Methodology.
It remains to be seen what the pricing bracket will be after billing the applicable charges
and what effect that will have on the considerations of Eligible Customers who may not
be keen on paying exorbitant rates in addition to the possible transmission and
distribution cost likely to be incurred where there are added considerations for third
parties.
Concerns on new and stranded generation capacities
The possibility of GenCos prioritising their sale of electricity to EC’s is an
understandably valid consideration for DisCos and their end users. There may be
potential conflicts of interest where GenCos are more disposed to deal with customers
willing to pay a premium rather than to DisCos through NBET on the existing model
which is proving to be unreliable. As a solution, the regulations provide that any GenCo
seeking approval of its agreement with the EC shall provide evidence of excess capacity
4
Transmission Use of System charge to be paid to the Transmission Company of Nigeria (TCN) for the
transportation of electricity from generators to the local bulk supply point.
5
Distribution Use of System charge to be paid to the Distribution Licensee for the connection and delivery of
electrical energy. Use of System services is an electricity distribution network service provided to a user of the
distribution system for the transportation of electricity that can be reasonably allocated to a user on an
individual basis.

3. 3
over and above that contracted with NBET. This forestalls complexities that could arise
from conflicts of interest. This way, only GenCos capable of fulfilling their existing
generation obligations are permitted to sell to Eligible Customers.
Collection and Payment Issues
By transacting directly, GenCos run the risk of collection and payment disputes with
Customers who default on their financial responsibilities. The Regulations look to
mitigate this risk by ensuring that GenCos are not left financially exposed in their
dealings with EC’s. A requirement for determining the eligibility of customers is that
applicants shall post a letter of credit or bank guarantee in favour of the market operator
in accordance with the market rules6
to cover market administration charges, TUoS
charge and DUoS charge and other charges as may be approved by the Commission.
A new option for end users
The main purpose of the Regulations is to grant end users the permission to purchase
power from licensees other than DisCos. An understandably derivative concern of ECs
is how willing DisCos will be in granting access to their distribution networks when they
are primed to lose market share as a result of direct competition from GenCos and other
licensees trading electricity.
To forestall this, the Regulations ensure that Eligible customers are granted access to
transmission and distribution networks for the purpose of delivery of electricity pursuant
to the execution of the DUoS and or TUoS agreements signed with the Transmission
Company of Nigeria(where applicable). Where a network licensee unduly refuses to
allow third party access to an applicant, the Commission shall issue an Order granting
access and sanction the licensee for the denial.
This right to access is crucial to the success of the Regulations and this is recognised by
the institutional framework put in place to safeguard that right by stating that Customers
on application for third party access to a transmission or distribution network must be
provided a response within 30 days of the submission of their application and sanctions
the defaulting licensee where there is no basis for denial. This ensures sees that EC’s are
not unduly frustrated in their arrangements with GenCos or other trading licensees.
Competition transition charges
The Minister is empowered to further issue a directive7
for the collection of competition
transition charges from the EC. This raises additional issues of cost which have to be
borne by the Customer. Considering the rate at which GenCos will contract with EC’s, it
is left to see how competitive the billing system will be taking into account the additional
charges that ECs are set to incur in transmission and distribution costs.
6
Market Rules For Transitional and Medium Term Stages of the Nigerian Electricity Supply Industry (2014)
7
S28 EPSRA

4. 4
The ambiguity of the modalities and considerations of the Minister in issuing a directive
for the rates and collection of transition charges leave a degree of uncertainty as to the
fluctuation and stability of the rates at which Eligible Customers will contract.
Competition for DisCos
While the regulations are set to make the NESI more competitive and will affect the
market share of existing DisCos, their competitive advantages of scale, quasi monopoly
and early market entry ensures that they remain a key component in the electricity value
chain. ECs and GenCos are required to have a supplier of last resort when applying for
approval from the Commission.
A supplier of last resort shall act as the contingent supplier to an Eligible Customer in
the event of a failure by the contracted supplier. A Distribution Company shall act as
supplier of last resort to an Eligible Customer operating within its network coverage area
and the service shall be provided under a provisional arrangement at a price to be
mutually agreed by the contracting parties.
Potential for other market entrants
The existing regulations8
of the Commission allow it to issue a license to construct, own,
operate and maintain, or to procure the construction, operation and maintenance of an
independent distribution system in a designated geographical area within the area of
operations of the successor DisCos provided that the grant will maximise access to
electricity services and will reduce distribution congestion to the benefit of consumers.
Despite this provision, Independent Electricity Distribution Networks (“IEDN”) have
up until this provision, not had the opportunity to tap in to this market because they
have been unable to buy directly from GenCos. This represents an opportunity for
Independent Electricity Distribution Networks (“IEDN”) to purchase power directly
from GenCos as it paves the way for more collaborative investments for smaller
distribution companies.
What next for the NESI
The Declaration on Eligible Customers is a regulatory milestone that is poised to
stimulate the NESI by opening the sector to more stakeholders and invariably more
competition. However, to have the desired impact, it requires the Commission to be
more alive than ever towards its regulatory responsibilities so as to effectively hold to
account all industry stakeholders.
NERC’s difficulty in arresting the trend of under remittance by DisCos and sanctioning
defaulters does not set an encouraging precedent. If there is a similar lack of
accountability over access to networks for EC’s by DisCos, it will largely frustrate the
intentions of the Regulations. Considering the large electrical supply deficit that remains,
the Regulations are overall a positive step towards expanding the frontiers of the
8
Regulations for Independent Electricity Distribution Networks, Regulation No:0212 (2012)

5. 5
electricity supply value chain by opening up new areas of investment to supplement and
ultimately compete with traditionally more established stakeholders.
Emmanuel Anchaver – Associate
Nnaeto and Partners
No 3, Ziguinchor Street
Wuse Zone 4
Abuja, FCT
Phone: +234 092 912 320
Eanchaver@nnaeto.com