NIGERIA’S CONSTITUTIONAL AMENDMENT AND ITS ELECTRICITY DISTRIBUTION MARKET: AN INTRODUCTION OF ENERGY MARKET COMPETITION OR ANOTHER LOOMING ELECTRICITY CRISIS?
The current constitutional amendment has been heralded as a solution to many of Nigeria’s challenges and a step closer to becoming a true Federal State. However, some others are mindful and demand the need for an overhaul of the entire Nigerian Constitution. Irrespective of the divide, we all agree that the current amendment makes for new, intriguing and interesting discussions, realities as well as challenges.
For the Nigerian energy market players, participants and analysts, the proposed amendment to delist “electricity distribution operation in areas not covered from the national grid system within the State” from the Exclusive legislative list is a major highlight of the amendment. Hitherto, the licensing regime of electricity distributors was under the concurrent legislative list, which consist of areas that both the Federal and State government can regulate either via law or policy however, the State government is only permitted to operate within areas not covered by the national grid system. In furtherance of this, the FG had the sole right to license electricity distribution companies (DisCos) to operate within designated franchise areas in Nigeria. The implication of this is that only the licensees were permitted to operate electricity distribution operation within the franchise areas with little to no input from the host State. Subject to a few statutory exceptions such as the eligible customers provided for under the Electric Power Sector Reform Act (ESPRA, 2005), distribution companies have acted as sole electricity suppliers within States.
Expanding the scope of DisCos in the concurrent legislative list to include State involvement even in areas covered by the national grid introduces interesting legal, economic and political implications for the existing electricity distribution licensees, regulators, consumers as well as Government at all levels. The amendment introduces a potential competition law mechanism, considering that State Governments can now license new electricity distribution operators, what then happens to the existing license holders? Would this be a breach of their license rights? Does this introduction of competition portend well for consumers and potential investors?
Electricity market investment along the value chain are increasingly capital intensive and require a substantial sunk cost that often times require a monopoly market to operate efficiently. The idea is that investors need to recoup these costs and the most effective way to do this is via a monopolistic electricity market. Backing the rationale behind assigning multiple States to individual DisCos; with the exemption of Lagos, to allow for wider coverage over large operational zones and consequentially higher electricity rent. While this system is not without its peculiar challenges; ATC&C losses, energy theft, obsolete electricity transmission networks amongst others, practicability dictates that a monopoly was the most cost-reflective system. The idea is that monopoly would help to recover cost substantially and ensure security of supply.
This means, while the Federal government-backed market monopoly allows players to effectively recover sunk cost, the introduction of competition through the constitutional amendment would diminish these gains and further obfuscate an already plagued sector. It would be the argument of the DisCos and a fair one too. However, from a consumer perspective, competition would be a welcome addition for the electricity market, particularly given the current lack of innovation, metering deficit, collection losses and poor customer relations that bedevil the DisCos. The idea of additional investment in the market would stir up the attention of any Nigerian consumer. Nonetheless, the implication of the constitutional amendment could be farther reaching than that. State Governments would be empowered to issue license to new market entrants within franchise areas designated to the existing DisCos. Few have argued that this would amount to a breach of the rights of the current DisCos under the current licensing regime and would potentially lead to multiple litigation with multifaceted implication for Nigerians. Possibly, this might not be the case, the DisCos should get re-licensed under new parameters laid down by State legislation and regulators. State governors that tune into the commercial potentials of a State licensing authority for electricity distribution markets would create more revenue and score high political goodwill due to the dearth of power supply in Nigeria. The relationship between DisCos and State Governments could be re-negotiated to include better services while promoting higher energy investments and localizing the much-touted Service Level Agreement (SLAs) for efficient electricity distribution operations. But as most would come to learn, there is a greater financial and policy price to pay to ensure this.
Inversely, this might only provide temporary succor for agitated investors because constitutionally, unless an exclusive operation agreement is made with State government, nothing hinders the licensing of competitors within the franchise areas. The EPSRA all but impliedly permits this by the provision of third-party access obligations (TPA) on distribution companies. Third-party access rights are simply put, rights of new market entrants and competitors to use the electricity network, infrastructure of existing market players. Existing market operators that have undertaken the built the energy infrastructure are obliged to create a schedule that clearly shows how they intend to permit their competitors to use their energy infrastructure subject to the approval of the Regulator. This commitment is borrowed from the European Union single internal energy market Directives, Regulations and Policies aimed at promoting competition within the EU electricity industry. However, the need for DisCos to recover sunk cost makes this statutory provision highly undesirable. This amendment could not have come at a worse time for them. The core-investors only recently took over distribution assets in 2013 and in that time, they have been plagued with a force majeure financial year in 2018, frequent regulatory and policy summersault, habitual threats of license revocation, the self-inflicted forex crunch, never-ending energy losses and theft, the fiscal implications of covid-19 as well as this amendment. At the moment, investing in Nigeria’s electricity distribution market could not be more unattractive for potential investors.
In any case, the doctrine of covering the field would come to the fore in this looming debate. The Doctrine of covering the field is a constitutional law principle which is usually manifest in Federal systems of government, where there is conflict between a Federal and State legislation and an inconsistency arises, the Federal legislation shall prevail (Section 4(5) CFRN. It is noteworthy that the Federal legislation is required to fully cover the subject matter or sector involved. A partial legislative coverage would not nullify a State enactment and would not be in breach of this doctrine. This provides an interesting dimension to this constitutional amendment, since the electricity distribution market licensing is exhaustively covered by Federal law (EPSRA) there is an argument to be had that a State licensing regime is completely unnecessary. This presents for a groundbreaking constitutional debate, reminiscent of the A.G Federal Republic of Nigeria v. A.G Abia State and capable of having the most significance in the history of Nigeria’s electricity distribution market.