Power, Insights

NERC Issues Order on the Transitional Accounting Treatment of Tariff Related Liabilities in the NESI as Part of Implementation of the PSRP

The Power Sector Recovery Program (PSRP) which was approved by the Federal Executive Council on the 22nd of March 2017 has as its program scope, the de-risking of the power sector for private investment through a comprehensive package of financial, operational, governance, and policy interventions. According to the PSRP, between February 2015 and December 2016, the market shortfall which is the amount owed by the Distribution Companies (DisCos) to the rest of the electricity market is estimated at NGN 476 billion, of which the tariff shortfall (deficits caused by tariffs lower than cost of service delivery) is estimated at NGN 420 billion.

The resultant effect is that the power sector as a whole is not financially viable and more so the Discos are neither attractive to the banks (considering most of them are yet to pay off the loans received from the banks to procure the PHCN assets) nor to private sector investors who should be pumping in much needed funds to improve service delivery, address infrastructure deficit and provide network rehabilitation which would invariably reduce ATC&C losses and address other inefficiencies. The poor financial status of the DisCos has made it impossible for them to make full payments to the Nigerian Bulk Electricity Trading Plc. (NBET) for energy received and to settle the invoices issued by the Market Operator (“MO”) under the relevant industry agreements. It is clear that unless the DisCos become viable, our power sector will continue its gradual decline to collapse.

In simple terms, the PSRP’s financial intervention fundamentally relies on utilizing public funds to subsidize power consumption by Nigerians until end-user tariffs become cost reflective. These funds are to be sourced from the Payment Assurance Facility (PFA) funded by the Central Bank of Nigeria (CBN), guaranteed by the Ministry of Finance and managed by NBET, additional NGN 927 billion through Federal Government budgetary contribution, and a US$1 billion World Bank Performance Based Loan (PBL).

Some of the areas of intervention provided for in the PSRP include commitment to fully-fund projected sector deficits due to tariff shortfall from 2017 until 2021, development of a Financing Plan to fully-fund the shortfall until tariffs attain cost recovery levels and support sector liquidity, clearing of historical deficits due to tariff shortfall as part of the Financing Plan, and clearing of historical Ministries Departments and Agencies of Government (MDA) debts, and the implementation of a payment mechanism for future electricity bills. According to the PSRP, NGN 40 billion (US$ 131.1 million) was included in the 2017 federal budget in order to settle some of the MDA outstanding arrears. CBN is to develop an MDA debt payment system whilst the Nigerian Electricity Regulatory Commission (NERC) is mandated to implement a mechanism for regular payment of future MDA electricity bills. Going forward, the DisCosare charged with the responsibility of metering and collection of tariffs from the MDAs regardless of stiff resistance that may be put up by certain of the MDAs.

As part of the ongoing implementation process, NERC recently issued the Order on the Transitional Accounting Treatment of Tariff Related Liabilities in the Financial Records of Participants in the Nigerian Electricity Supply Industry Order No. NERC/196/2020 dated 28th January 2020 (the “Order”)…





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