The finalization and the issuance of the Uniform System of Accounts Regulations 2018 (USofA) is the latest item of regulatory intervention from the Nigerian Electricity Regulatory Commission (NERC). The Nigerian Electricity Supply Industry (NESI) is facing unprecedented levels of regulatory oversight. Understandably, regulators are keen on standardizing the sector. As a result, licensees are facing tremendous regulatory and public scrutiny and pressure to streamline operations, modernize infrastructure, increase efficiency, and reduce costs. It appears that this trend of succeeding regulatory interventions will intensify in the short term. Without a defined, well-structured and well-managed regulatory compliance program, legal and regulatory compliance costs of DisCos and GenCos will significantly increase over the next few years and they may have to devote a greater percentage of their net income to compliance and regulatory fines.
In sum, the primary objective of the USofA is to require licensees in the business of power generation, power transmission, system operations, distribution and electricity trading (Licensees) to now maintain their books and records in line with the standards prescribed in the USofA. The USofA prescribes basic account descriptions, instructions, and accounting definitions and classifications that are useful in understanding the information reported by Licensees and also, in achieving uniform accounting records.
The issuance of the USofA is in line with global best practices in utilities regulation and definitely a welcome development for the NESI. For the NERC, the USofA will facilitate planning and timely decision-making as large amounts of financial data will now be processed with greater ease and speed. On the basis that every regulatory decision suggests an underlying accounting treatment, we expect that the USofA should also engender, transparency, rate setting fairness and comparability.
The reality on the industry side, however, is that, in addition to market and credit risk that Licensees are constantly managing, Licensees also face an increased burden of managing legal risk and complying with a myriad of regulations. DisCos, particularly, have a peculiar exposure to litigation risk and we estimate that the current exposure to litigation risk will subsist for the foreseeable future. It also doesn’t help that Licensees typically require significant upfront investments, which may often go hand in hand with, equally a degree of uncertainty about long term outcomes. On this basis, it should be strategic for Licensees to move beyond the traditional approach to legal and compliance risk management, with a view to bringing regulatory compliance exposures within reasonable confines.
Looking ahead, we believe Licensees will need to focus on the following areas, in order to manage regulatory compliance and legal risk exposures more efficiently in a fast-paced regulatory environment:
The need to implement a robust regulatory compliance framework which leverages technology and ditches manual processes and incremental responses. Licensees need to put in place systems and organizational structures that are scalable to evolving regulatory requirements;
The need to be proactive by anticipating regulatory trends and regulatory mandates. Licensees need to pay more attention to emerging developments in the global utilities industry as local regulation tend to following the trajectory in more developed markets;
The need to undertake a critical assessment of existing relationships with compliance and legal service providers to determine degree and scope of value addition vis-à-vis the burden of such engagement for the balance sheet of Licensees; and
The need explore opportunities to create value out of ongoing regulatory hurdles by fostering a more collaborative engagement with regulators, which entail that regulators are fully aware of the business issues that underpin operational, market and credit risk in the industry. Licensees need to engage early and more constructively with a view to retaining the best interests of regulators and forestalling the enactment of anti-market regulations.
Please reach out to us on firstname.lastname@example.org, if you require clarification on this update or if you wish to receive a copy of the USofA Regulations.