Operators accuse regulator of crossing from oversight into business management as commission defends move to boost network investment
Electricity distribution companies (DisCos) have kicked against a new regulatory directive issued by the Nigerian Electricity Regulatory Commission (NERC), arguing that the order places their internally generated revenues under excessive regulatory control and undermines the independence of their corporate decision-making structures.
The controversy follows the implementation of NERC Order No. NERC/2026/062, which took effect on July 1, 2026, requiring electricity distribution companies to create dedicated Capital Expenditure (CapEx) Provision Accounts and channel significant portions of their residual revenues into those accounts after settling market obligations and administrative expenses.
While NERC said the directive was introduced to strengthen investment in distribution infrastructure, improve electricity supply reliability and enforce financial discipline within the Nigerian Electricity Supply Industry (NESI), operators insist that the measure goes beyond regulation and amounts to direct interference in how privately owned companies manage their finances.
Under the new arrangement, DisCos without outstanding market debts are required to transfer 70 per cent of their earned non-administrative operating expenditure into the dedicated CapEx Provision Account, leaving them with 30 per cent for operational needs.
For companies with outstanding obligations to upstream market participants, the allocation structure is even tighter. The order directs such DisCos to pay 25 per cent of residual revenue to the Nigerian Bulk Electricity Trading Plc (NBET) towards outstanding obligations, another 25 per cent to the Market Operator (MO), 35 per cent into the CapEx Provision Account, and retain only 15 per cent for their own operational requirements.
The directive further provides that where a DisCo owes only one of the two market institutions, the portion that would have gone to the other institution must also be transferred into the CapEx account.
A senior utility official who spoke on the development said the arrangement effectively limits the financial freedom of distribution companies.
“NERC is, in effect, taking control of how DisCos spend their surplus revenue. The Order leaves a DisCo with market debts only 15 per cent of residual revenue for its own operations and even a DisCo without debts retains only 30 per cent. Everything else is either owed to market participants or locked in a NERC-controlled account,” the utility executive said.
Regulator insists measure is aimed at improving electricity infrastructure
NERC, however, maintained that the order was necessary because of the persistent investment challenges confronting the distribution segment of the power sector.
The commission said its review of DisCos’ utilisation of earned non-administrative operating expenditure during the 2025 market cycle showed that some companies were able to generate sufficient revenues to cover administrative costs and recover portions of approved tariff components, despite challenges in meeting upstream payment obligations.
According to the regulator, the inability of many DisCos to access adequate external financing made it necessary to ensure that available funds were directed towards critical network rehabilitation, expansion and reliability improvements.
NERC said the directive was backed by Sections 34(1) and 116(2) of the Electricity Act, 2023, which empower the commission to promote an efficient electricity industry, ensure optimal utilisation of sector resources and support prudent investment.
The commission added that the order would support capital investment commitments contained in tariff approvals, accelerate feeder rehabilitation programmes and complement ongoing initiatives such as the World Bank-backed Distribution Sector Recovery Programme (DISREP) and the Presidential Metering Initiative (PMI).
DisCos accuse NERC of assuming management responsibilities
Despite the regulator’s explanation, operators argue that the commission has moved beyond its legitimate oversight responsibilities by determining how companies should allocate and spend their earnings.
One northern-based distribution company described the order as an attempt by NERC to assume responsibilities reserved for company boards and management teams.
“This Order does not regulate; it manages, it assumes control and takes over the role of the boards of DisCos. There is a fundamental difference. By mandating exactly where a DisCo’s earned revenue must go, in what percentages, into what specific accounts, and with regulatory approval required before a single naira of it can be spent, NERC has stepped out of its regulatory role and into the role of a financial controller of private companies,” the company stated.
The operator argued that while regulators have the authority to establish performance obligations, they should not determine the internal financial decisions of privately owned businesses.
“It is not enforcing rules; it is making operational and financial decisions that belong to the boards and management teams of privately owned companies. The DisCos were privatised. Their revenues are private earnings, not public funds held in trust for NERC.
“A regulator can say, ‘you must invest X amount in your network’; that is a performance obligation, which is legitimate regulation.
“But a regulator that says, ‘we will decide which account your money sits in, and you must ask us for permission before you spend it,’ has crossed from regulation into administration of the business,” the company added.
Concerns over investor confidence and possible regulatory interference
Some operators also warned that the approval process introduced by the order could discourage investors and create opportunities for unnecessary interference in commercial decisions.
The order requires funds placed in the CapEx Provision Account to be used only for NERC-approved Performance Improvement Plan (PIP) projects.
Before accessing the funds, DisCos must obtain a “No Objection” approval from the commission for eligible projects, receive additional clearance before awarding contracts and secure further approval before each payment milestone during project implementation.
A utility stakeholder warned that the arrangement could create new challenges for investors and contractors.
“Moreover, not only will the new order serve as a deterrent to investors by attempting to get involved in the award of contracts, but NERC is clearly opening the door to rent-seeking, because contractors will simply flood their offices to influence who gets what job in the DisCos,” the stakeholder said.
Another operator questioned whether the directive was connected to changes in regulatory authority following the implementation of the Electricity Act, 2023, which allows states to establish their own electricity regulatory frameworks.
“This to us appears more like a power grab by NERC, which has been forced to devolve a lot of its powers to state electricity regulatory agencies since the passage of the Electricity Act, 2023. Otherwise, how can this be explained?” another DisCo asked.
Operators highlight financial risks
Stakeholders within the sector warned that restricting between 70 per cent and 85 per cent of residual revenues could weaken the ability of distribution companies to respond quickly to emergencies, manage cash flow pressures and secure commercial financing.
One DisCo argued that the directive creates uncertainty for lenders and investors because surplus revenues would effectively become inaccessible without regulatory approval.
“First, NERC substitutes its judgment for the DisCo board’s on how earned revenue should be deployed. That is a governance function, not a regulatory one. Boards of Directors (not regulators) decide how companies allocate their financial resources, subject to their legal obligations.
“Second, it bypasses the enforcement mechanism that already exists. If a DisCo is not investing sufficiently in its network, NERC has tools available such as licence conditions requiring specific investment levels, performance improvement plans with consequences for non-compliance, and ultimately licence suspension or revocation. Those are regulatory tools. Pre-approving every CapEx disbursement is not.
“Third, it creates a perverse incentive. By locking up 70 per cent to 85 per cent of residual revenue in a tightly controlled account, NERC has ensured that DisCos will have even less financial flexibility to respond to operational emergencies, manage their balance sheets, or attract private financing,” the company said.
The operator added that the policy could undermine the investment climate the power sector urgently needs.
“Lenders and investors looking at a DisCo whose surplus cash is sequestered by a regulator will price that risk accordingly or walk away. The Order may actually worsen the very investment problem it is trying to solve.
“In short, NERC has confused the symptom by taking control of that revenue directly. A regulator that manages the businesses it regulates has lost the plot of what regulation is for.
“And in a sector where the urgent need is to attract private capital and institutional confidence, a regulator that behaves like a parent doling out pocket money to children it does not trust will achieve exactly the opposite of what Nigeria’s electricity market needs,” the utility stated.
Debt reconciliation and legal questions emerge
Beyond revenue allocation concerns, the NERC order also directs DisCos with outstanding upstream obligations to complete reconciliation exercises with NBET and the Market Operator within 180 days and agree on repayment plans subject to commission approval.
However, some stakeholders have questioned whether adequate consultation was conducted before the order was issued.
They cited provisions of Section 48(1) of the Electricity Act and Sections 7(3) and 24 of NERC’s Business Rules, which they argue require consultation with affected licensees, stakeholders or members of the public before decisions with significant operational consequences are implemented.
The dispute now places the regulator and electricity distribution companies at another point of tension over the balance between ensuring accountability in the power sector and preserving the commercial independence of privately owned operators.