By: Mohamed Nabil Hazzaa

Keywords: Infrastructure & Power, Banking & Finance

The Executive Regulation of the Electricity Law is out giving more details and clarifications to the new electricity regime introduced last year. The Minister of Electricity & Renewable Energy issued the Executive Regulation 230/2016 (the “Executive Regulation“) of the recent Electricity Law 87/2015. It yields further details to the principles, procedures, and documentations stated in the law.

Generally, the Executive Regulation does not introduce much that is new. It simply clarifies, amplifies, and elucidates the new electricity regime that is introduced by the Electricity Law and by various regulations issued by the Egyptian Electric Utility & Consumer Protection Regulatory Agency (known as “EERA“).

The main areas where the Executive Regulation provides detailed rules are:

• The rules governing the determination of the tariffs, prices, and fees paid by various electricity players for various types of activities and services.
• The licensing regime for generation and distribution of electricity.
• The dispute settlement committee.
• The steps leading to the sovereign guarantee issued to investors in the electricity field.

It is this last area that we find of particular significance to the financing involved in electricity projects. We set out below an analysis of this topic. If you would like more information as to some of the main rules introduced by the Executive Regulation in relation to (A) fees & tariffs, (B) licensing, (C) dispute resolution, or (D) the overlap between distributors, scroll below and press more.

More Complication to the Issue of Sovereign Guarantee?

The Background:

• Following a serious of legislative changes and the reorganization of the electricity utility by the conversion of the Egyptian Electricity Authority (“EEA“) into a holding company under the name of the Egyptian Electricity Holding Company (“EEHC“), the Central Bank of Egypt (“CBE“) could no longer guarantee EEHC’s power off-take obligations.
• Accordingly, Law 14/2013 (the “MoF Guarantee Law”) was promulgated. It gives the Minister of Finance (acting on behalf of the government) the authority to guarantee the obligations of EEHC and its subsidiaries in relation to projects that it awards to the private sector or executes in partnership with the private sector. However, with the promulgation of the new Electricity Law, EETC is given an autonomous status as a private joint stock company fully owned by the state and independent from all electricity sector companies and participants. Accordingly, EETC is no longer a subsidiary of EEHC, and consequently falls outside the scope of the MoF Guarantee Law.

The Solution:

• In light of the above, the Electricity Law introduces a mechanism for the provision of the sovereign guarantee. Pursuant to Article 35, off-take agreements of EETC will only be eligible for a MoF guarantee, if such agreements are authorized by the Cabinet of Ministers to meet any capacity shortages forecasted in a Supply Report prepared by EETC, and provided that such guarantee is explicitly authorized by the Cabinet of Ministers.

Why Is this Solution Problematic?

• The guarantee will not be issued in abstract and as an independent document. The language of the Electricity Law suggests that a guarantee is tied to other reports, procedures, and steps prescribed by the Electricity Law and the Executive Regulation.
• Accordingly, it may be argued that pursuant to Article 35 of the New Electricity Law, the power of the Cabinet to authorize such sovereign guarantee is contingent on the satisfaction of the following conditions:

1. the Supply Report and EETC recommendations are presented by the Minister of Electricity to the Cabinet of Ministers; and
2. the Cabinet of Ministers authorizes the measures for facing the forecasted shortage, including authorizing the sovereign guarantees for new generating capacities to be added.
3. the Supply Report prepared by EETC and presented to EERA and the Minister of Electricity forecasts shortage in the electricity supply and includes specific recommendations/plans for adding generating capacities;

• If these steps are not satisfied, it may involve risk of contestation that the Cabinet acted outside its power under the Electricity Law. This is because the language of the Electricity Law suggests that the Cabinet’s power to authorize such guarantees is limited to the extent deemed necessary to counteract the forecasted shortage based on the Supply Report.

How did the Executive Regulation complicate this situation even more?

• The Executive Regulation introduces two new measures that must be undertaken by EETC prior to the Supply Agreement. EETC, in collaboration with the Ministry, shall prepare an expansion plan for generating electric energy in Egypt (“Expansion Plan on Production“). The plan shall give an estimation of the expansion to the generation of electricity for a five years period; and it shall consider the required additional production capabilities that are needed to generate electricity and the available alternative sources. This plan must be approved by the Board of EERA and by the Ministry and finally by the Cabinet of Ministers
• In addition, EETC shall prepare an expansion plan for transmission of electricity in Egypt (“Expansion Plan on Transmission“). The plan shall provide proposals for the expansion of the transmission network; the increase of its capacity; and the connection between the current stations and resolving the crowdedness/overcapacity on the stations. This plan is issued for a period of ten years and shall be approved by the board of EERA.
• Both the Expansion Plan on Production and the Expansion Plan on Transmission must be taken as a basis for the preparation of the Supply Report. The Supply Report must refer to them Plan and ensure the integration between Expansion Plan on Production and the Expansion Plan on Transmission.
• Accordingly, this adds an additional layer to the already lengthy and detailed process of verifying the legality of the sovereign guarantee.
  

More details on the Executive Regulation:

Tariffs, Licensing, Dispute Resolution & Overlap Between Distributors

(A) Tariffs & Fees:

• The Executive Regulation provides more details as to how the electricity tariffs & fees will be determined.
• EERA sets the Rules & Economic Principles for the calculation of (i) the tariff of electricity, (ii) the prices for exchange of electricity between non-qualified members, and (iii) the fees in consideration of using the transmission and distribution grids (the “Rules”). Subsequently, the Rules are submitted to the Prime Ministers Cabinet for approval. These Rules shall then be published on the website of EERA.
• The Rules can be revised if:

1. EERA decides it is appropriate to revise them, or
2. One of the energy players party submits a reasoned request to re-consider the Rules.
3. the Prime Minister consider it necessary to revise the Rules,

• EERA will then propose the tariff, the price for electricity exchange, and the fees for using the Grids in light of the approved Rules. The board of directors of EERA shall approve it. Subsequently, the tariff shall be issued by a ministerial decree and published in the Official Gazette (Al Waqae’ Al Masreyya).
• The Electricity Law provides that, if the cabinet decides to decrease the tariff to an amount that is less than the determined rate, the state shall cover the difference on an annual basis. Article 17 of the Executive Regulation provides the details of such settlement. In particular, a separate account to be managed by a department within EETC shall be established for the purpose of such settlement.

(B) The General Licenses and Permits:

• The Executive Regulation provides more details as to the procedures and documents for issuance of the licenses relating to generation or distribution of electricity. The Executive Regulation states that the conditions for licensing shall be determined in the Rules approved by the Board of Directors of EERA. Accordingly, the principles and rules included in the Executive Regulation are not the only rules. Other details may be added by the Board of Directors.
• EERA had already issued rules and guides to procedures for issuing the necessary “Licenses” for electricity related activities pursuant to its mandate under the previous Electricity Law 339/2000. A substantial bulk of these rules and documentation relating to procedures is integrated into the Executive Regulation. This being said, the rules issued by EERA provide more comprehensive conditions and procedures governing the licensing process.
• The main difference, however, to the existing published guidelines is that the Electricity Law and the Executive Regulation modify the licensing regime of power generation to make it similar to the FiT licensing regime. The Law and the Executive Regulation introduce a two-tiered licensing procedure, whereby an applicant will first apply for a permit (similar to the interim license in the FiT scheme) in order to set up the process and start the construction. Subsequently, the applicant will apply for the License. Accordingly, we expect that the published licensing rules issued by EERA will be upgraded to reflect this two-tiered regime and re-issued again.

(C) Resolution of Disputes

• According to the Electricity Law and EERA’s Regulations, an electricity player (such as an electricity generation company) must refer any dispute relating to its activity (whether with its customers or other license holders) first to an industry adjudication body within EERA for settlement before resorting to arbitration or court, as the case may be.
• It is unclear as to how that process will work and how this industry adjudication body is structured. The Executive Regulation introduces some details in this respect. This industry adjudication body will be a committee within EERA formed by a decision issued by EERA’s chairman valid for one year and renewable for similar periods of time.
• This adjudicatory body shall be presided by one of the Deputy-Heads of the Council of State (who is a judge) and shall include technical, financial, commercial, and legal experts. The total number of the members of the adjudication body shall not be less than five (5) members. The committee may hold meetings with the parties collectively or separately and may request any documents, memos or information from either party.
• The sessions shall be confidential. The committee must issue its decision within 60 days from the date of submission of the request and must submit the decision for approval by the Board of EERA. The decisions of the committee are issued by a simple majority and the decision must provide the reasons the decision was not unanimous, if that is the case.
• Beside the relevant parties, third parties may request to join the dispute if EERA finds they have a related interest.

(D) Overlap Between Distributors:

• The Executive Regulation explicitly states that no permit may be granted to any licensee to establish a distribution grid within a grid area belonging to or operated by other companies with a valid permit or license in such area.
• A licensee (distributor A) is prohibited from extending its distribution grid to a subscriber in an area where there is an existing grid belonging to another licensee (distributor B). Yet, the distributor A may use the grid of distributor B to provide such subscriber, provided that distributor A pays the consideration for using the grid as approved by EERA.
• A subscriber may choose to buy electricity from any licensee. No penalty may be imposed on any subscriber for the transfer from one to another licensed distributor. In case the subscriber transfers to another licensed distributor, a notification shall be sent by the subscriber to the old distributor. A grace period of at least one month shall be sought to set off mutual obligations.
• In case a dispute arises between the subscriber and the old distributor, the subscriber may be allowed to start receiving electricity from the new distributor pending the dispute is resolved by EERA. If the subscriber refuses to pay the due amounts to the old distributor, the new distributor must deduct these amounts from the subscriber and deliver them to the old distributor.