Electricity Regulatory Commission Seeks to Curb Conflict of Interest in Hydropower Companies

The Electricity Regulatory Commission has proposed a new directive aimed at strengthening corporate governance in the power sector, which includes a key provision to restrict companies from doing business with affiliated firms. The draft of the 'Directive on Corporate Governance Related Standards for the Electricity Sector, 2082,' released on Monday for feedback from stakeholders, proposes prohibiting licensed companies involved in electricity generation, transmission, distribution, or trade from procuring construction, consultancy services, or goods from other companies in which they have a direct or indirect stake. If implemented, the provision would prevent power companies promoted by the same business group from providing goods and services to each other.

Commission member Gautam Dangol explained that when related companies provide goods and services, there can be a lack of cost transparency, and the objective is to ensure that the concerned companies can obtain goods and services at competitive prices as much as possible. The provision, if enforced, would mean, for instance, that Nepal Electricity Authority could no longer hire NEA Engineering Company for consultancy. Similarly, hydropower companies under the Sanima Group would be barred from taking consultancy from Sanima Hydro and Engineering and construction services from Wabhari Construction. Acknowledging these examples, Dangol stated that whether to implement the proposed provision will be decided after discussions with stakeholders.

The draft directive also proposes that no more than one individual from the same family can serve on the board of directors of a licensed entity at any given time. It further mandates that the board include at least one female director and ensure representation for all classes of shareholders. Regarding procurement, licensed entities would be required to formulate and implement a procurement regulation adhering to the basic principles and provisions of public procurement to ensure transparency and competitiveness.

On the conduct of directors, the draft bars them from taking personal financial gain from the company's work or transactions that are against the company's interest. It also states that directors or other officials cannot use company employees for personal work. In matters of conflict of interest, directors not indulge in discussions and decisions on any matter where they have a personal interest or stake. They are required to inform the board in writing about such matters, which must then be recorded in the board's minutes.

The directive allows for the appointment of independent directors, specifying that they must be individuals with specialized knowledge of the electricity sector and at least ten years of experience, or those with a master's degree in relevant fields and a decade of experience. However, an independent director cannot hold an executive position like Chairperson or Managing Director. An individual owning one percent or more shares in the company, or their immediate family members, are also ineligible for the position.

Regarding risk management, companies will be required to identify, list, and categorize risks related to project construction, operation, and management. Risks exceeding 80 percent would be considered critical, while those between 60 and 80 percent would be categorized as major. Dangol noted that the commission has prepared certain indicators for this, and company management must assign scores based on them, which must then be approved by the board of directors. Additionally, the draft mandates that companies make arrangements to prepare and implement a succession plan for senior management, technical leadership, and other key positions.

Reacting to the draft, Ganesh Karki, president of the Independent Power Producers' Association Nepal, suggested that such provisions should only apply to companies that have issued shares to the public, arguing that private companies should not be bound by such a provision.