INTERVIEW: Despite privatisation, no plans to increase Nigeria’s electricity tariff now – NERC Chairman Sam Amadi

Sam Amadi spoke extensively on the new phase of Nigeria’s power industry
The Federal Government has said the thrust of the 2014 budget is job creation; and adequate supply of electricity is one key factor that can make this happen. The recent takeover of the privatized successor companies of the Power Holding Company of Nigeria, PHCN, by private operators has necessitated the review of some fundamentals of the regulatory environment of the power industry. Consumers fear this may result in fresh tariff hike. But the Chairman, Nigeria Electricity Regulatory Commission, NERC, Sam Amadi, allayed the fears in an exclusive interview with PREMIUM TIMES in Abuja.

PT: With the recent takeover by the new private owners of the power plants, how much has the regulatory environment in the power industry changed?

Sam: The regulatory environment in the power sector has not changed. The regulated market is not constructed to meet the interest of government entities. It is for all kinds of markets. The rules are the same, but what has changed favourably is that there are other operators now who would be more amenable to controls and regulatory sanctions. The regulator can target their bottom line; their profitability, and impose financial fines when they go wrong.

Essentially, after privatization, the industry is supposed to enter the transitional electricity market phase, which is the period before the full competitive market. During this period, the market would be largely determined by bilateral contracts between the electricity generating companies, GENCOs, and the distribution companies, DISCOs.

The companies that buy power from the generating companies would be based on their power purchase agreements, PPAs, and the various contracts they have. The Transmission Company of Nigeria, TCN or Bulk Trader has a PPA with the GENCOs stipulating the price and spelling out the terms and exigencies of their legal relations.

So, the market would run purely on those contracts and agreements they have. This transitional market would allow for the free rigour of contractual obligations.

Since November 2013, the industry has been in the interim rule period, which has not fully taken off, because there are certain outstanding issues that needed to be settled before the transitional market is declared fully by, may be March 2014, by the Minister of Power, with NERC’s advice.

These few issues that need to be fully sorted out include testing the market to ensure that the settlement platforms are all in order; and the information systems, to know that the networks are upgraded.

Within a couple of months, these would be done. We have not declared that stage of the market yet, because we need to do some testing, forensic reviews and firming up of the institutions of the market.

After that, there would be a full-scale movement towards a completely competitive electricity market. That is the capacity and large number of supply and demand that would provide the choice for the DISCOs to buy power from anybody.

The first stage was the unbundling of the Power Holding Company of Nigeria, PHCN, into privatized companies, to set the market for contracts-based trading, before moving to full competition, where NERC might then deregulate the price of wholesale tariff, so that there would be enough capacity, and the market would now settle for full business.

PT: During the transitional market period, what would be NERC’s role?

Sam: NERC’s role in all these phases would remain the same. It would continue to remain the regulator, licensing people, deciding price, monitoring quality and protecting consumers.

What changes the nature of the market is that before now, we had government entities. They were not following the terms of their contracts fully. Settlements were never in full. But, now we have private entities. They are now testing the market, building the rules, strengthening their contracts and verifying their data.

By March, when they enter the transitional market, and using their contracts, NERC would still be there to supervise the contracts, to ensure that they were followed.

So, NERC’s role as the regulator would not be compromised. The focus may keep changing. Much down the line, when we get to the full competitive electricity market, NERC might then totally deregulate the wholesale tariff, by saying that the tariff would be set by the forces of demand and supply.

But, most Nigerians thought that immediately the power plants were handed over to private operators, the mode of operation would change to enhance power supply in the country.

Yes, ownership has changed. People can now bring in capital and run the industry as business. Before now, government entities were not paying the price for gas. They kept it for government. But now, if they do not pay, the gas company would cut them off from the source of gas supply.

What has changed is that NERC can now say: if any of the companies say it cannot keep any of its regulations, it would penalize such a company, or impose a fine. But, as government entity, they could not be bothered, whether they were closed down or not.

What has changed is not NERC’s rules, but the way the market is now responding. There is now enough incentive for better performance and opportunity for discipline and sanctions. There is more responsiveness to regulatory interventions today.    .

PT: Since the recent handing over of the power plants by government to the new owners, the level of power supply appears to be deteriorating. What would you say is responsible for this?

Sam: Well, it is possible the level of electricity supply has, indeed, dropped. But, we should ask what the level of supply was this time last year? Remember there are still issues of network, low water level, and inadequate gas supply to be sorted out.

Recently, there has been some drop in the supply level here and there across the country. The drop was not because there were new owners of the power plants. But, we must acknowledge the fact that we have gas supply constraints.

Even if it was traceable to the transition period, it is not a permanent state. That is why the people who are coming in must quickly come to terms with what is going on.

So, it is natural for one to say, empirically, that there has been a drop in the level of power supply in recent times. But, that could be as a result of gas supply, whose infrastructure was not privatized, or ownership changed; or as a result of pipeline vandalism; or some of the pipelines were closed for routine maintenance.

There is also the cyclical rainfall process that affects the level of water at the dams and the hydro power plants.

A few weeks ago, the industry had about 2,900 megawatts, MWs, of unutilized capacity, because there was no gas to fire those power plants. It was not because new owners came, but because we had 2,900 MW unutilized capacity not available.

So, we cannot say it was because of the new owners that the level of power dropped. It might be because there was a certain percentage that was due to uncertainty between management and the workforce as to the directions they should go.

It could also be possible that the new owners failed to overcome the uncertainty and the teething problems of taking over of the plants. It is not a big issue really. We are seeing things coming back to normal very soon.

This is a long journey. This is not a destination. This is about counting days since the new owners took over. We are talking about moving from less than 4000MW available to 20,000MW.

So, it is impossible to assess the success in few weeks that power supply dropped under the new owners. Other markets went through this process. So, we understand that it is not easy. In as much as we are working very hard to show that the new owners do well, we should really not lose sleep, because there are fluctuations.

The new owners’ captive advantage is that with sustainably, they are better placed to help improve the networks, and move the country to a higher capacity.

The new owners have since November 1 taken over the power plants. So, everything now is in their hands. They are the ones supplying the country with electricity at the moment. If anything happens now, they are the ones to hold responsible.

It is just like any other takeover in any other economy, either as mergers and acquisitions, or buy-outs; they are the owners of the plants now. They run it totally independent of anybody. It does not, however, mean that all the issues in the sector are theirs and have been resolved with the takeover.

This is an end-to-end market. They took over the power plants, but did not take over gas supply. Assuming there is no gas to power the plants, it would not be because they took over, but because probably there is gas supply constraint, or the transmission lines are not working, or the quality of gas available is not okay.

The issues that affected the old people would likely affect them. What matters now is how they are going to work to overcome those issues. They have more efficiency, finances and can now enter into more bankable contracts.

So, taking over does not mean that suddenly the constraints are over. Taking over does not mean that they have taken over the transmission facilities. That is not their job. Their job is to generate electricity and the TCN would sell.

If for instance, the transmission facilities are weak, it does not mean that the new owners would start building the transmission facilities. That is not what I meant by taking over. They are taking over the generation and distribution companies. The Federal Government would still be handling transmission.

So, taking over is not a game changer overnight. What it means is that they are in charge of the power plants. But, if there is a gas supply constraint, or transmission problem, they still need to resolve them. It should be understood that they took over a company, but they did not take over the whole existing network.

Each of the companies that have taken over, either as GENCO or DISCO, has a particularly area of specialization or competence that it can improve things quickly. But, the overall impact of their taking over, and the incentive unleashed to the system would bring improvements even in areas that they are not in charge.

That is why the Federal Government brought a management contractor to take charge of the TCN. The idea was to create equivalence, so that when the DISCOs are improving in their operations, TCN would be improving in the sale of electricity, and the job of NERC as the regulator would not be to be outsourcing responsibilities, but to ensure that all that need to be done is done.
That is why NERC holds monthly meetings with all the operators, so that we know the problems and areas they have challenges since they took over. That would enable us track the problem and address them. We would know whether it is a problem that they can solve on their own, or one that needs a third party.

Clearly they are in charge of where they are operating. But, they are not a regulator, neither are they the policy maker. The only expectation is that they are to operate independently, with efficiency, and produce the kind of result that would make electricity available for the people as quickly as possible.

PT: From the meetings you have been having with the new owners, what problems are they saying they are facing, and what timelines do we think these problems would be resolved for Nigerians to look forward to having stability in electricity supply?

Sam: Though they have taken over the plants, the workers have not been fully paid their severance benefits. They are still having workers they do not need in their payroll that should be laid off. But, they have to wait for the Bureau of Public Enterprises, BPE, and the Ministry of Power to sort this out for them. So, there are legacy problems for them to sort out.

Yes, they have taken over, but they are also asking about the drop in the level of power supply and what they can do about it. The DISCOs do not have enough electricity to sell to the consumers. They did not come with new power plants that would generate electricity. They have to wait for those who bought the power plants to recover capacity.

They are waiting for the new capacity from the NIPP to come, to increase the energy available to them.

The people who bought the generating companies are talking about the problem of gas supply to increase their capacity. These are the teething problems. We are looking at all these problems.

NERC is looking at what it can do to ensure that there is more gas to give GENCOs. We are asking questions on how to improve the transmission, so that the power that is generated is not stranded.

These are serious technical problems, which we must study, pay attention, think through and develop solutions that may not manifest from the first day and you solve them and get out of there the following day.

For instance, if gas is to be unleashed to power, it might be that we might do some things to the power plant, and that might take a few months before that desired new capacity is created. For the person who is watching it might seem as if nothing is being done. But, things are going on.

So, we need to pay more attention, be more intelligent and work very hard to deal with these constraints.

PT: You said the new owners have come with new capital to invest in their operations. But, there is this N50billion fund said to have been set aside by government for them. Why would government put so much to fund private investors whose main motivation in coming into the industry was profit?

Sam: The N50billion is from BPE; from the sale of Egbin power plant. The money is kept there by government more like a back-up to take care of unforeseen circumstances.

Production of electricity is not that straight business. No one comes just like that to begin to produce power. There must be a PPA in place. The PPA spells out the terms of operation, including the price that government would pay the producer for producing a certain volume of electricity over a particularly period, whether the power is taken or not.

So, it is a risky business. There must be what is called pay or take obligation in place. With this, if there is a problem with gas supply and the producer could not produce, because it was not his fault; or the producer sends the power, but it is lost in transit, because the transmission lines were bad, the truth is that he has produced, but it has not been evacuated for no fault of his.

Since money comes from what the consumers pay, and in this case, the power has been produced, but could not be transmitted to the consumer to pay for, and therefore no revenue is forthcoming, government would still be under obligation to pay the producer for what has been produced.

So, some of these monies set aside are to take care of those contingencies as they arise. It is just monies set aside so that there would be guarantee that power generation and supply would not be disrupted if a situation like that happens.

Again, if there are delays in payment, it is from such monies that government can draw from to pay till when revenue has come in. It is more or less a fund to hedge risks in the business.

PT: But such contingencies do not happen every day. Suppose the money is there and throughout, there was not a need to meet any contingency as you have explained, what happens to the money?

Sam: There is no contingency that would happen any other way in favour of government. The only ones that might happen might be that there is no gas, or transmission failure. So, the only person that would suffer is the producer of electricity. He is the only one that has taken the risk to produce power.

If the fault comes from the producer and he could not produce electricity, he takes nothing. But, if the power is produced and is unable to evacuate, because the transmission lines are bad, or he cannot produce, because there was no gas supply, then government has to pay to indemnify the producer.

There is only one arrow point in this argument. If as a newspaper house, at the end of the day’s production, for one reason or the other, cannot distribute the printed copies; and money was not made because the papers were not sold, would the reporters working there not be paid their salaries?

The contract is clear. The producer had signed in the PPA that he would be ready to produce power at all times. But, if for whatever reason that is not his fault that power was either not produced, or produced and was not evacuated, then he must be paid.

On your question on if the anticipated circumstance did not happen, the answer is that the money would still be there in an escrow till such a time that it becomes necessary that it should be drawn from it.

The electricity market involves million dollar transactions. If government says it is putting in place N50 billion, it did not say that it is taking that every month. If there are no contingencies or default, it would not be used at all.

It is just like market capitalization fund. It is never anticipated that it would ever be used. If it is drawn down, then there is a crisis in the market. It is money kept in case one cannot pay energy bill, or the DISCOs cannot pay for some months, then the bulk trader can draw from there, so that there would not be any power failure.

The job of NERC is to ensure that every power sold is fully accounted for, so that the collection goes back and power flows from top to down – the GENCOs sends the power, transmission sends to DISCOs and DISCOs send to the consumers, but the money flows up.

The market is near equilibrium. The market is working. NERC does not need to intervene in the settlement, because the invoices are being scheduled every day, because people sell power and settle themselves.

The World Bank that gives such guarantees does not expect it to be used. It is just to give confidence to the operators that in case of any unforeseen circumstance, there would be something to fall back on; to borrow money and continue with the business, to avoid disruption to power supply.

PT: The issue of prepaid meters is still not resolved. Why has NERC not been able to sanction people who still sell these meters to consumers, when it is supposed to be free?

Sam: You cannot sanction people when they are doing what NERC is asking them to do. NERC did not say the meter is free. What NERC said was that meter was free to the extent that people are paying their bills.

What this means is that the DISCOs are supposed to provide meters as part of their services to the consumers. But, that does not guarantee that they would give everybody meter the same day.

We have about 50 per cent metering gap. If NERC is going to ask the DISCOs to provide meters to consumers in one year, it means the tariff would go up, because the money to acquire the meters would have to be provided for. There is no other way services are paid for in the industry except through tariff. Any service provided in this industry is paid for by somebody somewhere through tariff.

What this means is that the DISCOs would take their time till when the metering problem has been resolved. They have to come up with a metering plan. When NERC approves for them, it is bound to respect the agreement. If that is done, it means NERC has to step up efforts to monitor their performance. Otherwise, people would still not get their meters on time.

People are even saying today that they are ready to pay for the meters. But, if they are ready to pay, NERC is still insisting that meter is free, because the money should be refunded later. So, nobody is being forced to pay for meter, if they are ready to pay when the meter becomes available.

The DISCOs does not have the capacity to raise the money to acquire and provide the meters. If the people that want to pay for their meters are allowed to, they would be putting pressures on the DISCOs for their monies to be refunded.

But, NERC is saying that the policy is the same, but consumers cannot pay additional charge when they are already paying for tariff. The implication is that they have to wait until they are metered, because metering is a service they roll out based on their business plan.

Except government would be prepared to put in several billions of Naira as intervention fund to ensure that everybody is metered, to me it does not make good business sense to do that.

PT: But, considering the inconvenience to consumers, would it not be better to do it once and for all, rather than allow them to be exploited through such an arrangement that exposes them to extortion by some officials?

Sam: That is why NERC has asked consumers who would not be ready to wait to take the incentive of paying and recovering later. Everything in the industry has to do with finance. The new owners would not go and borrow money to meter consumers, because it is part of their operations. But, they cannot meter everybody by day one.

Even if all the meters were ready today, it would take a minimum of a year to service everybody. One has to get and pay installers as part of the logistics.

PT: It appears as though enough effort has not been made to attempt to pursue it?

Sam: From the baseline, there is no way everybody can be metered at the same time. The other question is: What is adequate metering? This is a function of cost. If everybody is to be metered quickly, it would take a timeline of three years.

A budget of the exercise would be given, which NERC would put in the tariff plan for recovery. What stops NERC from doing that is that the cost in this industry is not proper. If NERC puts a tariff for the new owners, they would say government negotiated 50 per cent increase for workers’ salaries, there would be problem.

NERC had a metering agreement with the old owners, and we discovered that after six months the metering was not going anywhere. They convinced NERC that their cost had escalated, because labour wrongly held government to ransom by not producing enough power, yet collecting salary increase.

The consequence is that there is somebody somewhere who is paying for this. If the new owners are saying they are paying workers off, where is the money going to come from? At the end of the day, the reason the consumers are not metered has to do, partly, on corruption, and another, finance.

What we have done is to find a creative way of getting consumers who are willing to pay for their meter and wait to recover their money. We are forcing the DISCOs to do what they may not like to do, which is metering the consumers without any mark-up. NERC has asked them to continue with this one till they come up with a better plan based on investment they are going to make and recover over time.

PT: Now that the private owners have fully taken over the power sector, how would the multi-year tariff order, MYTO, fit in the new arrangement, considering that the driving force in their involvement is profit-making and cost recovery?

Sam: There appears to be a misunderstanding here. MYTO is not subsidy. Subsidy is a component of MYTO. The new ownership structure does not change MYTO. MYTO is a method in which NERC uses to arrive at the cost in industry and the price the consumer should pay for electricity.

People often mistake subsidy for MYTO. Subsidy is what government pays to mitigate the impact of electricity price on some categories of customers. MYTO has not changed, and will not change.

MYTO is a five year plan of what government would do for the class of people mentioned. It is not for government entities. MYTO has generation, transmission and distribution costs. It has all the costs in the industry. But subsidy is that government says, instead of charging this category of consumers, say N12, they would be charged N4. That’s the subsidy component of MYTO.

The question should be: Would government be willing to put in more subsidy under the arrangement? If not, what happens to the pricing? If government increases the subsidy, it would reduce the impact on this category of customers. If it does not, then those customers would bear the full impact of the price regime.

The issues have always been how to identify this class of consumers that should benefit from the MYTO subsidy?

Generally, it has to do with the volume of electricity they consume and, of course, the kind of facilities they use in their homes. If one is living in a duplex and has a three-phase metre, one should not expect to pay same price with the person living in a one room apartment and has one-phase meter. The DISCOs know how to assess the load base and do the pricing appropriately.

PT: NERC is contemplating electricity price review and a new tariff order. What shape is this going to take? Would this not result in another price hike?

Sam: We have processes for electricity price review. NERC has not yet concluded plans on that. What NERC is doing now is to allow the new owners look at their data assumptions, benchmarks and review their
costs and bring to NERC for review to confirm whether or not they are correct.

So NERC is not thinking about tariff review now. It is doing a minor review and validation assessment of the aggregate technical, commercial and collection losses in the industry, to be able to know the number of their customers and verify their loses. How many of them are metered and so on. NERC would look at it and know whether it is different from the financial and technical assumptions in MYTO. If they are widely different, then NERC would think of what to do to redress the revenue requirement so that they can recover their allowed revenue requirement. It is a technical process.

No one can predict where the pendulum would swing. It might stay normal. It might even go down. So, it is presumptuous to talk about tariff increase now. It is about validating the industry data and reconfirming that the financial profile in the market is as projected.

PT: In Nigeria, price reviews hardly follow the downward trend?

Sam: It is not peculiar to Nigeria. In the world, maybe because of inflationary factors and other things, the prices do not necessarily go down. Prices go down when they arrive at some level of technical efficiency.

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