The Process and Industry Development Limited (P & ID) saga remains
unresolved and one would have thought that the government would be
extra-ordinarily sensitive to ensuring that it does not find itself
remotely close to a reoccurrence of a similar situation.
Unfortunately, with the recent actions of one of its agencies, the
Nigerian Electricity Regulatory Commission (NERC), relative to the
threatened cancellation of licenses of the electricity distribution
companies, no matter its gratuitous populist flavour, it would seem
that no lesson has been learnt from the P&ID debacle – precluding a
need to thread softly in its intervention to address the challenges of
the power sector. More so, when one takes into consideration that
significant contributions to the situation that the power sector finds
itself in are regulatory and policy inconsistency, politicization and
sheer incompetence.
The great novelist Chinua Achebe once said that the problem of Nigeria
is failure of leadership. In the past three decades with the sprouting
of myriad industry regulators, one can safely add that regulatory
failure accounts for a significant part of our various challenges. The
regulatory risk in the power sector is high and climbing.
NERC has threatened to revoke licenses of eight Discos over
non-remittance of funds to NBET. NERC’s regulations on remittance
threshold is interesting—while the threshold on energy bills varies,
that of the Market Operator (MO) is 100 percent remittance. NERC takes
care of itself, the MO, that is, TCN and NBET. So, all the government
agencies are feeding fat based on 100 per cent remittance. Why should
it be so? Importantly, when one takes into consideration that a major
leakage in market revenues is the failure of MDAs to meet their
electricity consumption obligations. Simply put, the government does
not pay its electricity bills but has a minimal remittance mechanism
in place to ensure that only government entities are paid 100 percent
as a first line charge of electricity market revenues.
More damning is that NERC has consistently understated the Aggregate
Technical Commercial and Collection (ATC&C) Loss Level of the Discos
in the new Multi-Year Tariff Order (MYTO). The new remittance regime
took effect on July 31, 2019 whereas the new tariff takes effect on
January 1, 2020. Why the asymmetry?
Since the passage of MYTO 2015 which became effective in February
2016, inflation is up to 17 % versus 9 % currently the assumption in
MYTO; forex is N360 to $1 in the tariff; generation has averaged less
than 4000MW versus 8,384 MW in the tariff; yet no adjustment was made
to the tariff to reflect the above discrepancies until June 2019. Even
when it did, NERC could not bring itself to tell the public it will
raise electricity tariffs. Read its discombobulated press release in
August 2019: “We wish to provide guidance that the minor review
implemented by the Commission was a retrospective adjustment of the
tariff regime released in 2015 to account for changes in macroeconomic
indices for the years 2016, 2017 and 2018 thus providing certainty
about revenue shortfall that may have arisen due to the differential
between tariffs approved by the regulator and actual end-user
tariffs,” NERC said. “The Commission therefore wish to notify the
general public that no tariff increase has been approved by the
Commission vide the Order.”
We should also note the failure of the government to fulfill its
obligations in the power performance agreement is also responsible for
the operational inefficiencies of the private sector players along the
Nigerian Electricity Supply Industry (NESI) value chain.
For instance, the MDA debts. It is obvious that MDAs’ energy
consumption debts would elicit suits if the license of any Disco is
revoked on the premise of inability to remit funds to NBET. Remember
that the presidential directive to deduct MDA’s energy consumption
bills at source has not been implemented. Instead of NERC addressing
the challenge, it chickens out. The regulator decided that Kaduna
Disco which has the highest number of military formations and as such
contends with cases of poor payments of energy consumption bill, would
be given concessionary consideration during monthly remittance to
NBET. Nor has there been, historically, the cost reflective tariff
that is a fundamental requirement or pre-condition under the
performance agreement that the government and the investors executed.
Reports have it that the Discos have sought legal intervention. The
legal resort by the Discos would likely be on two fronts. Some have
already gone to court to challenge NERC’s decision. And were the
licenses of the Discos revoked, arbitration looms. And it is in
London. Is another P & ID loading? You don’t expect investors who paid
$1.6 billion to just willy-nilly accept the nationalization of their
assets by a 40 per cent equity shareholder.
It is true that the recent review of the Minor Review and the Minimum
Remittance order issued by the regulator essentially wiped off the
historical market shortfall (through offsetting) and created an upward
adjustment to cost reflectivity (via injection of N600 billion
intervention and other subsequent interventions, ie, leaving MDA debts
on NBET books.)
However, uncertainty persists given that the N600 billion and
N701billion intervention funds are support loans to the system to
temporarily defray the government’s commitment to investors made in
sale/ concession agreements which have unfulfilled portions.
Last September, Vice President Yemi Osinbajo said that the Federal
Government has spent N1.5 trillion on the power sector in the past two
years. He is correct but it should be contextualized. What part of the
intervention fund accounts for FGN’s 40 per cent equity in the Discos?
The N213 billion CBN-NEMS Fund is a loan and not subsidy which,
interestingly enough, sought to largely address the legacy energy and
gas obligations of the Power Holding Company of Nigeria (obligations
that should have been borne by the Nigerian Electricity Liability
Management Company [NELMCO]), since the Discos have a 10 year period
to pay back with two year moratorium period. The N600 billion is
subsidy since it will be used to add to the minimum remittance amount
set by the regulator for the Discos to pay NBET. The N701billion was
approved and used by NBET to add up to the payment received from the
Discos to pay the Gencos. While it is seen as a subsidy, NBET is still
required to pay the interest and the amount to CBN.
“However, if the country is to achieve its aim of channeling funding
to other critical sectors of the economy, it is pertinent that
structural reforms be put in place to enable the power sector to fund
itself sustainably,” Osinbajo added. Well, it is obvious the
government is in denial. It must decide if it wants the consumers to
pay cost-reflective tariffs or subsidise electricity consumers. The
decision is for the Government to make; not the private sector players
of NESI who, understandably, are seeking to maximize their investment.
Efficiency is a product of capital investments (CAPEX). Such CAPEX
include metering, distribution network expansion, transformers, and
injection substations. Under the current tariff, the CAPEX allowance
for TCN is ten times more than that of the eleven Discos. This is an
example of technical misalignment.
MYTO 2015 assumed a CAPEX of N305 billion ($847 million) for the
eleven Discos over a period of five years to cover comprehensive
metering, distribution network rehabilitation, network expansion and
new connections. This means N5.50 billion ($15m) per Disco per year.
In context, a Supervisory Control and Data Acquisition (SCADA)
application purchased by a Disco costs $13.8 million (N5 billion.)
Metering alone for the 4.7 million metering gap will cost $874 million
(N314 billion) at N67, 000 per three-phase meter. And remember that
Discos cannot spend over the allowable CAPEX because it is a regulated
industry—one cannot recover what is not provided for.
Let us remember the remarkable feud, last July, between the BPE and a
former Chairman of NERC, Dr. Sam Amadi. Amadi has always contended
that the removal of collection losses from tariff did not contribute
to the challenges facing the power sector. Said BPE: “We make bold to
say that the removal of collection loss component of the ATC&C losses
was the single most devastating decision so far taken in the power
sector.
“After the handover to the core investors on November 1, 2013, a NERC
supervised study was conducted and the actual losses were determined
to be 49%, which vindicated the earlier position of the Bureau. In
line with the agreement, NERC in December 2014 released a new MYTO
that took effect on February 1st 2015…The impact of this new tariff on
the revenues of the distribution companies was immediately felt as the
distribution companies were able to pay up to 75% of their power
invoices which collapsed to 25% when the effect of the collection loss
removal hit the market. The announcement of the removal of collection
losses was immediately followed by a declaration of force majeure by
the distribution companies and the power sector is yet to recover from
that decision.”
So, what is the way forward? There has to be appropriate pricing of
the product. A mechanism that would spur investments along the entire
value chain, ultimately resulting in improved efficiency and increased
power supply.
This is just as important as commercial alignment. Such alignment
requires that as a minimum, the respective capacity of gas supply,
generation, transmission are in sync along the value chain.
One is at a loss about the reluctance of the Federal Government to
faithfully implement its Power Sector Recovery Program (PSRP)—which
was approved by the Federal Executive Council (FEC) and the World
Bank. PSRP recognizes the need for a reset of the sector that
addresses the financial requirements for making the value chain whole,
increasing transparency and good governance, ensuring that there is a
minimum generation of 4,500 MW, promoting the effectiveness of
contract, implementing performance requirements that make the Discos
and Gencos accountable, etc. This plan represents the only credible
road map, at this time, that has a chance of re-directing the sector
towards all of the objectives that were envisioned under the National
Electric Power Policy, 2001 (NEPP), the genesis of the power sector
reform in Nigeria. Continuing to adopt knee-jerk, short-term and
ill-advised palliatives rather than comprehensive and strategic policy
approaches will not get us to the sustainable and viable commercial
market that is critical for the improved power supply, the principle
objective of the power sector privatisation.
Source: www.thecable.ng
