Wednesday, December 2, 2015

On The Just Concluded West African Power Industry Convention 2015: Matters Arising (2)

Idowu Oyebanjo
The event was a sure delight and the organizers, SPintelligent, did a good job but the most regrettable part was the conspicuous absence of representatives of NERC, the industry regulator, and members of the newly formed Nigerian Electricity Consumers’ forum. To say the least, this was disappointing as most of the discussions centred-on and around matters relating to these two entities. However, it was nice to have other key stakeholders like NBET, CBN, local Banks, the Ministry of Power and representatives from network operators.

A major drawback of the privatisation process according to fresh claims by the  investors is the fact that they were unable to have access to the asset before taking ownership. This simply means they were unprepared for the job. No one will invest huge amount of money in a business of this scale (going by the amount of money they had to pay) and not insist on carrying out due diligence. This is why the process is facing many challenges from network delivery point of view. Discos especially have claimed that the network asset are largely dilapidated than they ever imagined and the inherited staff lack requisite skills and attitude to turn the situation around. Enough of rhetorics! we must say. Government no-doubt will have to provide intervention as recommended in part 1 of these series. A key highlight was the acceptance by the network operators of responsibility of failing to meter customers who have paid for such under the CAPMI scheme.

It is important for all customers to be metered in line with earlier suggestions. The networks need rejigging to be able to consolidate the gains of the reform process. As we speak, even if we have increased generation, the transmission network is unable to carry the electricity produced successfully. Technically speaking, this leaves no room for discussions around cost reflective tariff (CRT). Representatives of TCN lamented the spate of bureaucracy and cutting of “transmission” budget by the National Assembly as the root cause of the problem. In general, inefficiency, corruption and lack of skilled manpower have made it practically impossible to improve the net transmission capacity of TCN network in the last 2 decades. In this regard, Dr Reuben Okeke, DG NAPTIN, reiterated that the structured training program within the former PHCN was stopped 22 years ago until government revamped the department in 2009 by establishing NAPTIN, the national power training institution.

However, some of the trained personnel from NAPTIN are yet to be given employment by network operators. Speaking on what the DISCOs in particular can do before asking for increases in tariffs, Engr Okeke opined that much more needs to be done in the way of addressing technical losses. Discos need to replace feeder pillars which currently dissipate significant amount of losses , embark on significant investment in technical loss reduction and general network reconductoring. Speaking at the technical workshop entitled "localisation and capacity building of the power sector workforce", he praised the achievement of NAPTIN but expressed concern that the Nigerian 20GW project requires at least 6,550 engineers and over 12,000 artisans to be trained. Government, he noted, has provided support by means of the sure-p programme but a lot more still needs to be done by all stakeholders including individuals who benefit from training, companies looking for skilled staff, network operators, and other training organizations, especially with regards to payment of tuition for trainees.

A key discussion at the event was the issue of cost reflective tariff (CRT) and this was brilliantly anchored by Dolapo Kukoyi, a leading commercial solicitor with significant experience in the legal aspects of the developments within the Nigerian power sector reform. She agreed that the issue is no doubt contentious as key stakeholders disagree on what a cost reflective tariff for electricity should be. Power experts reiterated the need for transparency and accountability in the process for determining CRT. What are the basic elements considered in arriving at the cost?, What is the actual cost or price of gas?, What is government's policy on coal and energy mix for power and how can this affect the interpretation of a CRT?, What impact does operations and maintenance costs, age and depreciation of assets have on CRT? There are lots of questions to be answered.

In general, conference delegates agreed that the subject of tariff needs to be well understood by all stakeholders. I will be providing insight on this in separate articles. It was found that the discussions around CRT held with investors by BPE was hazy and at best inconclusive as the country hurried into the privatisation of the sector. This is a lesson for other developing nations to avoid this kind of hullabaloo. For example, consideration was given to an aggregate technical, collection and commercial (ATC&C) losses of 30% in the reform process whereas investors now claim on receipt of assets that losses could be well above 50%. The question is how have they arrived at this value and how are we to be convinced that this is not an attempt to ask for an increase in tariff willy-nilly? A more worrisome question is when will they ask for another increase in tariff or another "cost reflective tariff" if this subject is not robustly tackled?

The initial optimism shared by network operators in the power sector relating to CRT with the revision of the Multi-Year Tariff Order (MYTO) - 2 was doused by the reversal of decision by NERC early March 2015. This left network operators with great uneasiness as customers who have been at the receiving end of increased costs for no electricity consumed since and before privatisation remained in confusion. Banks and lenders on the other hand are not comfortable with such trends and will as a minimum like to know how costs are determined. They will want to have a cost regime that reflects flexibility and simplicity, that can be modelled financially with the ability to respond favourably to micro and macroeconomic shocks in the larger financial market. Also, they will like to see major reviews provided for every 5 years with bi-annual reviews of tariff regime. The inconsistency on the part of the regulator with regards to  5 or 10 or 15-year tariff path is causing a crisis of confidence in investors who may be left with no option soon than declaring a force majeure. Already, the liquidity problem in NESI will mean the electricity market will remain grounded.

The disbursement of the Nigerian electricity facility stabilisation fund of 213 Billion naira commenced but now stopped by CBN was to address this shortfall but it was only in part able to alleviate cost of legacy gas debts owed to Gas providers, and monies owed Discos by government ministries, departments and agencies (MDAs). The general consensus was that MDAs in particular need to change from the culture of not paying for electricity consumed if the power reform process will make any sense. The position of network operators is that they are running out of cash flow and the business is clearly not profitable in the short term. While one feel great pity for their situation, it confirms however that these guys are not investors but opportunists as proper investors look at profit over the long term. The lacuna already created by the incompetent and shoddy manner of privatisation of the electricity network of the largest economy in Africa will be with us for a long time to come.

As a summary, it is believed that Discos can do more with the current tariff if they meter all customers, collect payments of outstanding debts from MDAs, operate more efficiently, reduce staff and overhead costs and proof their credibility to investors.
Sincere gratitude to the organisers and sponsors of WAPIC 2015 as we look forward to an equally rewarding experience at the 13th edition in the future.

*Idowu Oyebanjo MNSE CEng MIET


On The Just Concluded West African Power Industry Convention 2015 (1)

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