The declaration of
Eligible Customers (EC) in the Nigerian Electricity Supply Industry (NESI) in
2017 has sent the right signals to investors that the NESI is progressing
towards retail competition. However, it seems the Nigerian Electricity
Regulatory Commission (NERC) is yet again trying to walk before it crawls by
introducing competition transition charges (CTC) that may discourage potential
eligible customers (PEC) and investors from taking advantage of the business
opportunities presented by the recent declaration.
This is not the first time
we have seen how the timing and implementation of policy directives can make or
mar the chances of the power sector surviving turbulent and stormy periods. It
is against this backdrop that we analyse the current plans of NERC to introduce
CTC in the NESI as it can potentially lead to an increase in the cost of
electricity supply (tariffs) to all consumers.
Whereas section 27 of
the Electric Power Sector Reform Act (EPSRA) of 2005 establishes ministerial
directives respecting eligible customers, section 28 provides for CTC as one of
the charges payable by EC and other consumers in the NESI. Section 27 of the
Act states: “The Minister may issue a directive to the Commission specifying
the class or classes of end-use customers that, from time to time, shall
constitute eligible customers under this Act”.
Furthermore, Section 28 of the
Act establishes the compensation that may be available to distribution
companies (DisCos) and other trading licensees when it states: “ If the
Minister determines, following consultation with the President, that a
directive given under section 27 will result in decreasing electricity prices
to such an extent that a trading licensee or a distribution licensee would have
inadequate revenue to enable payment for its committed expenditure or is unable
to earn permitted rates of return on its assets, despite its efficient
management, the Minister may issue further directives to the Commission on the
collection of a competition transition charges from customers and eligible
customers, the distribution of the funds collected to the trading licensee
described in section 25(a) and to distribution licensees, and the duration of
the competition transition charge.
To avoid some of the
misunderstandings that trailed earlier declarations in the NESI such as the
Transitional Electricity Market (TEM) in 2015, and the EC Regulation in 2017,
it has to be clarified by NERC on this occasion that the Minister of Power,
pursuant to section 28 of the Act, actually consulted with the President,
obtained approval, and conveyed a directive to NERC (the Commission) to
introduce CTC. Also, section 28 clearly states that the pre-condition for the
introduction of CTC is that the declaration in section 27 results “in
decreasing electricity prices”. Clearly, with talks about increasing
electricity tariff and not its preferred reduction, it stands to reason that
the declaration of customer eligibility has not led to decreasing electricity
prices in the NESI.
Apart from the responsibility to determine the tenor, NERC
has the responsibility to establish the amount, the arrangements for collection
and distribution of the competition transition charges to relevant parties in
accordance with sections 28 and 29 of the EPSRA. Prior to all of these, section
30 of the ACT requires that NERC shall hold a public hearing to obtain the
views of any interested parties. The objectives of the CTC can therefore be
summed up as to ensure the introduction of the EC Regulation does not adversely
impact on an efficiently operated distribution licensee’s ability to generate
adequate revenue to enable payment of their committed expenditure and also earn
permitted rates of return.
The notion of CTC
hinges on concerns related to “stranded costs” incurred in providing services
to customers exiting the DisCos’ networks and how to compensate them in line
with the provisions of the EPSRA. Stranded costs largely refer to investments
in infrastructure by network operators that may not be recovered within the
earlier projected life span of the financed assets arising from the transition
from the traditional regulatory model being operated since the enactment of the
EPSRA in 2005 and the recent introduction of competition which now provides a
window for eligible customers to switch supply from the DisCos to trading and
generation license holders. Some of the main components of stranded costs
include costs associated with long-term Power Purchase Agreements (PPAs) and
Vesting Contracts (VCs) commitments, Regulatory Assets/Tariff Shortfalls,
Unamortized Investments in Networks, Overhead, Cross Subsidy and other legacy
commitments.
The introduction of
competition transition charges (CTC) will impact on potential eligible
customers, DisCos, Transmission Service Provider (a.k.a TCN), other network
operators, generators, trading licensees, government, and retail electricity
consumers. In view of this, NERC has recently published a consultation paper
with a view to seeking inputs from all stakeholders in the NESI.
There are a number of
question that the introduction of CTC in the NESI at this time will raise and
they include: Should CTC be a one off charge payable by exiting customers to
cover for all the identified stranded costs or should it be tied to the life
span of the assets and liabilities? Should a potential EC who chose to set up a
captive plant and exit the DisCo network be exempted from defraying the costs
and liabilities attributed to him while in the network and the burden thus
taken over by other customer or must he like other ECs that exited to licensed
traders and generators also bear the costs attributed to him? Since Section 28
of the EPSR Act provides that consumers and ECs bear the burden caused by the
exit of ECs by being charged CTC, who should be the other consumers outside the
EC that should be responsible for paying CTC? Should independent power
producers (IPPs), other wholesale electricity providers, state and federal
governments be involved?
Does payment of CTC reward the DisCos for past lack of
Investment in Networks and bad management decisions? Does payment of CTC act as
a barrier to entry and exit of other participants in the market place? Does the
payment of CTC apply to customers who do not have a written contract in place
with DisCos? Does a customer have to pay for CTC if it physically leaves the
DisCo’s network franchise area? Will there be a reversal of approved CTC within
the transition period by change in policies? Does the proposal consider the
possibility of negative transition charges when the book values of assets are
below market prices? Are there other considerations aside those listed above
that should be considered for the determination of “stranded cost” and
subsequent computation of CTC? The answers to these and many more questions
will be the subject of future industry debates and speculations.
*Engineer
Idowu Oyebanjo, MNSE CEng MIET, is a UK Chartered Power System Protection
Engineer
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