CUSTOMERS IN NESI AND POLICY RECKLESSNESS

Chudi Nelson Ojukwu argues that investments will continue to elude the industry as long as government is unable to provide sustainable regulations

On 15th May 2017, the Nigeria Electricity Regulatory Commission (NERC) announced that it had received directives from the Minister of Power, Works and Housing, Babatunde Fashola, declaring categories of eligible customers pursuant to Section 27 of the Electric Power Sector Reform Act 2005 (EPSR). This announcement has received applause in some quarters as the panacea to the lingering power problems in the country.

The substance of the minister’s declaration is to the effect that certain categories of consumers were now free to purchase power directly from the generation companies without going through the distribution companies. The classes of eligible consumers are as enumerated below:

One, a group of end-user customers registered with NERC with monthly consumption above 2MW and connected to a metered 11KV or 33KV delivery point on the distribution network of an electricity distribution company; two, end-user customers with monthly consumption above 2MW and connected at 132KV or 330KV on the transmission network; three, end-user customers with consumption above 2MW and connected at 33KV on the transmission network and end-user customers with consumption above 2MW and who are located near a GENCO or generation facility.

The purpose of this directive as explained in the NERC advertorial is that it “is expected to bring into play new and stranded generation capacities which may be contracted between generation companies and eligible customers”.

There are several issues that arise from this policy directive. What is it intended to achieve? How will it help resolve the problems currently facing the power sector? Does this enable the creation of an electricity market or only does it help to destabilise it?

The EPSR Act has over the years been bedevilled with misinterpretation of some of the core concepts of the reform leading to unintended outcomes that have generally impeded the success of the reform programme. The premature declaration of eligible customers once more showcases this problem. Before I go into the details, there are some questions that are burning for an answer. Did the policymakers acquaint themselves with the market design and structure before making this declaration? Did anyone reference the power policy document in other to understand the intendment of section 27 of EPSR? Were Sections 24, 25 and 26 of the EPSR Act reviewed or considered before the directive was issued? What is the purpose of declaring eligible customers?

The NESI was designed as a three-stage market comprising the transitional market, medium term and long term. The differentiation of the market stages is tied to the level of development of the wholesale electricity market.

The transitional stage is characterised mainly as competition for the market (competition in the procurement or entry of new generation). The electricity market is open to competition for new generation entry and dispatch. Optionally, some large customers connected directly to transmission may be authorised by the NERC as eligible customers that can buy in the electricity market.

The electricity market is opened to full wholesale competition with both competition to enter the market and in the market. The number of eligible customers gradually increases, as authorised by the NERC.

The electricity market is opened to full wholesale competition and retail competition.

From the market design, the only competition to be introduced at the transition stage is competition to enter. It means that at the generation level of the business, competitive procurement of power will be introduced. Even though eligibility is an option under this stage, it would only be allowed for persons directly connected to the transmission system.

The reality is that currently, NERC has been unable to even meet the criteria for a transition market. The market and NERC have not achieved competitive procurement of generation. If the first level of competition has proved impossible for the market and NERC to achieve, it is difficult to understand the desire and motivation for jumping to eligibility that is designed for the second stage of market development.

What is evident from this faux pas is that the market design documents were not consulted nor did anyone seek counsel from those with historical knowledge of the electric power sector reform in Nigeria. It is unnatural to feel your way through when there exists documentation to guide you.

I have also noticed that it would appear that those who urged the minister to make this policy did not read Sections 24, 25 & 26 of the EPSR Act, but instead confined themselves to the provision of Section 27.

For ease of understanding, I will reproduce the relevant portions of Section 24 of the act;

“Until such time the Minister has made a declaration in accordance with subsection 3 of this section the commission shall prepare each year a report for the Minister as to the potential for competition in the Nigerian electricity supply industry and these reports shall present the Commissions analysis and recommendations as to whether the Nigerian electricity supply industry has developed to the point where a more competitive market ought to be established under section 26 having regard to: (a) the degree of privatisation that has occurred;

(b) the existence of a sufficiently large number of potential competitive entities so as to avoid likelihood of an abusive market power; and (c) the existence of other preconditions, including the necessary metering and information technology infrastructure, required for the operation of a more competitive electricity market.

(3) The Minister shall present to the President and the National Council on privatisation and the National Assembly each report submitted by the commission under subsection (2) of this section and when the Minister, in consultation with the President and National Council on Privatisation is satisfied that the electricity market in Nigeria has developed to the point where a more competitive market ought to be established pursuant to section 26 of this Act, having regard to the criteria described in paragraphs (a) (b) and (c) of subsection 2 of this section, the Minister shall issue a declaration that a more competitive market is to be initiated.”

The critical points to be taken from these provisions are;

NERC ought to be providing an annual report on competition, which to the best of my knowledge they have not done to date; the minister ought to be guided on market development by NERC not the other way round; a more competitive market requires certain pre-conditions to be met; the minister’s actions and directives in relation to market competition must be taken in consultation with NCP and the President (and there is no indication that either the NCP or the President have been consulted on this).

Further, one of the critical factors to be considered in moving to a more competitive market as explained in the Electric Power Policy 2001 is that conditions in Para 4.4 have been met and then competition can be introduced without threatening the financial viability of the main participants in the system.

It is easy to assume that neither the Minister nor NERC was acquainted with the market design and therefore they were easily misled on the appropriateness of declaring this level of eligibility in the Transitional Stage of market development.

The minister’s actions are in reality a declaration of a more competitive market without even meeting the conditions of operating the transitional market. The policy document on eligible customers does not say what benefit is accruable to the industry or consumers from this policy save for the scant reference to stranded and new generation.

The concept of eligible customers was introduced in the industry design as part of competition-enhancing mechanisms when the market had reached a certain level of maturity.

Eligibility does not reduce market illiquidity nor does it cure payment delinquency. It does not improve the transmission system nor does it improve the financial viability of distribution companies. Indeed if the declaration is anything to go by, the eligible customer will have to rely on the transmission system and distribution network that have been found inadequate to ‘Bluetooth’ its eligible power to it.

NERC and the minister have failed to consider that electricity distribution is a volumetric business and the end user tariffs in the sector are currently being subsidised by the class of consumers it has boldly declared eligible. Neither the government nor NERC has demonstrated an appetite to allow the tariffs free float to cost reflective levels. It remains to be disclosed who will pay the differentials that will occur if these classes of consumers are indeed removed from the revenue base of DISCOs.

Despite my reservations about the declaration of eligibility at this stage, it would have served the industry better if the minister had confined the category he opted to make eligible to that referenced in the market design for this stage, i.e. consumers directly connected to the transmission grid. As unnecessary as this may be at this stage, it would at least not distort the market design.