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‘Banking on tariff increase to improve power sector liquidity is illusory’

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Amadi

With a deeper look at some of the critical and current challenges in the nation’s power sector, former Chairman, Nigerian Electricity Regulatory Commission (NERC), Sam Amadi in this interview with KINGSLEY JEREMIAH explores implications and leeway to the country’s electricity deficit.

NERC has said it will by next month introduce a new regulation against estimated billing of consumers. Do you see this as a sustainable solution?
I think the biggest setback for the sector is the low rate of metering. That’s the source of the scourge of estimated billing. Estimated billing is a double curse. First, it means that customers are overcharged and don’t have any capacity to control consumption since the bills mostly remain the same. For the discos, estimated billing is arguable a means of loss of revenue. Everyone benefits when we have accurate measurement of consumption. So why does estimate billing persist? The answer is that the financials of the sector cannot sustain rapid metering of customers except there is a huge public sector financial intervention. That is not even possible or advisable in the context of today’s fiscal crisis. So, the best solution is regulatory control. When we were in NERC, we set up the methodology for estimated billing which tried to bring scientific methodology to controlling the reckless and self-serving behaviour of discos. The discos argued that the methodology was difficult to operate. We tried using CAPMI to bridge the metering gap.

Finally, in the 2015 tariff, we inserted a provision that anyone who pays for meters for three months and did not receive meter will no longer pay for power. This was a very harsh move against the discos. NERC did not implement it when we left perhaps because they felt it could weaken the already very weak discos. Now is that the time to do something. I believe that the proposal to cap consumption by unmetered customers is the right policy. The guiding principle is to push the crisis to the discos who can best manage it. If discos lose money through capping then there will be strong incentives to meter their customers. Right now, they are not feeling the pinch. They should feel it. That’s is why it’s called incentive regulation
On whether the proposed policy will be sustainable solution depends on the other reform efforts. I think this sector is in a big mess and the bigger problem is the lack of adequate diagnosis. We are offering band aid to a mortally sick patient. The sector is very sick, even unto death. The sickness is because of untimely and inappropriate privatization. The entire reform is good and we could have turned better if we had intensified restructuring of the electricity market, namely strengthened commercialization and corporatization and also deepen effective regulation. As David Newbery argues in his book, there is no demonstrated evidence of difference in performance of state-owned utilities and privatized ones without introducing competition into the services supplied into the network. Changing ownership alone would not make any difference. Between 2013 and 2019, we have seen the limitation of privatization. The only sustainable solution is one that recognizes this result and works to undo the errors of privatization through radical regulation.

There has been public outcry against the proposed increase in electricity tariff by the Nigerian Electricity Regulatory Company. What is your take on the situation?
Tariff usually generates concern all over the world. Even in the most developed economies where we can count on improved service and availability of product, increasing tariff will always elicit public outcry. We saw that recently in the UK. Now this outcry is more so when it’s a privatized electricity market which is generally believed to be skewed against the public. But we know that increasing prices of product in times of increased costs of production is one way of ensuring availability. So, a regulator will not shy away from increasing tariff in deserving and just circumstances. The problem is that in Nigeria, there are two major difficulties in this regard. The first is that the quality of service is dwindling and customers who pay for public are not getting value for money. The second point is the lack of public support for the policies in the sector. We lack the discipline of public participation. If we manage public communication well we may succeed in reducing resistance to the much needed but harsh reform in the power sector.

I think what we lack now is credibility and proper rigor. In 2014 or thereabout, we provided a regulation that gives the discos the responsibility to determine their tariff. At the heart of that process is customer consultation by the discos. It is the responsibility of the operators to go to their customers and convince them of the need to increase tariff. Of course, customers will not readily agree to an increase of tariff but the idea is to create a forum for accountability. The discos will make a case for the new investment of improvement that warrants the increase of tariff. NERC will review independent reports of these consultations and conduct quasi-judicial proceedings to finally approve tariff. What we intended to achieve is credibility, transparency and accountability. We know that jurisdictions that follow such transparent procedure for determining tariff always have the most cost-efficient tariff. We need to rigorously follow this price and back it up with premium communication

What are the implications of the recent power play in the sack and reversal of the MDs of Rural Electrification Agency and Nigerian Bulk Electricity Trading Company?
The reform of the power sector is based on some form of governance. This governance structure is based partly on the EPSR Act and the terms and conditions of the licensed entities in the market. The reform sees the minister of power as the policy maker exercising the part of the executive power of the President. NERC as a regulator also exercises the executive power of the President under Section 5. There are also other market-based entities that exercises authority. So, the minister is not the sole authority in NESI. NERC has more authority in the NESI than any other person.

Now both MDs of REA and NBET are appointees of the President, so the minister can only sack them on the express approval of the president. If the president approves, then they can be sacked. They don’t enjoy legal tenure. But as regards the NBET MD the argument is that the chairman of the board is the Minister of finance and not power. Anyway, she ought to be removed by the president acting through the board chairman. It looks like that never happened. There’s no presidential approval, so it is invalid.

Now the implications of this power tussle are loss of confidence in the stability of the sector. The worst is the rampant allegations of corruption levelled against the heads of these agencies. Some of these allegations are unproven and even false, especially against the MD of NBET. Don’t these guys know that these allegations create a contagion of risks and does not give an assurance of credibility to the sector? Why should NERC allow this drama of allegations of corruption last too long without stepping in to resolve matters? NBET is subject to the oversight of NERC as a licensee of NERC. NERC has the right to penalize its management if they infringe on corporate governance. Why wait for the minister and allow such sensationalism that has weakened the credibility of the sector? I think next time NERC needs to boldly and decisively step in and settle issues.

How will the movement of NBET to ministry of finance affect the power sector?
I think there’s no basis to move NBET to finance. It was a good idea to recall the MD who was wrongly suspended, but a bad idea to take NBET to finance. NBET is a power agency, a single buyer in the design of the electricity market. Its work is basically to buy power on behalf of the discos that lack financial credibility. The idea of making the Minister or Finance chairman is strategic to ensure better oversight because of its impact on balance sheet of government and also add a non-power sector person to policy control. This is prudential and does not change the fact that it’s part of the power sector. Taking it to finance is will result in possible weakening of coordination between NBET and market operators as it will not share common platform for information and management. It’s a bad decision. It’s perhaps an overreaction. When we licensed NBET our idea was to have it wound up now. But the market did not start as planned and NBET is just starting life. I think NBET may be an error. It may lead to a moral hazard that will continue to enthrone inefficiency in the market. The discos will never rise to their feet if there is an NBET buying power on their behalf. Maybe we need to redesign and follow the example of Toronto and other places. When we licensed NBET I preferred sunsetting NBET after three years except the regulation approves extension. The commission chose a different model that allows NBET to be alive. Unless the commission acts to end its license, NBET will remain.

In the face of the outrage over tariff increase, how do we address the liquidity gap in the system?
The liquidity crisis in the sector is very deep. The error is to think it can be filled by quick tariff increase. Of course, we need an improved tariff but the much ado about tariff increase is misplaced. Some level of tariff increase can actually worsen the situation by increasing collection losses and energy theft. If we keep harping on tariff increase without significant improvement in power supply, we will ruin the collection efficiency of the discos as customers will revolt and our political economy will weaken in the face of public protests. We need to be strategic. Increase tariff appropriately but improve service and transparency in billing and customer service more. The answer to liquidity problem is more on the supply side. Discos should invest more on reducing losses and improving power supply through embedded generation. They need to sell more power and be more efficient in connection and collection. Banking on using tariff to improve liquidity in the short to medium term is illusory in this sector as it stands today.

So far, would you say the Meter Asset Provider initiative has lived up to expectation?
I don’t have enough information to assess the success or failure of the MAP. But from the stories I received every day from customers of discos, I know that metering remained as bad or even worse. Some of the MAP firms have one complaint or another. Anyway, all regulatory interventions suffer initial crisis. It is for NERC to re-assess the scheme and tweak it to address some of the shortcomings. That’s is why we say that regulation is iterative; you study what is happening and reorganize errors of omission and commission and fix them. We should not be discarding policies that face challenges. I believe that CAPMI would have succeeded massively if we kept faith with it. But it was thrown away precipitately. We should not be in a hurry to throw away MAP. Let’s work hard on it; change what needs to change and enforce more rigorously the provisions of the scheme.


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