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‘DisCos, GenCos blackmailing government to bear costs of their inefficiency’

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Amadi

‘The former Chairman, Nigerian Electricity Regulatory Commission (NERC), Sam Amadi in this interview with KINGSLEY JEREMIAH, discussed germane issues in the electricity sector, especially the call for a review of the privatisation agreement. He also said the biggest setback for the sector is the low rate of metering, while the scourge of estimated billing constitutes a double curse.

It’s been over five years after the privatisation of the power sector. What is your assessment of the sector so far?
The plain assessment is that we have not achieved the strategic objective of the privatisation. I think it is better to talk about the over 16 years of the power sector reform. Has it achieved the objective? Of course, no. We have not achieved both the entire reform, and the privatisation. The reform was aimed at reversing the collapse of the electricity sector by increasing capacity, improving efficiency and ensuring availability, affordability and reliability of electric power. To achieve the aim, the reform focused on unbundling and privatisation of the former National Electric Power Authority (NEPA).

But today, we don’t have any increased capacity; electricity is not affordable, and not anywhere close to reliable. Does it then mean that the reform was a wrong idea? Not necessarily. It simply means that it has not delivered on the objective. So, we need to now interrogate the reasons for this failure. Is it due to wrong modeling or ineffective implementation? I think it is both. We erred in modeling the reform and focusing mostly on the privatisation. Between 2010 and 2013, we focused almost only on the privatisation instead of enhancing regulation as well as corporate and structural reform. The privatisation was also wrongly designed and executed. It was basically rushed under the wrong assumption that change of ownership was enough to engender efficiency. Because we believed too much in the magic of privatisation we did not work hard to ensure that those, who took over the assets have the demonstrated financial and technical capacity to turn around the assets.

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Of course, the choice of divestment method is also a cause of concern. Some feel that perhaps, the assets should have been sold on a token to those, who showed bankable financial commitment to make investment. So, instead of these investors borrowing heavily to acquire the assets, they would b borrow to improve the assets in a short time. So, the failure of privatisation to deliver so far relates to errors in the design and implementation of the process.

There’s has been a clamour for the reversal of the privatisation agreement. Do you support the clamour?
A decision to cancel the privatisation in the manner that politicians like will be dangerous. It will undo whatever successes that have so far been recorded in the reform. However, the biggest success that has been recorded so far is policy continuity, which leads to lower perception of risks. In a world defined by Thomas Friedman as “golden straitjacket,” a perception of political risk is dangerous; it will dry up foreign and domestic investments, and no one would understand why the Federal Government has to cancel privatisation after five years. It will look obviously like nationalisation, which is the major fear of investors in a capitalist global economy. So, we will get back to 2009 when President Umaru Yar’Adua backpedaled on the reform.

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So far, the Federal Government has spent nearly N2t in bailing out the sector, despite the privatisation. Why is the sector failing to perform despite these interventions?
The financial bailout could be like throwing money at problems. The problems are more complex than the policy managers realise, and the DisCos and GenCos are blackmailing the government to bear the costs of their inefficiency because they have also realised that the government cannot abandon its social obligations to provide electricity to the people. So, head of tail they win. But the government has to change that by internalising the losses in the DisCos and GenCos not on public treasury. This can be done by regulatory interventions. We need to be smart to benchmark operators and closely enforce; we need to consider to revise their franchises through a credible regulatory process that is peer-reviewed so that those who can’t deliver lose to those who can, or to new market entrants.

We need new private-public partnerships that expand capacity where the DisCos can’t, or help them to perform. The basic thing is to start with the realisation that the process has failed, and do a proper diagnostic of the failure. We have not done that; we are throwing money away because of political pressure, and we are reinforcing failure in our anxiety

The distribution value chain is often referred to as the weakest link in the sector. So, how do we solve the challenges besetting DisCos?
The way to solve the distribution crisis is for a strong regulatory intervention in the manner of forcing the delinquent owners to dilute ownership after due process to institutional or other investors with capacity. Government can also use its 40 per cent to engineer corporate takeover of delinquent DisCos based on regulated performance indicator. The critical point is that the regulator should base its action on clear industry reviewed benchmarks. That’s a regulated solution.

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How do we solve the huge liquidity crisis in the sector?
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 is the weak in the face of public protests. So 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 terms is illusory in this sector as it stands today

What are the loopholes that are causing drawback, which you think that the government should address?
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, which 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 we tried to bring scientific methodology to controlling the reckless and self-serving behavior of DisCos. The DisCos argued that the methodology was difficult to operate, and we tried using CAPMI to bridge the metering gap.

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Finally in the 2015 tariff, we inserted a provision that anyone who had made payment for a meter and has net taken delivery of it after three months 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 it 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 they will have strong incentive 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.

The problem in the power sector is not mainly legislative bottlenecks; it is mostly design and implementation failures. We need to be bold and revise the design to align with institutional pathologies in our system, and focus mostly on performance. But in terms of legislative bottlenecks. People have spoken of criminalising energy theft. That should go together with wanton exploitation of consumer. What’s good for the goose is good for the gander.

Secondly, the legislature may need to develop greater engagement with regulatory policies. The legislature has not been doing its job as regards legislative oversight. It does not go through the policies of NERC to ensure compliance with the EPSR Act. Without effective legislative oversight, the regulator may slack or be captured by special interest. Oversight is not summoning regulator on behalf of the DicCos or unduly harassing regulators doing their jobs. The major legislative constraints of the electricity sector is the lack of knowledge of legislators

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