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Monday 23 July 2012

‘There Are Shortcomings In Power Sector Reforms’


As the power sector reform process gains momentum following the opening of the bids for the PHCN successor companies, Chairman of the Nigerian Electricity Regulatory Commission (NERC), Dr. Sam Amadi, in this interview with Juliet Alohan, opens up on his concerns about the process and notes that mistakes made in the past have weakened government’s bargaining powers over the sale of the utilities.
How would you assess the power reform process so far and what are your major concerns?
I think the reform process, as articulated in the 2001 National Electric Power Policy and 2005 Act, is the way we should go; it is properly articulated. The reform principles articulated that, first, you unbundle and create 18 companies out of the public monopoly, NEPA. The next, stage two, you corporatise these entities and what that means is that you begin to run these entities as if they are independent corporate entities. All over the world, the theory of reforms in the electricity sector, which started from experience in England, is based on the idea of first removing public monopoly, but creating a commercial framework that introduces better governance. The ideal is separate ownership, management and regulation. Take, for example the case of ESCOM of South Africa; it’s a publicly-owned company, but it is efficient: it is returning revenue to government. ESCOM is a success because it has a framework where it is owned by the Ministry of Enterprise, which could be our equivalent of the BPE. The electricity policy is fixed by the Ministry of Energy which could be our equivalent of Ministry of Power, and the market is regulated by the electricity regulatory agency of South Africa, which is our equivalent of NERC. So, they succeeded in the economic theory that says you have to separate ownership and control. What we did wrong is that even though BPE or Ministry of Finance own these companies, the Ministry of Power continued to run them and that is why, in the last seven years of this reform, we have remained where we were in 2001 significantly. Although there have been some marginal improvement, but we are still stranded in the 2002 situation. The ministry has got itself involved in the operations of these entities, negating the whole idea of unbundling and corporatising. That weakens both managerial and regulatory control. The two ways to demand accountability in the energy sector is what we call managerial oversight and managerial accountability.
The managerial accountability is that you appoint a CEO and task him with running the entity and collect revenue and improve capacity to deliver more, while the regulator insists that the market is the key performance indicator or else you are sanctioned. Now, on the two ends you are putting pressure for performance. Nothing says public entities cannot work; I am a believer that they can work as long as they are run according to the structure that allows for efficiency. Manitoba Hydro that is going to run our transmission company is a Canadian public entity, but it is run with clear performance framework. So that is where we got it wrong; we didn’t fully corporatise. We neglected the Act, instead of the networks improving, it’s almost degenerated and so we are at a place where we are having a bazaar sale; where it is like we need to dispose the wares with no choice, where the control is not with us but with the external person because the external person can price it how they like. There are no incentives to buy and therefore we may be forced to downgrade to sell. So at this stage, because of our governance weakness, because we are not ready to play by the rules we set for ourselves, we have no option but to privatise.
But if we had followed the 2005 Electric Power Sector Reform Act, fully corporatised, allow the regulator to come in, we would have set up a market that is close to efficient and then we would have had about 70 to 80 per cent success on metering and have reduction in losses, improvement in collection efficiency; and therefore the IPPS would have had more confidence. Today we are bringing the bulk trader and the risk around the bulk trader is going to increase, whether government has to fund or capitalise it. These are results of failure to create a market that is solvent, which should have been a product of managerial and regulatory accountability so that people can come to this market and set up IPPs and have confidence that when they make such investments, they can remain profitable in business. And government needs to show responsibility to guarantee confidence because if governance setting is inefficient then people will not be guaranteed. So what I am saying is that the privatisation process is more expensive, more risky because we did not follow through the National Electric Power Policy of 2001 and EPRA of 2005.
And two central missing pieces there is that we didn’t allow the regulator to regulate the market and we didn’t pull out the Ministry of Power from running the companies as if they were the owners. That constituted two major mistakes. If we had done that we could still privatise, but we would have privatised like Britain and some other countries that privatised not from a state of disrepair but a state of some degree of performance. But we are now reforming with no alternatives, and our bargaining power over the process is weaker. If, God forbid, that at the end of the bid process we don’t have very good bids for the companies, we will have no option than to enter into Plan B and that Plan B could involve anything. So we got ourselves into a blind alley where we have little avenue to pull out; we just have to sell off these things and, even at that, we are not sure whether the bidders will bid and even if they bid, we cannot be certain that they will deliver on their commitment.

What could the potential ‘Plan B’ entail?
There are still some degreesof uncertainties: will they bid? And if they bid, are they able to raise the finance and take over the network and take the real risk of managing the network? I’m not too familiar with what BPE has set out on Plan B, but in time to come they will appraise NERC what Plan B is. But from a regulator’s point of view, Plan B must be a plan that gives value for value, a plan that is sensible to improve on the network. The Plan B might be, and I will think this is a good option, that if at the end of the day 20 to 40 percent of the network is taken, then we can say that the remaining entities should be weaned from the mother’s milk, put them to run as public enterprises, have them compete with private enterprises, face the full rigour of regulation, pull out the ministry of power and let them just do the work of oversight of policy and not oversight of operations. Let the BPE and ministry of finance, who are the owners of the companies, set up a framework that allows them to run as viable entities. Then over time, there could be merger acquisitions, reduce their risk factors, reduce their inefficiency, a buyer comes on the way and they can be disposed. But what should not be compromised is the idea that this market should be regulated efficiently.

Beyond these issues, what about the issue of gas to power, because there seems to be no adequate short-term solution to the challenge?
Nigeria has a problem that wasn’t caused by this present administration; that is, when we were planning our network, we didn’t have capacity expansion plan. The current system has taught us that the major feedstock for the increase in capacity is gas and, therefore, we would have aligned the reform in gas and reform in electricity. Many countries of the world, including Ghana, what they did was to align the regulation on gas and power. The best answer to Nigeria’s problem is to converge gas and electricity regulation. The British had that same problem; they first had an office of gas commission and office of electricity regulation separately, but they later discovered that it was not efficient, the cost was high and there were lapses and misalignment, so they converged it and called it the Office of Gas and Electricity Market, OFGEM. So the OFGEM, which is the equivalent of NERC in the UK, oversees gas and electricity regulation. So what we should have done is to have streamlined that function. Two ways you can do it: you can converge them which is a more efficient way and let NERC take responsibility for it, because the investment needed for gas infrastructure will arise from a gas tariff; the gas tariff can only be recovered through electricity tariff, so, at the end of the day NERC, should be able to input what we call a pass through cost. But if you have two disconnected individuals doing this job, it is possible that half of the tariff we approve may not factor the real cost of gas transportation, and therefore the incentives to invest will not be there. The second best thing to do is to create a greater synergy between the two markets, so we have been having a better relationship between the Ministry of Petroleum, Power and NERC. But in the future, for sustainable system long-term planning, you just have to align the regulatory framework of the gas and electricity market.
In your opinion, would the reforms in the power sector be enough to address the nation’s power challenge or you think there is need to diversify our energy sources?
We already have a framework for diversification; it is only that the ministry of power has not perfected on the renewable energy master plan. But I think the major challenge today is for us to have increased capacity, and gas is the main ingredient for that to happen. But we need to plan for the future, have a proper renewable master plan. Renewable is the way to go in the future. As technology improves, it will get cheaper. Today, it is expensive but it going to be cheaper in the future. We can’t avoid renewable energy increasingly becoming a major chunk of our energy mix, but in the next three to four years, the prospect of renewable energy making any impact on our energy capacity is near zero. The best way renewable energy can be used is for rural electrification project. I opposed the rural electrification project in the past because I saw it as a form of contract market, because the way it works all over the world is to make it a central piece of renewable energy so you have to link it to renewable energy plan. You go to a community and do a survey of their resource base - if it’s solar or wind - and do renewable energy along the resource base. That is how you can tie renewable to grow electricity projects. But for Nigeria to come to some degree of less energy deprivation we need to focus on improving gas to power.
What are the implications of the lack of transparency in the process; why are they not publishing the full list of the bidders?
Everybody will agree that this process we are having is more qualitative than the previous once we have had, thanks to Mr. President who has not interfered with the process. But the real challenge, going by Nigeria’s history, is proactive disclosure and transparency. So I will suggest to the BPE to publish the list of all bidders, publish their owners and promoters, remove every obstruction so that when you declare the winner, there will be no mystery man at the end of the day. Get it to be open, let the media and civil society groups be part of the process. The best security is publicity, because if I’m not in this job and I am a civil society activitist I will not believe that this is going on smoothly, you will have to go the extra mile to prove to me that this is not some sweet heart deal. But from the evidence I have seen so far, there is no sweet heart deal, because the law requires NERC to approve the transactions, and I won’t approve anything that has a question to it. That’s why I will insist that we do the right thing. I would like to see a technically credible bidder win the bid in a fair and transparent process and take over the entities and improve efficiency.

SOURCE: 23 July 2012.


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