KEY REGULATORY ISSUES AND CHALLENGES CONFRONTING THE NIGERIAN ELECTRICITY REGULATORY COMMISSION

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KEY REGULATORY ISSUES AND CHALLENGES CONFRONTING
THE NIGERIAN ELECTRICITY REGULATORY COMMISSION

• A Presentation to the NERC-NARUC Workshop
• By
• Market Competition and Rates Division JULY, 2008

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INTRODUCTION

• Even though electricity generation in Nigeria
  began in 1896, the country has not made much
  progress in the sector commensurate with the age
  of the industry.
• The sector witnessed no new investment for over a
  decade, between 1980 1990. Generation capacity
  remain at about 6,000MW with actual generation
  most often below 40 of the capacity.
• Proper maintenance and replacement of obsolete
  equipment was not accomplished, leading to a
  progressive drop in supply.
• The long years of neglect and inadequate
  investment resulted in dilapidated, weak, and
  obsolete transmission and distribution network.
• Tariffs were below cost, metering was grossly
  inadequate, billing was poor, revenue collection
  very low, and power theft rampant.
• It was against this background that the Nigerian
  Government commenced the reform of the
  electricity sector in 2000.

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REFORM OF THE
INDUSTRY

• The Nigerian electricity sector reform process
  commenced in 2000 and was given a
• legal backing in 2005 with the passage of the
  Electric Power Sector Reform Act (2005).
• It involves the following
• Structural reform which involves separating the
  potentially competitive functions from the
  existing vertically integrated monopoly (NEPA)
  and establishing a competitive industry structure
  for commercial functions
• Competitive neutrality - establishing
  corporatised governance structures for the
  unbundled entities 
• Privatisation - of distribution and generation
  companies with only the transmission company
  retained under Government control
• Immediate opening - of the generation sector and
  later the distribution (retail sector) to new
  entrants 
• Regulatory authority- establishing the Nigerian
  Electricity Regulatory Commission (NERC) to
  regulate the industry
• Access- enabling new participants especially the
  generators access to monopoly infrastructure.
  With NERC overseeing prices and terms of
  engagement
• Market design-establishing a national electricity
  market with associated institutions to oversee
  the rules and manage the market. 
• The overall objective of the Government policy as
  enshrined in the National Electricity
• Power Policy (NEPP) is ultimately to establish a
  long term electricity market structure in
• Nigeria in which multiple operators provide
  services on competitive basis to the
• broadest range of customers

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KEY REGULATORY ISSUES AND
CHALLENGES

• The principal objectives of NERC as enshrined in
  the EPSR Act (2005) includes
• To create, promote, and preserve efficient
  industry and market structures, and to ensure the
  optimal utilization of resources for the
  provision of electricity services
• To ensure that the prices charged by licensees
  are sufficient to allow the licensees to finance
  their activities and to allow for reasonable
  earnings for efficient operation
• To ensure the safety, security, reliability, and
  quality of service in the production and delivery
  of electricity to consumers

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REALISING NERCS OBJECTIVES

• To realize the objectives, key regulatory issues
  must be resolved, some of
• which includes
• How to develop a competitive wholesale and
  retail electricity market (where the private
  sector will be the key driver) out of an
  existing monopolistic entity
• How to establish a pricing mechanism that will
  provide incentive to investors as well as protect
  consumers.
• How to ensure a level playing field to all
  operators, both new and old as well as ensuring
  access to transmission and distribution
  facilities
• How to ensure reliability and security of supply
• How to monitor service quality and ensure that
  consumers get value for their money
• How to integrate the country into the proposed
  regional pool
• The next few slides will show NERCs responses to
  resolving the issues raised and those that still
  remain a challenge.

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THE DEVELOPMENT OF A WHOLESALE
AND RETAIL MARKET

• NERC has identified the following elements as
  necessary in the development of the Market
• Presence of many buyers and sellers- (lack of
  market power on both sides of the market)
• Demand and supply responsiveness to price
• Liquidity in the market place
• Equal access to essential facilities
  (transmission, distribution wires and system
  operations)
• Management of subsides and environmental controls
  so that they do not interfere with the workings
  of the market
• The EPSR Act (2005) recognised three distinct
  stages in the development of the wholesale
  electricity market
• Transition Stage
• Medium Term
• Long Term
• Commencement of each stage will be triggered by a
  declaration by the Minister that a more
  competitive market is to be initiated
• This declaration is predicted on a report by NERC
  indicating the potential for competition in the
  Nigerian Electricity Supply Industry (NESI).

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TRANSITIONAL STAGE

• The Transitional Stage commenced with the passage
  of the EPSR Act 2005, which made the following
  possible
• Incorporation of an initial holding company i.e
  the Power Holding Company of Nigeria (PHCN) to
  take over the Assets and Liabilities of NEPA
• Full unbundling of PHCN into successor Generation
  and Distribution Companies as well as the
  creation of a single Transmission company
• Creation and institutionalization of new market
  structures and trading arrangements including the
  following
• Operationalization of the Transmission System
  Provider (TSP), Market Operator (MO), and System
  Operator (SO) functions, within the Transmission
  Company
• Implementation of the Grid Code and the Market
  Rules
• Licensing of IPPs and other operators/service
  providers
• Development of an appropriate tariff regime
• Establishment of performance indicators,
  requirements and reporting formats for market
  monitoring
• Establishment of a trading arrangement and
  financial settlement system
• Establishment of various panels for market
  monitoring and dispute resolution.

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MEDIUM TERM

• The management and ownership of substantial parts
  of the DisCos will be in the hand of the private
  sector
• Thermal plants are either sold or concessioned to
  private sector
• Bulk trading licensee commences the novation of
  its existing rights and obligations for the
  procurement of electricity and ancillary service
• Power will be traded on the basis of bilateral
  contracts
• Generators and distributors will be able to trade
  power and capacity in the contract market
• Generators

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LONG TERM (Retail Electricity Market)

• End user customers can choose their supplier from
  competing electricity retailers.
• Customers will have the power to choose their
  energy supplier
• Possibility for lower prices and new service
  offerings for small customers
• More efficient electricity market
• Retail reforms are traditionally follow ups from
  the electricity wholesale reform.
• The NESI also intends to follow the same route
  for the creation of the REM

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TARIFF AS A TOOL FOR INCENTIVE REGULATION AND
PROMOTION OF INFRASTRUCTURE INVESTMENTS

• Central to the resolution of the problems of the
  power sector in Nigeria is the issue of
  commercial viability of the industry. The
  industry is barely able to generate enough
  revenue to cover its operating costs let alone
  meet its considerable capital expenditure needs
• The Commission developed a new Multi Year Tariff
  Order (MYTO) for the industry predicated on
  revenue requirement and sustainability of the
  incumbent operators and new entrants
• At the centre of the new tariff order is a
  multi-year tariff model, which calculates
  electricity prices based on revenue requirements
  of the whole industry. This approach is aimed at
  ensuring the necessary support for operating and
  capital expenditures of the various sub-sectors
  i.e. generation, transmission and distribution
• The tariffs are set at levels that support the
  viability and growth of the Nigerian Electricity
  Supply Industry (NESI)
• To avoid rate shock, the tariffs paid by
  consumers will be less than cost reflective
  values over the first three years of the
  introduction of MYTO. However, the Federal
  Government support will provide subsidy to make
  up the difference between actual and cost
  reflective tariffs over three years

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THIRD PARTY ACCESS AND A LEVEL PLAYING FIELD TO
ALL OPERATORS

• A single Transmission Company will co-ordinate
  the system on an open-access basis
• NERC will continue regulate transmission and
  distribution tariff
• The transmission company will be responsible for
  all power lines of 132Kv and above
• Transmission company will neither buy nor sell
  electricity
• Transmission company will not own or have
  ownership stake in generation, distribution or
  sales
• Distribution companies will manage all power
  lines below 132Kv
• Distribution companies will not own or have
  ownership stake in generation and or transmission
  

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RELIABILITY AND SECURITY OF
SUPPLY

• The ESPR Act (2005) provides NERC with the power
  to ensure adequate, safe, reliable and affordable
  electricity supply.
• The National Electric Power Policy (NEPP) has
  also identified the protection of life and
  property rights as well as the promotion of
  national security as vital for overall economic
  development. Accordingly, Government shall ensure
  that electricity operators comply with generally
  accepted standards for provision of special
  services for safety, emergency and national
  security.
• Central to the concept of reliability is the
  issue of security of supply and NERC considers
  security in two distinct areas
• The risk or likelihood of cessation of provision
  of electricity, for whatever reason, to any
  party who uses and needs it.
• The current or prospective absence of provision,
  for whatever reason, of electricity to a party
  whose welfare and effectiveness would be
  enhanced by it.
• In pursuance of the EPSR Act (2005) mandate and
  the NEPP, the Commission has established the
  following regulations to ensure safety and
  reliability of supply
• Grid Code
• Metering Code
• Distribution Code
• The Commission is also working towards the
  following
• Plant siting guideline
• Sensitizing State Governments on the requirements
  for setting up power plants. Emphasis is for each
  state to utilize its natural resources endowment
  for generation and thus set up small off grid
  Hydro, Wind and Solar to electrify rural
  communities.
• NERC is also encouraging potential investors to
  diversify into renewable energy.

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ESURING SERVICE QUALITY AND VALUE FOR MONEY TO
CONSUMERS

• Customer Service Standards of Performance For
  Distribution Companies
• These are minimum service standards expected
  from distribution companies in the provision of
  electricity supply to customers. They cover
  issues of time allowed in attending to faults,
  obligations with respect to replacement of faulty
  equipment, installation of equipment such as
  meters, minimum duration for attending to other
  technical problems that may impinge on the
  provision of uninterrupted electricity supply to
  customers.
• Meter Reading, Billing, Cash Collection Credit
  Management For Electricity Supplies
• Provides procedures concerning accurate meter
  reading by distribution companies, correct
  billing, adjustment of bills where overcharges
  and undercharges exist and processes for payment
  of bills. This ensures that customers are spared
  the vexed problem of estimated bills.

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INTEGRATING NIGERIA INTO THE WEST AFRICAN POWER
POOL (WAPP)

• In West Africa, economic growth is currently
  being stifled by insufficient supply of
  electricity to meet burgeoning demand.
• As a whole, the region is an energy surplus
  region.
• Each national utility works independently of its
  neighbors, evaluating its operation and expansion
  options on a project-by-project basis. But the
  cheapest energy source for a country might well
  lie just across the border.
• With cross-border energy networks, countries with
  surplus power could run their stations at optimum
  output without risking oversupply.
• Countries with limited generation capacity could
  access affordable power without building costly
  facilities. Power pooling also diversifies energy
  sources.
• In October 2000, 14 members of the Economic
  Community of West African States (ECOWAS) signed
  an agreement to launch a project to boost power
  supply in the region. The scheme known as the
  West Africa Power Pool (WAPP) is planned as a
  joint power pooling mechanism to help integrate
  the various national power systems into a unified
  electricity market.
• The major sources of electricity under the power
  pool would be hydroelectricity and gas to fuel
  thermal stations.
• In February 2003, the Presidents of Ghana,
  Nigeria, Benin and Togo signed a treaty providing
  for a comprehensive legal, fiscal and regulatory
  framework to build a joint gas pipeline. The 620
  km pipeline is set to run from Nigeria's Escravos
  oil field, where it will capture gas flared by
  Chevron, to Ghana. It will also provide gas to
  Benin and Togo and may eventually pass through
  Côte d'Ivoire before finally terminating at
  Senegal.

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INTEGRATING NIGERIA INTO THE WAPP (2)

• The West Africa Gas Pipeline (WAGP) delivered
  its first volume of gas from Nigeria to Tema last
  December.
• WAGP is expected to be a feeder project for WAPP
  which benefits are expected to be spread to the
  whole Gulf of Guinea in the long term. It is
  hoped that WAPP would assure the sub region with
  a stable and reliable electricity supply at
  affordable costs by creating a sub regional
  energy trade and cross-border exchange between
  national utilities.
• The ECOWAS vision is to
• Develop and put in place a cooperative power
  pooling mechanism with a view that such
  mechanism would reduce the sub regions
  vulnerability to droughtinduced power supply
  disruptions, diversify supply sources and spur on
  economic growth.
• Assure national power utilities of mutual
  assistance to avoid a sub regional power system
  collapse, or in the latter case, rapid
  restoration of interconnected regional power.
• Foster sub regional economic and political
  integration that would support economic growth,
  based on reliable, continuous quality electricity
  service

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REGIONAL ISSUES

• Common Market Rules
• Tariff
• Open access to network
• Standardized codes
• Regional regulator
• Relationship between regional regulator and
  national regulator

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CHALLENGES

• Even though the generation sector of the industry
  has witnessed the licensing of over 20 firms
  since the commencement of the reform none of the
  licensed generators has commenced operation.
  Timely intervention in generation is therefore a
  major challenge. Without adequate generation
  there can be no competition in the market.
• The industry is  still predominantly public and
  even the licensed generators upon commencement of
  operation may have to do business with mainly
  government owned companies and  thus be exposed
  to the usual  tension and friction in the 
  relationship between public owned and purely
  private owned business.
• The appropriate frame work for ensuring optimal
  national transmission investment is lacking and
  transmission is now considered as a major bottle
  neck in the industry. It may therefore pose as a
  barrier to entry for prospective generators.
• The distribution/retail sector is still under the
  control of government and thus shut from
  competition.
• With the increasing importance of natural gas in
  the energy mix there will be a need for better
  price transparency to enhance competition and to
  provide appropriate signals for new investment.

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CHALLENGES - 2

• The proposed wholesale market unlike the market
  in most developed economies that have excess
  capacity and is usually an Energy-only market
  (meaning generators are only paid for producing
  energy) will likely be an energy and capacity
  market. This means generators may be paid for not
  only providing energy but simply for making
  capacity available.
• A uniform pricing arrangement is expected to
  subsist nationally within the National
  Electricity Market (NEM) despite the cost
  differential associated with transmission and
  distribution among the various distribution
  zones. This will result in cross subsidies.
• Proper coordination between competitive entities
  and essential facilities - coordination that was
  previously provided by NEPA is replaced by new
  institutions, and new agreements and rules. This
  is posing serious challenge and was said to be
  the major reason of the present decision to
  provide a new transition Board for PHCN
• Ensuring that the market prices that will
  eventually replace regulated prices are set in a
  market that is truly competitive
• Galvanising public confidence in the activities
  of the Commission due to perceived policy
  failures in the past

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CONCLUSION

• The Commission expects new issues and challenges
  to constantly crop up in the execution of its
  assignment
• The industry is at its infancy and a lot of the
  challenges will mainly arise from the
  inadequacies of the system
• Need to build confidence and hope on the reform
  process amongst the population
• An open and transparent consultative process in
  addressing issues and challenges
• Industry is gradually on the path to sustainable
  development
• The Commission believes that its success will to
  a large extent depend on the quality of its
  manpower and is therefore intensively training
  staff to meet with the challenges of this dynamic
  industry