Be firm, but fair. Regulate but be business oriented
by Ayodele Onifor
February 16, 2017 | 1:00 am| | | Start Conversation
What new NERC commissioners should do to fulfill this charge by the Minister of Power
The newly appointed commissioners of the Nigerian Electricity Regulatory Commission (“NERC”) have been charged by the Minister of Power, Works and Housing to be “firm but fair”, and to ensure that they remain “business oriented” whilst regulating the electric power sector. There cannot be any better advice than that, considering the current status of the power sector. The sector has been in transition for far too long and in actual sense, for almost two decades. The sector has, in reality, barely made tangible progress in the last few years with NERC arguably over-regulating the sector.
The previous commissioners have sometimes been accused, by both industry practitioners and a few former members of staff of NERC, of being ineffective in their roles. Perhaps tellingly, NERC’s activities have continued in the absence of newly appointed commissioners reasonably well, bearing in mind that the absence of such commissioners delayed decision-making and implementation.
Regulatory Capture was a term that sometimes arose in reference to the previous commissioners, and there was genuine concern that rather than NERC acting as an industry regulator, empowered to act in the public interest, it was actually putting forward the commercial interests of the dominant industry participants. As such, the onus is on the newly appointed commissioners to win back the public’s confidence.
However, in their bid to rebuild public confidence and trust, it is important that the new commissioners put in place measures and regulations that would incentivize investors to enter into the industry. As such, the commissioners must walk a fine line between protecting the public interest, and promoting and encouraging investments in the industry.
One key area where the new commissioners can play a role is in encouraging efficiency and speed with which industry participants can do business with NERC. In my experience in the sector advising private entities seeking to enter into the sector, one common complaint by investors is the amount of delay experienced in certifications or approvals from NERC. It is impossible to overemphasize the havoc that inordinate delays in obtaining even minor approvals (for example, for meter installations) can wreck on financial plans, and many potential and current market participants have lost out on some good opportunities as result of NERC’s long timelines for approval and communication of its decision.
Many of the approvals required from NERC should ideally be given within 2 weeks of application. Even with regard to the licences, while the ESPRA mandates a maximum period of 6 months, I believe that most licences can be granted within 3 months. While we cannot assume this to be an easy task, with the introduction of clear timelines and efficiency (as well as the introduction of sanctions to officials or NERC for their failure to fulfill any material obligation), such timelines are achievable.
It is important that entrepreneurs and investors do not lose out on opportunities simply as a result of regulatory ineptitude as this has potential to damage business. It is suggested that NERC overhauls its management model with the introduction of a strong but clear ‘Key Performance Indicator’ system with sanctions for failure to perform as well as reviewing the effectiveness of some consultants.
Inordinate and Convoluted Process and Licensing Rules
There are several rules, including the procurement guidelines, which simply make it difficult to apply for and obtain licences and I am not quite sure the power sector is at a stage where we should have guidelines which prevent people from applying for unsolicited licences. There have also been situations where the Minister has had to intervene Onifor NERC to issues licences, and a popular case, of which many players in the power sector are aware of, comes to mind.
The licensing process should be easy and for now, there should be no inhibition to licensing or application for licences, with even more robust opportunities for players in the industry. Foreigners looking to invest risk capital and play in the sector should not be frustrated, as is the case between certain independent power producers and distribution companies who would rather be territorial than support generation players looking to do business in their catchment area. The rules regarding eligible customers are a bit too untidy and unclear, and in a clime like ours where we require serious investments, we should be encouraging rather than discouraging would-be investors.
Employment is needed, foreign direct investment is also required in a country that requires a push out of recession and falters in terms of the “ease of doing business” index. The new NERC commissioners would do well to play a crucial role in Nigeria improving its position in the ease of doing business index. I know that the new commissioners are some of the finest professionals and I trust they would make us all proud.
In deciding what policy or regulations that should be put in place, the first step should be the systematic collection, analysis, and monitor of data to recognize risks and measure progress. The information discovered will then inform the policies to be introduced. It is, therefore, important for NERC to identify useful and accurate sources of data. As such, for NERC to truly make informed policy decisions and regulation it must take steps to expand its knowledge base.
In the power sector, data-driven regulation means that, for example, proper attendance and care is giving to the determination of baseline figures, or that an accurate estimate of the total number of customers is ascertained. Such data will then drive the decision-making process as well as the type and kind of regulations that would be issued. So, for example, determining the exact number of customers and their energy needs, as well as relevant baseline figures for losses, will allow for an accurate adjustment of the MYTO tariff with little controversy.
However, this means the NERC commissioners will need to review hiring practices, as well as contracting the right consultants to deal with such issues. This will lead to a higher degree of accuracy in its determinations.
Metering and Distribution Regulation
Metering has been a persistent problem in the power sector. In 2014, as an effort to reduce the metering gap, NERC introduced the Credited Advance Program for Metering Implementation (CAPMI), which is a system whereby the customer would pay for the meters in advance and would recover the costs through discounted billing. While many customers were willing to accept these terms, it appears the discos were content to continuing the previous system of estimated billing. So while CAPMI was a good initiative, it was not effective in addressing the metering problem. The unwillingness of the Discos to adopt this system appeared to suggest that metered customers are less profitable than unmetered clients and the Minister has announced that the scheme is to be discontinued.
However, the failure of CAPMI does not detract from the need for an accurate metering system, whereby consumers are only charged for energy consumed. Currently, customers without functional meters are being billed in an arbitral manner and at the discos’ discretion, and the discos are more than happy to transfer energy charges to unmetered customers. Such arbitral charges are rightfully contested by consumers, who sometimes resort to the illegally connecting to distribution lines.
NERC had attempted to fix this problem by placing a cap on amounts charged for estimated billing and released a Concept Paper on Capping Estimation of Energy Consumption (the “Concept Paper”), which sought to introduce ‘an estimate charges capping system’. In this respect, NERC intended to protect the customer and dis-incentivize Discos from estimated billing such that it then became imperative for them to accelerate the metering of all unmetered customers. However, the previous commissioners failed to properly implement and enforce these regulations.
It is important for the new commissioners to ensure the whole of Nigeria is metered as without it, a genuine push towards and efficient system is unlikely to begin. Consumers are unlikely to be willing to continue paying for energy if there is not some level of accountability in the system. This, in turn, will have a detrimental effect on the discos as they will have reduced liquidity.
Metering also has a psychological effect, as people are more likely to be willing to pay for a service over which there is accountability, in contrast to the estimated billing system, especially when there is a huge divergence between the estimate and actual consumption. This is an area that the new commissioners need to drive.
Changing Grid Code and Market Rules to Support Diversity
In recent times, the government has pushed for energy diversity, in particular, the inclusion of solar energy into the energy mix. However, transaction experience has espoused that the current slant of the Grid Code leans too greatly on thermal plants (especially gas) and hydropower, and does not take enough cognizance of the possibility of solar generated electricity. As it stands, the Grid Code actually contains several provisions that would prevent solar projects from being commercially viable.
The new commissioners must work towards dealing with these challenges, in particular, to seek derogations from NERC as well as the potentially an amendment of the Grid Code. In doing so, it is important to employ local engineers who may be able to identify local issues that foreign counsel may miss, as they may be using resources that do not apply.
In conclusion, it is with anticipation we see await the actions of the new commissioners, who have been selected based on their experience and technical abilities and so are more than up to the task.
Ayodele Oni, (firstname.lastname@example.org), a commercial lawyer and Partner in a leading Nigerian law Firm, specializes in international energy investment law & policy advising a number of electric power developers. He holds a mini-MBA in Power & Electricity and is also currently advising some ministries, departments, and agencies of the federal government of Nigeria on the post-privatization restructuring of the electric power sector.
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