BY Emma Ujah,Oscarline Onwuemenyi

Members of the Nigerian public want nothing, as badly as, a reliable electricity power supply from the government of President Goodluck Jonathan.  Knowing how desperate the people are, several government officials have taken advantage of this crave to turn power into a sector for high political game.

In this interview, the Chief Executive of the Nigeria Electricity Regulatory Commission, NERC, Dr. Sam Amadi, revealed that some politicians have turned rural electrification into a means for money laundering.

He said however, that the sector was being opened up for greater participation in order to reach a level where Nigerians can have reliable power supply.

Excerpts

Nigerians are eagerly looking forward to NERC to set down procedures for quality service delivery in the nation’s power sector. What to you consider as the greatest challenge to investment in the power sector in Nigeria?

Dr. Sam Amadi

I think there are two greatest challenges to investment in the power sector in Nigeria, and these are: one, the tariff structure- the pricing methodology and the price itself. The other challenge is the governance structure of the sector.

Investors are a unique kind of animals; evidently, they are concerned that they are not just going to make profit, but they continue in business which means they cover their cost and make profit because the funds they are investing have real cost, probably because it is borrowed or fund that could be used in another sector to yield profit.

So, essentially, investors expect that the pricing regime would enable them recover their cost and be able to pay back the money they borrowed from elsewhere.

Secondly, they expect to see a favourable governance institution- whether in terms of corporate and macro-economic policies that assures them of certainty.

They want to see certainty, for instance, when you get a licence you have a guaranteed of that licence; they want to know that when they sign a contract, whether on power purchase agreement or gas sales contract, that contract would be honoured and is not subject to political whims or other conveniences.

They would also be concerned about the political environment for instance, when government is going to pull back. So, they are looking at all of these; you can call it risk analysis: various types of risks and assessing what will be the cost of mitigating them. If all these calculations do not even out, if the financial and risk balance sheets are not encouraging, they may be reluctant to come into a sector.

But the good news is that all of these issues are being favourably and seriously addressed by government. The hazard of wrong pricing is now largely taken care of by the Multi-Year Tariff Order (MYTO) methodology that we have put in place since 2008 and which we are now revising to reflect the reality of cost of production in the sector.

 How does our tariff compare with those of other countries, especially in a country like Ghana?

The fact about tariff structure is that they may not be the same because although you can compare across board, the comparisons are not going to be very instructive because tariffs are not so abstract. You don’t just create a tariff; they respond to costs in the sector.

For example, if you look at the budget of building a power plant that will produce 250MW of electricity, the cost might be twice or more the cost of building the same power plant in another part of the world primarily because of several issues including cost of labour, ease with which you get land, among other factors. Not forgetting the corruption factor which can ultimately increase the cost of the project.

Essentially, and in spite of these cost, Nigeria has one of the most depressed tariff structures; we still believe that the tariff rates in Nigeria for electricity is still one of the lowest in the whole world.

Electricity tariff in Nigeria is very low. The reason why consumers are complaining about the price is because there is no sufficient quantity in supply, and they are worried about the number of hours they actually enjoy the electricity.

Up until July 31, 2011, the tariff was at N8.50 per kilowatt hour, which really was very low considering also the purchasing power parity of the naira, and all the components of electricity power business is denominated in dollars – money to import the turbines, paying the EPC (Equipment Procurement and Construction) contractors, are usually paid in dollars.

If Nigerians were to pay the right price, for instance, instead of N8.50, how much would it have cost us?

It depends; the right price is a function of quantity. So, what we do is that if you are producing, say in 2008, we benchmarked that by 2011 or thereabouts, we should be having 16,000MW. The idea is that with that 16,000MW, the price will come down.

The reason is that, evidently, the tariff here is total cost divided by the quantity. What we do is that we look at the industry and say: how much does this industry require? You do the asset valuation, the cost profile, the capital and operating cost, maintenance and put them together. Assuming that amounts to, say N10 billion that this sector is worth; you now ask yourself: what is the quantity we are looking at?

Assuming we say 4,000MW, the average cost of tariff would simply be the N10 billion divided by the 4,000MW that gives you the average cost, which is the tariff. Although, what one class of consumers pay may differ from another.

For instance, if private consumers pay N10 per kilowatt of power, commercial users could pay as much as N30 to N40 because of the cost of serving them. However, the average cost remains at N10.

But, if our power improves and our generating capacity improves, and we now have as much as 8,000MW, the increment in total cost would not be proportionate to the quantity because some of the cost are fixed cost because the same work you did including the EPC costs to produce 2,000MW could have given you 8,000MW.

Therefore, if the total cost moves to N15 billion divided 10,000MW, the average tariff is lower. The work we are doing now which we plan to release to the public in September is that we are setting new a tariff structure from now till 2016. The new tariff structure will be based on our projection of generating capacity.

We have several scenarios, such as the expectation that the Nigeria Integrated Power Project (NIPP) comes on board and injects another 4,000MW between now and the next two years.  Also, if some of the licensed IPPs are able to deployed and finish on time, between now and 2013, you might have an increased in capacity. Between now and the next couple of years, you might not see a significant change except for a few hundred increases here and there. But if the NIPP projects move fast, we can have them in the next couple of years.

What happened to the NIPPs?

The NIPPs had a problem with management; they were not properly managed, especially from 2005 when most of them were set up to 2009 when they were stopped.

Some of the contracts that were signed were non-performing because they were given to people who cannot perform, coupled with a lot of political pressure. That is where you see the corruption in the system.

It is not strange. The IPP operators could not deliver on the schedule because they were initially given to people who had no capacity simply because they were connected to people in government.

Dr. Sam Amadi ...The NIPPs had a problem with management; they were not properly managed, especially from 2005 when most of them were set up to 2009 when they were stopped.

That led to most of the contracts being cancelled and re-negotiated, and procurement process done all over again leading to massive loss of revenue and time. During this process, the country lost more than 18 months.

Also, in the case of the IPPs, some of the plants were stopped at the ports, which caused delays. The best scenario would be when the NIPPs all come on board, including some that were recently licensed, and then capacity would definitely go high. In that case, you can have a significant drop in tariff during the next two or three years.

We want to be realistic by not attempting to distort the price mechanism. We don’t want to say there will be a drop in tariff next year on the assumption of an increase in capacity and it doesn’t happen.

We are giving what we call base-case scenario, the one that looks more likely such as the NIPPs coming on stream, and we can see improvement in the capacity of the existing IPPs as some of them are running below 40 percent of their capacities.

We believe that with the completion of the scheduled maintenance going on, we would be able to up the capacity and then have more. The tariff is a function of the cost in the industry. Another thing is that the fact that the tariff is ‘X’ doesn’t meant that every customer must pay ‘X’.

That is where the issue of subsidies given by government comes in or the cross subsidies that other class of consumers are made to pay to subsidize others, which is just like price discrimination.

Theoretically in pure economics may be wrong but in practical economics it has to respond to public policy. When we fix the right price, the other issue is how we would divide the consumer class: who should be on the lifeline tariff, which is a tariff that is consumed below threshold that as you escalate across options you pay more.  There are also the energy efficiency and conservation programmes which we have initiated.

We are initiating a Bill to make sure that even as you enjoy your electricity, you do so in a sustainable manner. For instance, we are particular about the use of energy-saving lighting or bulbs, which we want to promote as part of our consumer enlightenment campaigns to help consumers reduce their energy wastefulness even as they enjoy more electricity.

Therefore, two things are happening: the impact of the rate shock of this increase will be less.  At the same time, they are actually creating new energy by releasing energy they could into the system for others to use. With this, ultimately, the change in terms of what you pay as tariff will be less. And we are marking it up with improvement in the distribution network so that people can have improvement in the supply, at least.

You may not have 10 to 20 hours uninterrupted supply but, at least, when something goes wrong and you call your distribution company to come and fix it, there will be an immediate response- then people will have some degree of confidence in the system. That is our target.

We may not have much control in terms of pegging the price very low, but the reality is do you want the system to collapse after just a few years or do you want better service?

Nigerians seem less concerned about paying high tariff as long as there is adequate and quality electricity, after all they currently spend so much money in procuring alternative forms of energy The black market of this economy, especially of the power sector, has made it so that people pay more for alternative power supply.

Some calculations show that many Nigerians pay on the average as much as N60 to N70 per kilowatt of electricity through alternative energy generation. And it is clear that they do not mind paying a reasonable tariff whenever there is improvement in the supply.

The question is how do we improve power? I will suggest two ways. One of them is getting the Distribution companies (DISCOs) to improve their metering of power consumers. Oftentimes, Nigerians complain of poor metering systems, especially in situations where they have either been away for sometime or do not get a reasonable amount of power over a period, and then they are presented with outrageous bills.

The only way meters can come in is when distribution companies make that investment. An average distribution company in Nigeria today needs about N7 billion to bridge the metering gap in the country.

Now put the figures together. When we say we want everybody to have a cover. Actually, it is the investors who would make that investment in metres and the tariff would have captured it because the only way it works in this industry is if you invest, you recover. So, when we say tariff that is part of it.

The investor has to calculate his profit and find a way to put that in the eventual tariff. So, if we decide to give them a fixed tariff, say N20 per every kilowatt of electricity, they would have to do their arithmetic and see what they can get as revenue in case they have hired people, made investments and entered into other contractual agreements, and then it happens that they cannot regain their money.

The rate of collection has been found to be less than 30 percent effective. So, it is clear that the present state of things benefits the investors more because when people are not metered, you do it by process of elimination.

Because you do elimination, you can underestimate or overestimate, and then the officials collude to rip off the consumers. In this situation, PHCN and the Distribution companies lose a lot of money because the only way you can be sure is that you are putting the revenue back. The whole idea of tariff is to provide for a measured and cost-reflective pricing for electricity consumed.

In the past, government will say don’t charge costly tariff. But government is not really involved. Until today they depend on what is called minimum funding, and some DISCOs have only N50 per month for replacing their tyres in a month for the whole of their fleet, and when you have such a paltry budget for your tyres in a month, when the tyres in your fleet are bad and you have an emergency, you cannot deploy effectively.

The truth is that the level of funding in the sector is very low. And by the time you pay the over-bloated PHCN workforce that nobody wants to be retrenched, and the CEO takes care of himself in the Nigerian tradition, there is little remaining to use as investment in service delivery.

This tariff issue is like the chicken and egg situation. You need revenue to metre the consumer so as to get the accurate billing; they too will know their energy consumption and be able to control their use of power. But there needs to be some investment for it to be comprehensive.

In the United States, investors in a sector like power can afford to wait for ten years or more to recoup their investments, but here in Nigeria, everyone believes that the uncertainty in policy and the poor guarantee on investment has caused investors to demand to get rewards on their investments within three years.

When the investor invests with an eye on the long-term, he allows the customers to pay back over a long period which makes it possible to make minute and insignificant increments on the tariff over time; but investors coming to Nigeria know we are under difficult straits, because any investor would like to get his money the next day. That is because they are not even sure of the investment environment, or they are not even sure what will happen in the industry the next moment.

 It appears that the government is not interested in giving Nigerians quality power. Or else, why is the situation with the River State IPP, which we are told has over 300MW lying waste because the Federal government would not permit the state government to effectively distribute the power?

That is what they tell you; they do not have 300MW. The facts we have from the experts there is that the Independent Power project in Port Harcourt cannot generate more than 150 to 200 megawatts.

The issue really is how do they evacuate that power? The Chief Executive Officer of the Port Harcourt DISCO was here a few weeks ago, when the President invited us on this matter. He says that the only investment by the Rivers State government in the IPP is only about N5 million.

Let’s be clear on this.  We have received reports from state governors making claims of N17 billion or N20 billion as investment in rural electrification, and you ask the distribution companies, since the projects must be handed over to PHCN, and they tell you that all the equipment that were supplied are all damaged and they have to replace them.

We are in this country and we see what is going on. truth is that rural electrification has become the new money laundering scam, and that is why many governors will come to you and say they are commissioning 500 transformers, knowing that nobody would go back to count and verify.

And so they commission an agent to go and waste time in China. Secondly, the Port Harcourt Distribution Company is meant to serve about five states including Cross Rivers, Bayelsa, Akwa Ibom and Abia States. The bulk of it is 50 percent of all Nigerian distribution companies apart from the commercial consumer, the residential consumers that do not pay much. If you take out Port Harcourt, Rivers state, how would the other states serve the distribution company because you would have taken the major revenue and you will now have Port Harcourt Industrial complex to concentrate on.

NERC has just approved what we call Imbedded Generation Regulation, which allows you or anybody to generate power in Abuja, for instance, and instead of connecting to the National transmission which is where the problem is, you simply connect to the distribution company and drop the power to Abuja instead of getting it to the grid and bringing it back to Abuja.

You simply connect to the distribution line under some framework and agreement and that power can be tagged for Abuja.