Monday, September 17, 2012

Unbundling and Privatization of the Nigerian Electricity Sector: Reality or Myth? (II)

   
By Nkiruka Chidia Maduekwe

           CURRENT POSITION IN NIGERIA:
The reform was suspended for two years after the present administration came into power in 2007[1]. As it stands at present, PHCN has been restructured into the18 (eighteen) separate companies but these companies are still yet to be privatized. Therefore, the companies are still subsumed under PHCN, making them subsidiaries. The Yar’Adua administration when it took over centralized an already decentralized PHCN.[2]
The reform was intended to be done in phases and different timelines. PHCN was to be a transitional company that will transfer its assets and functions to the 18 successor companies and then dissolve after the incorporation of the 18 (eighteen) companies; bringing about a true ownership unbundling.
In essence, the reform that is in place in the electricity sector is Corporatization/Commercialization and not the intended Privatization/Ownership Unbundling. PHCN remains a vertically integrated company. Therefore, what took place was just a change of name and nothing more. The status remains the same; “the Nigerian electricity sector still follows the common form of organization referred to as the Sectorial model”.[3]
The Yar’Adua administration, moving in line with its “Seven Point Agenda 2008 - 2011”, in 2009 decided to go ahead with the Electricity sector reforms. To affirm its seriousness on the reform, the Federal Government had set “a target of producing 6,000MW[4] operable power generation capacity by the end of December 2009 and also the target  of 10,000MW operable power generation capacity by the end of 2011”.[5]
The Federal Government hopes to achieve this target through rehabilitation/continued rehabilitation of the necessary transmission and distribution infrastructure, maintenance of existing power plants and transportation infrastructure, and commissioning of new power stations. It is expected that by the first quarter of 2010, the first power station will be commissioned.[6]
In addition, transitional management boards are being created for each of the successor companies. This will allow them to carry out their affairs, as well as budgeting and investment, with no interference from the PHCN. Furthermore, the BPE anticipates that by the end of 2011, it will resume work on the privatization of the successor companies[7]
To this point, the Paper has discussed the current situation in Nigeria as regards the Reform. The next sections will look at England’s experience, what Nigeria can incorporate from it and also the reality, success or failure of the Reform of the Nigerian electricity sector.
    ENGLAND’S EXPERIENCE IN REFORM OF ITS ELECTRICITY SECTOR:[8]
Before the Paper discusses the above issue, it is pertinent to understand the influence the electricity industry system will have in a country main objective in carrying out a reform in the sector.
Principally, two categories of electricity industry system exist. The first system is one with sufficient capacity to meet demand, in which case the reform process is intended to create competition between existing facilities with the aim of reducing price or to minimize price rises, or to introduce a more efficient technology. England is an example of such system.[9]
The second system on the other hand, lacks sufficient capacity to meet demand. Therefore, the reform process in this system is carried out with the core objective of providing further access to funds for investments. Most developing countries fall into the second category. This means that they cannot afford to build new infrastructures and are therefore are compelled to take on some degree of liberalization to permit domestic and foreign companies build new plants. Nigeria falls into this category.[10]
This naturally sets the tone in understanding the key objective behind England’s reform process.
Prior to 1990, England operated a Sectorial model in its electricity industry. The Central Electricity Generating Board (CEGB) was the public vertical integrated utility that owned and operated the power stations as well as the transmission and distribution of electricity supply. It sold about 95 (ninety-five)% of its production to the regional area boards, which in turn distributed and supplied power within their local development Zones. [11] This was de facto, a vertically integrated monopoly.[12]
The Reform process began in 1988 with the “White Paper: ‘Privatizing Electricity’ which stipulated the regulating reform. This was backed by the coming into force of the Electricity Act 1989, which on its own part “provided the framework on which the industry was privatized”.[13]
“By April 1990, the nationalized monopoly structure (CEGB) that had existed for about 40 (forty) years, was replaced with one that introduced private ownership, competitive markets and independent regulation.”[14] The CEGB was divided into four different companies. They are:
·         Transmission was formed into a separate company called the National Grid Company (NGC); which had the role of setting common transport tariffs for all users of the high-voltage network and was also in charge of plant dispatch.[15] NGC had “the statutory right to serve as the non-profit making Independent System Operator (ISO). It was the only utility licensed to operate the national transmission system (NTS) with the 12 RECs serving as joint owners of the Grid”.[16] To ensure independence from the regional distribution and supply companies, NGC in 1995 was sold to the public.[17]
·         Generation was divided into three companies – National Power (NP), PowerGen (PG), and Nuclear Electric Power (NEP). In 1991, 60 (sixty) % of NP and PG were sold to the public and in 1995, the remaining 40(forty) % was sold. NEP remained in public ownership but in 1996, part of it was privatized.[18]
Also as part of the reform, the Area Boards were privatized into Regional Electricity Company (REC), introducing competition at the supply end. The RECs “where to have monopoly control over the wires, but would be subject to increasing competition in retail supply to final customers. RECs furthermore, had permission to own some of their own generation”.[19]
The Electricity Act 1989 what's more, established the post of the Director-General of Electricity Supply (DGES) with the duty to regulate the natural monopoly wire business of the NGC, the RECs. The Act makes it an offence to generate, transmit, or supply electricity without a license issued by the DGES.[20] The DGES carries out its functions through the Office of Electricity Regulation (OFFER)[21].
A compulsory power pool was established to bring about competition in the Electricity sector. It applied to generators and suppliers.[22] “This system was a compulsory bulk electricity spot market that determined the merit order and wholesale price of electricity”.[23]
In spite of the fact that it was one of the first organized wholesale electricity markets, the ‘pool’ proved unsatisfactory in some aspects, leading to its replacement by a new trading mechanism – the New Electricity Trading Arrangement (NETA). “NETA is a classical bilateral market that utilizes different durations of Power Purchase Agreements (PPA) to sell power wholesale”.[24]
A number of things made the reform a success but there are two outstanding aspects, which even led to making England’s experience a template for liberalizing electricity market. They are Regulation and NETA. The Regulator has the primary goal to “protect the interests of consumers, promote effective competition; it has the power to issue licenses, modify licenses, set price controls in the natural monopoly licensed sectors, investigate and penalize licensees who breach their license”.[25]

          WHAT CAN NIGERIA INCOPORATE FROM ENGLAND’S REFORM EXPERIENCE?
It can be argued that the Nigerian reform and England’s reforms were propelled by different core objectives; nonetheless, it does not mean that Nigeria cannot incorporate a thing or two from England’s experience. This stems from the fact that the Nigeria’s electricity reform geared along the lines of England’s reform: (ownership) unbundling/privatization.
One aspect Nigeria can incorporate is establishing an Independent regulator that is not influenced by government’s decisions or polices as witnessed in England’s reform (that is Ofgem). There is no gainsaying the importance of this to the success of the reform process.
At present NERC, which is the main regulatory body, cannot be said to be independent, reason been that the Minister of Energy “can issue directions to it in matters relating to the electricity supply process, and this is not limited to overall system planning and co-ordination”[26]. The Ministry of Energy is also involved in regulating the electricity sector. This does not give NERC the kind of independence it needs to carry out its functions without government’s influence.
The aspect of trading mechanism, that is NETA, can be adopted to promote and facilitate competition in the electricity market. That is pending when the Reform swings into full motion.

            CONCLUSION:
The Electricity Sector Reform firstly is not yet a reality as presently plans are still being made to implement it. Though structures have been put in place, for example the ESPRA 2005 and NERC the Reform is yet to be a reality, as targets have not been achieved.
Lack of political will has been a major problem in the implementation of policies. There is also lack of policy-continuity as every new administration comes in with its own agenda and policies. This creates an unstable environment, which discourages both domestic and foreign investor participation in the Reform.
The Yar’Adua administration has set the target to start privatization of the unbundled successor companies by the end of 2011. The problem here is that by 2011, a new administration should be in place. The crucial question here is how sure are prospective investors that history will not repeat itself? That is, the Reform will not be suspended again by the new administration as was done by the Yar’Adua administration. This is a question that only time can give an answer to, which unfortunately Investors do not play with and are very conscious.
Until the Nigerian government gets this aspect right, the Reform unfortunately might remain a myth.
In conclusion, in order to make the Reform a success, the following issues need to be addressed: firstly, there should be a “rehabilitation and overhauling of the generation, transmission and distribution networks as a whole. Secondly, the institutional appointment should be based on criteria such as expertise (managerial and technical personnel) rather than political favouritism. Thirdly, over-dependence on overseas manufacturer for the supply of power plant equipment, facilities and spare parts should be reduced and local manufacturing promoted”.[27] Lastly, political will is crucial in order to make the Reform a success.

Nutshell
This is the final installment of this interesting paper by Nkiruka. Here she examines the current position of Nigeria with regards to the privatization and unbundling of the Nigerian Electricity Sector. According to Nkiruka, “…the Nigerian Electricity Sector reform is not yet a reality as presently plans are still being made to implement it and an important factor in ensuring its success is political will.”  Read, Learn, Share and Discuss!!!



                           BIBLIOGRAPHY

PRIMARY SOURCE
The 1999 Constitution of the Federal Republic of Nigeria. http://www.nigeria-law.org/ConstitutionOfTheFederalRepublicOfNigeria.htm#ExclusiveLegislativeList. (Last Visited January 13, 2010).

SECONDARY SOURCE

Articles

Adeyemo, D.O., Adeleke, S., A Review of Privatisation and Public Enterprises Reform in Nigeria. http://www.cmr-journal.org/article/viewFile/607/2280. (Last Visited January 13, 2010).

Adoghe, A.U., et al. Power Sector Reforms-Effects on Electric Power Supply Reliability and Stability in Nigeria. http://docsdrive.com/pdfs/medwelljournals/ijepe/2009/36-42.pdf. (Last Visited January 13, 2010).

Adenikinju, A.F., Electric Infrastructure Failures in Nigeria: A Survey–based Analysis of the Costs and Adjustment Responses. http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V2W-47RRTCX-1&_user=1669875&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1162856510&_rerunOrigin=google&_acct. (Last Visited January 12, 2010).


Babatunde, M.A., Shuaibu, M.I., The demand for Residential Electricity in Nigeria: A Bound Testing Approach. http://www.africametrics.org/documents/conference09/papers/Babatunde_Shuaibi.pdf. (Last Visited January 12, 2010).

Glanchant, M., and Finon, D., (Eds) Competition in Europe Electricity Markets: A Cross-Country Comparison. (Massachusetts: Edward Elgar Publishing Inc., 2003)


Okoro, O.I., et al, Power Sector Reforms in Nigeria: Opportunities and Challenges. http://active.cput.ac.za/energy/web/due/papers/2006/O%20Okoro1.pdf. (Last visited January 12, 2010).


Thesis
Sanyaolu, H.A. Electricity Power Sector Reform in Nigeria: Utilising Restructuring and Regulatory Reform as a means of Achieving A more Efficient and Competitive Sector. THESIS (CEPMLP, 2008).

Journal
Arowolo, O., Licensing of Electricity Business in Nigeria: Issues and Comments. (I.E.L.T.R. 2006)29.

Internet Information
Chigbue, I.N., Electric Power Sector Reform: Privatization, Regulation and other Challenges. http://worldstagegroup.com/truecolour/media/11152404144.ppt. (Last Visited January 13, 2010).

Nigeria: Economic and Power Sector Reform Program (EPSERP) file:///C:/Documents%20and%20Settings/Administrator/Desktop/Economic%20and%20Power%20Sector%20Reform%20Program%20(EPSERP).htm. (Last Visited January 12, 2010).

Nigeria Power Unbundling Hits Snags. http://www.allbusiness.com/to-be-deleted/utilities-electric-power-generation/4077437-1.html. (Last Visited January 14, 2010).

http://www.nv2020.org/. (Last Visited January 29, 2010).






[1] That is Musa Yar’Adua administration.
[3] Supra note 9.
[4] Unfortunately, the government was unable to achieve this target.
[5] Supra note 14.
[6] Ibid.
[7] An important question to bear in mind is how realistic are these targets judging by the history of un-met targets experienced by the electricity reform process? - see Ibid.
[8] It is important to note that England’s experience is lies in the extreme influence it has had in a number of countries, including the European Union, Columbia, Ukraine and so – see Glanchant, M., and Finon, D., (Eds) Competition in Europe Electricity Markets: a Cross-Country Comparison. (Massachusetts: Edward Elgar Publishing Inc., 2003).
[9] Supra note 3.
[10] Ibid.
[12]Supra note 49.
[13] Supra note 52.
[14] Supra note 3.
[15] Supra note 49.
[16] Ibid.
[17] Supra note 3.
[18]Ibid. 
[19] Supra note 49.
[20] Supra note 3.
[21]. OFFER has been changed to Ofgem. This is a combination of gas and electricity regulation into a new body (Office of Gas and Electricity Markets) created by the Utilities Act 2000. The Utilities Act 2000 amended the 1989 Electricity Act. Its responsibility is to make certain that the regulatory process is free from political interference and to avoid creating unnecessary levels of uncertainty in the market. In spite of this independence, for checks and balances, Ofgem is subject to judicial review, parliament scrutiny, appeals to the competition commission, and so – see Supra note 49
[22]Ibid.
[23] Supra note 3.
[24] Ibid.
[25] Ibid.
[26] Supra note 35.
[27] Supra note 32.

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