Private management of power is a process
Although NERC was not directly involved in the actual sales, can you tell us how you felt about privatisation of the PHCN unbundled companies?
NERC is directly involved in the privatization because there are many components of the transaction, there is a regulatory, there is a transaction, and there is a policy. The policy of course, is that of the federal government with the National Council on Privatisation, NCP, and the Ministry of Power, deciding that we should privatise. But the mode of privatisation is already provided in the Act setting up the NCP and the Bureau of Public Entreprises, BPE - of course the Electric Power Reform Act.
BPE is the Secretariat, the bureaucracy of the council of privatisation so they are legally responsible for the mechanics of the sales. The industry documents, framework, and the real heart of the transaction is the multi-year tariff order, MYTO. The licence that the Commission gives, the vessels contract of the approval, the Power Purchase Agreements, PPAs, and Bulk trader will sign and will be approved by the Commission.
So essentially, the Commission is at the heart of the sale. The bidders could not have made any bid if they don't have a multi-year tariff because the price is what they are bidding with. So the industry document, NERC worked hand in hand with the BPE, ministries and other stakeholders to develop them. So we are the centre of the privatisation, but we are not driving the transactions in terms of terms of timelines.
The asset valuation on which the whole thing is based on is done, verified and confirmed by NERC. So essentially, we are together with the stakeholders in doing this.
You talked about valuation, we've realised about N400billion from this exercise, but the workers don't think this was a fair price, they think the value of these assets are much higher than they were sold. Do you think that is correct?
I think that we should be comparing apples to apples, not apples to oranges. When you say fair, there is a technical sense of fair, and if you like, a public sense as well. For us, the mode of evaluating these assets for privatisation, you have to do a methodology, and the methodology we used is what you call, the depreciation optimised asset valuation methods.
What that means is that we value these assets, and looked at them as regulated assets that will be used to determine tariff. So if you over-value them, it will affect the tariffs. It is depreciated over their life span, so this is a life time depreciation approach. For instance if we have three transformers and they have a life span of 20 years and what is remaining is three years, what the value captures is that it starts from the market value and discounts the remaining.
So what is the state of health of that asset? you optimise it. Through lack of use since it has been there it is now leaking oil. So we had experts who worked with Nigeria - they were foreign experts, they went down to the assets and did this asset valuation not because of any buyer but before even the transaction was opened. So in a sense, if they said that the value of the assets is not the same as the budget record of those assets, they are right because two things must be considered. One is that money put in the budget has degenerated costs by buying that asset.
Assuming you bought a fleet of cars like Camry let's say is N9million and then then procuring processes and whatever it took to get it is N13 million. That is not the real value. If we are going to do the asset valuation we'll put it at the market value which is N9 million, depreciate it over time and optimise it based on its conditioning - the state in which the asset is. A regulator may actually come and still do other discounts; he may decide to discount 20% off to further reduce the tariff. One aspect is that this is not market price alone, this is a depreciated optimised asset valuation methodology, which means the asset record, the budget, the expenditure record you have for this asset are not the same as the regulated asset. It is a regulated asset, and it is a value for tariff and therefore, if it goes too high up, the tariff goes up, that is one.
Two, is that even the book value, the record value is not same as the market value, so when Nigerians talk about this assets saying, we've spent so, so, so billions, just think about what conditions they are in. So we do it in a scientific way, fully verifiable, and I have no doubt that those assets are properly valued at the price at which they were valued. Considering all the factors, they did the tariff to recognise the deterioration and their actual state of health, so I think it's a correct scientific verified, and expert reviewed valuation.
The assets have been sold, but the unbundled companies don't seem prepared to hand over, they said they are waiting for directive. What is happening here?
There are two components of handover - one is the market, how is the shaping of the market, the other one is a structural, if you like, transactional. The PPE or the NCP draws up a programme, and says, yes, you have paid the money and we are going to handover the assets to you on a particular date. The companies may not be in a state of readiness as you said, because if we measure it, these are people who ordinarily do not have an incentive, so they are prone not to be enthusiastic about the handover. So in that sense that may be true, but for us at NERC, we are ready, but the key indicator of the handing over is the transactional existential market
Where are we? Most of the conditions precedent, have been fulfilled, maybe one or two still need to be properly finalised. In terms of the shape of the market, in terms of vital regulations and in terms of the test running, and the forensic review - the grid code, the market rules -MYTO and in terms of various pieces of what constitutes the market of electricity, I think we are ready.
It does not mean there are no areas of shattering up. For example, the regulator held a strategic management meeting from 8-10th of September, and the idea is to work through the checklist to see what we need to be doing in terms of capacity, in terms of structuring and positioning ourselves to deal with the market. Handing over is not a jack-and claim, it's not something you just sign off on some dotted lines. Besides, the new owners coming to take over are going to do their due diligence, they're going to raise issues and they are going to interface to do their back and forth with the regulator, the ministry and BPE.
Really, we shouldn't expect a 'one clean' handover; the handover should be a process, in which some events happen and will trigger others. For us, it is clear what those events are. They would include preparing the market to receive and enter into a rule-based, contract-based market. We have been working hard to establish those vital rules, and we've been working hard to entrench those culture of rules and following them. We have not yet got 100% there, but we've got a sufficient capacity to welcome these new entrants. And when they come, they will begin to identify areas of change, and the ministry is trying to transform itself to become a policy player in a market that they will not have direct transactional dealings.
I would say that we are ready, but there are some things that still need to be done. So handing over is not just going to be a one-off and you are done. Handover will involve collaboration of the colonies and then gradually all the actors will learn via a learning curve before we can have a smooth sale.
I thought the due diligence was done before the sales?
Yes, they were done before sales, but they are going to do another due diligence after the sales. The bidding were done about six to nine months ago, and then you are going to take over, for you to take over you are going to find out what is where. You may have had some ideas, you may have even done some physical investigations, but now you are in the saddle. This means that you are going to look at staffing - you are going to look at the top guys and decide who stays and who goes. So there will be some due diligence at the level of taking over and then you are going to come to the regulator, and say, this is what we saw as the tariff but this is what we are seeing now and if those things are divergent, you'll probably start a conversation with the regulator on what should be done.
The bidders know what it takes, they know it's not going to be one-stop but going to be a transition, a kind of process based take-over.
Still on takeover, but part of the fear is the transition of some of the employees which has been a knotty issue for a while, in terms of those that would be absorbed by the new owners and those that would have to go. What role is the Commission playing in this regard?
This is going to be a private market, and the idea of a private market is that you don't impose employees on private enterprise. The Commission benchmarks its staff, its licencees on cost based management. That means it is incentive based, there is a prudent level and you are supposed to maintain the level of staffing that allows you to be efficient and effective in your operations. That is our concern.
You are already benchmarked through a tariff and through a revenue requirement. We are benchmarking you on cost, because every cost you bring in has to pass through the consumer. If you over stock yourself with personnel, it means that your overhead will be more, your personnel cost is high, and that means your cost of service will be high.
Our concern as a regulator is to benchmark you on prudent cost, and this transcends to some kind of realistic staffing. Apart from that, it is totally up to you on what you do with your staffing. So if they come and find the guys on seat as very good and they right size themselves properly to be cost effective, there will be no problem. If peradventure, they come and think they should do away with those guys, and bring new people, as long as there is a pedigree, we have our fit and proper guidelines that tell you what kind of qualification you need to have people man some operations - the chief engineer, we have a minimum qualification we gave before he comes to your network. His ability to deliver, the technical competence as a firm, as a utility is measured by the quality and the qualification and experience of the key staff you have. If you give us key staff that are qualified, you have met the benchmark.
The other thing, seems to be enacted or approved is the local content deregulation. We would also keep an eye on the Nigerianisation of your work force, to see that Nigerians are part of your workforce. Apart from these two regulatory benchmarks, we are not going to be involve in saying who you retain and who you let go.
With regard to Nigerianisation, for the oil industry we're looking at, they say 40% content, which has not yet been achieved. Is there a particular target for the Power industry?
Yes, there is a regulation. There was a public hearing recently, and what that regulation provides is that, there are standards and degrees of Nigerianisation - men, women, and of professionalisation of services and technology software and all that. We are talking about localisation of employees, how your services accountants, lawyers are made up. We also mean tools and equipment. There are degrees of Nigerianisation and also processes to check and find out that we are doing that.
There are some arguments that we have to give some people some time before they can meet those national content requirements. The regulators are going for public consultation which would require the presence of the new owners and everybody to be part of the consultations.
Still on the process, now the consumers are going to be the centre stage of whatever will be thereafter. Is the Commission doing anything to prepare Nigerians for private sector led power industry?
The regulator is not the National Orientation Agency, so we are not going to go on cross country tours, telling people what is. But what we've done, for instance in August, I was in two civil society fora in Lagos and in Abuja, and two things actually came up, at the level of enlightenment, we have power consumer assemblies and we have civil society intervention fora. But we are more looking at the quality of our consumer protection regulations, and we are focusing on our benchmarking and monitory capabilities.
One of the things we are doing to prepare consumers is that we are setting up investment rules and regulation that allows us to design files to incentivise and sanction behaviors. Incentivise quality service delivery to consumers and sanction poor quality service.
In the past, because it is government owned, we didn't have much leeway to punish failure of service delivery, to punish negligence and sometimes criminal negligence. But now, we can do that because the Act gives us that power. But beyond the Act, we are now streamlining regulations, they have to be precise to identify different levels of sanctions, especially financial sanctions are critical in the industry because they go to the bottom line, and therefore have stronger persuasive power to determine effects.
Also, we don't want to over-regulate the sector; therefore, there are financial forfeitures and fines that help to trigger self-regulations of the entity themselves. Because they can see clearly what they lose if they don't invest in both resources and expertise, and attention to fixing problems that can result to poor service delivery. The logic we are applying is the logic of creating capacity in-house, of benchmarking properly, streamlining free work and having monitory and efficient capability, and then couple them with mobilising consumer groups.
I have put out that argument strongly in the public domain and I am working with Consumer Protection Council, CPC, to say, you must now begin to build capacity as consumers to intervene. That's why we want to set up the forum offices, which is a forum where stakeholders in the communities comprising the consumer groups, the civil society groups, the manufacturers themselves, staff and engineers and others, are part of the quasi-judicial tribunals. Their responsibility is that, if there are failures of service at the operators level, the consumers complains to the operators at the Consumer Complaints Units, and if they don't answer you on time or satisfactorily, you go to the forum.
The forum elects among its members, a chairman, and they seat like the tribunal, a court and there is a secretary. They will hear the case of both parties, and then give judgment, and those judgments are enforceable by NERC. These are the things we are doing to protect consumers, to create an avenue for effective remedies for abuse. One of the problems in this country is the lack of what we call, framework for effective remedies. If you suffer, do you have a framework to get redress? So you need to have these rules and regulations that condition operators to be very clearly accountable service delivery, so you can audit the service delivery pattern, and you can find where they are missing it, and as well help them through.
We are adopting an incentive based regulation, which is what the MYTO is all about; if you do better there are benefits that you get, and if you economise your costs, and improve on quality there are benefits for you, and if not there are sanctions.
You talked about efficient service delivery and one of the major complaints by customers has been estimated billing. Majority of the consumers are not metered. Government has gone back and forth on the prepayment meters. Now they are saying, it is the new investors that will metre the consumers. What is the true situation?
The idea is this, the original plan for metering is that as long as consumers keep paying their bills, they will be metered as of course; and metering as of course does not mean that everybody will get metered when they want meter. It means metering becomes part of the operational policy of the utility, and when they raise money, they make investments; they keep expanding. Our job is to mandate and try to enforce much more ambitious metering plan.
We are going to return to that with the new owners; they're likely going to tell us that they are raising money to finance meters because the meter will help them to collect their money and to reduce their losses. So nothing has changed.
The internal measure we adopted, was merely interim, to say, since the distribution companies, DISCOs - the existing PHCN companies were pleading they had no money, definitely they weren't interested in doing anything, a few of them are doing, but many of them don't want to go out and metre their consumers.
Then we brought out CAPMI. The idea being that give credit to consumers to finance their own meters are recovered through energy credit over two years or thereabout. Now this is voluntary skill, so when the new owners come, they may abandon it because they claim to have the money to invest in metering, and they invest and metre you. So what will happen is that the CAPMI is still running, its mandatory by regulation until each of the DISCOs come up with a metring plan and tell us they don't want to continue with the CAPMI and they have the financing to meter their consumers.
There is this technical issue that has been cropping up in the recent time, which has to do with territorial boundaries. Under one entity of PHCN, there was no need to say Eko starts here, and Ikeja ends there because they all report to all entity anyway. But now under different companies, is there no need for delineation to avert future crisis?
There is. There should be clear delineation and boundary metering and boundary metering, it's part of the process for declaring a transitional electricity market that will meter the boundary points for energy flow so that people will know who is receiving and sending what. So those boundaries are known and would be clearly demarcated. That's the territorial boundary and that is the basis for the PPAs on which we have contracts and know what they are trading. So they are known and they will be clearly delineated before the transitional market starts.
Going forward, what do you see as the future of the power industry, especially as the more Government says we will give you power, the less power we see?
The future of the industry can be nothing else than successful.
How soon will this success come?
It will come because it is already very successful. I understand Nigerians, we're counting gains; 5 megawatts has jumped to 4 or 3MW. The real success in this sector is the transformation of the sector. Today, we're talking about N400 billion of private sector investments, two years ago, there were zero of such investments because who is going to come to a market that cannot give you returns and cannot give you back your costs?
So what we've done, what NERC has done, and what the Federal Government has done is that we're creating a new market where people can now invest money. The same way you're seeing N400 billion, the same way people are putting billions in new generation capacities - they're applying for licence, they're doing their work; banks are making investments, so the market has changed. When will this result into thousands of megawatts? Very soon!
We're talking of October that Geometrics will go and put about 400WW or so to the grid, when they commission their plants, at least more than 100MW or 200MW in phases, I don't know how many, but they are doing the first phase. Two years ago, people were saying, Geometrics had got a license two to four years ago, but where are they. The power business is a long gestation, the value chains being transformed may not yield results today or immediately, but of course, we have seen some results and some improvements. While some people are complaining they don't have power, some are saying they have 24 hours power, full one week with no interruptions. You saw when we hit 4500MW, and then we had this drop, and we are rebuilding the structure, maintenance and others.