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N213bn CBN electricity fund not from taxpayers – Amadi

Why is government bailing out the power sector when the sector has been privatised?Government is not bailing out the power sector. This is not a…

Why is government bailing out the power sector when the sector has been privatised?
Government is not bailing out the power sector. This is not a bail out and NERC is against any bail outs. A bail out suggests that the market is in terrible crisis and even the optimisation of market processes may not stave off a looming collapse. That is not the case of the Nigerian electricity market. This market is not about to collapse. We have conducted a stress test of this market and we can say its fundamentals are still robust. It is said that what did not kill you makes you stronger. We went through a crisis and survived hence, we are stronger. NERC saved this sector from the terminal distress that would have warranted such a bail out through its effective management of the Interim Rules Regime. That regulatory framework enabled us to make a smooth and guided transition from public electricity market to a private sector managed electricity market. What remains now is to enter into a stage of the market that is wholly based on bilateral contracts. This N213billion is not coming from tax payers or from crude oil revenue. This is the Central Bank providing financial support to the electricity market, through the deposit management banks with clear guarantee of full repayment. This facility will be used for 2 things. Firstly, to pay debts owed gas suppliers. It is our expectation and plan that this will in turn enable the gas suppliers to supply more gas so that more electricity can be generated and distributed to the Nigerian people. As you may know, lack of adequate gas supply to GENCOs has been one of the main reasons for electricity shortage. And one of the main reasons that adequate gas is not getting to GENCOs is because the gas suppliers have been owed huge sums of money for the gas they have been supplying. About 80% of our generation comes from gas fired plants. But note that we are paying only well verified and attested gas debts‎. Secondly, It is to pay for the revenue shortfall in the power industry. Since November 1, 2013 when the new owners took over the GENCOS and DISCOS, concerns have been expressed that the tariff did not cover the exact levels of technical, commercial and collection losses. These losses constitute significant components of the prices. Again, there is a backlog of subsidies not paid which makes it difficult for the disco to receive all the guaranteed revenue to pay for power supplied by the GENCOS and pay for other services. Because of these problems, GENCOS are not paid for power supplied. The CBN money will help to pay for the unpaid debt owed to GENCO.
How do you ensure that these monies are utilised?
Firstly, we are putting in place a Performance Agreement with every party receiving the funds. Before they receive the funds therefore, they will commit to certain performance standards which they must meet. For instance, gas suppliers would commit to supply agreed quantities of gas under a very clear and enforceable contract while GENCOs and DISCOs would commit to invest in relevant upgrades and improvements in areas like metering, transformer replacement and general change management. Secondly, NERC, with the assistance of the fund managers and the Special Purpose Vehicle (SPV) being created for the project, will closely monitor and regulate the disbursement and fund utilisation to ensure that the Performance Agreement is adhered to by all parties. The disbursement will be done in tranches so that if a party does not live up to the performance agreement then it will not receive the next tranche of funds. Thirdly, NERC is planning a novel approach where the Nigerian consumer will be allowed to be a part of this entire process. To this end we are organising series of public hearings across the country. NERC wants to ensure that this entire process is not only transparent but also productive.
Will tariff be increased through this initiative?
If anything, the regulator wants to keep the tariff lower than it could be. That is why we are a consumer protector. Our mandate in the law is to ensure that the operator is efficient and when they are efficient, we allow them to charge the price that enables them to recover the reasonable and prudent cost of serving the customer. So, from this perspective, our commitment is to make sure that this sector continues to attract the right kind of investment that will lead to more availability and reliability. Apart from having the right price, you need a transparent and reliable regulatory framework to attract investment. This means that we must religiously follow our price methodology, except where it will work gross injustice or distress to consumers. The methodology requires us to review the pricing of electricity upon the occurrence of certain events. One of this is when we do minor review and the outcome show that the value of some core indicators have changed by more than 5%. Also, we review the pricing regime when, like now, we conduct a review of the degree of losses and it shows that there is a significant difference between what we put in the methodology and the current realities. But the good news is that the fund coming from the CBN has about 6 months to 1 year moratorium. That means that it will not make any impact on the tariff that consumers pay until much later when supply has heavily improved.   
In August you announced an intervention to pay N25bn for legacy gas debts. What is the justification for increasing the sum to N213 billion?
In August 2, we announced the N25 billion just for paying off the gas debts. We also made the gas price more attractive so that suppliers will be encouraged to supply even more gas. But that was just a first step in a series of steps. That first step corrects the gas supply issue but it does not deal with the other issues along the value chain.
How much additional power will be supplied as a result of this intervention?
This intervention not only drives increases in power output to reach the target of 5, 000mw later this year but it also secures future increases year on year.  There is evidence that the measures taken in August are already bearing fruit with electricity supply increasing, albeit in pockets across the country.
How do we prevent the debt from building up again?
The disbursement of the funds and the commencement of the Transitional Electricity Market (TEM) will take place almost at the same time. This means that with commencement of contract-based trading and the review of the tariff, there will be no reason for any DISCO not to pay for the power it distributed and the GENCO not to pay for gas supply. Again, the financial advisors working on the CBN fund is helping NERC and the CBN to develop set of market instruments that will raise early warning signals of financial ill-health of any of the companies and therefore enable NERC to step in on time to relieve the management team and the owners of the responsibility of running the business in order to protect continuous supply of power by a financially solvent firm.
What is NERC’s role in the disbursement of these funds?
The process of determining the actual shortfall in the industry funding is led by the Commission while the disbursement and other finance management related issues would be led by the CBN. The framework for this is being discussed and would be communicated to DISCOs and GENCOS as soon as it is ready.   How will the government guarantee that the money is paid back?
As stated earlier, this is not free money, neither is it an intervention fund. The Commission worked out the recovery procedure and the tenure through revenue collection by the utility firms. This process is to ensure that all encumbrances in the way of efficient performance are removed.

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