Awakening Discos to their Obligations

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By insisting on structured Performance Improvement Plans, the Nigerian Electricity Regulatory Commission plans to make sure the 11 electricity distribution companies it approved fresh tariffs for meet up with their obligations to electricity consumers in the country, writes Chineme Okafor

The Nigerian Electricity Regulatory Commission (NERC) has rolled out a robust retail tariff for the 11 Discos in Nigeria’s power market.
The policy indicated the regulator’s intention to ensure the Discos accomplish their obligations to consumers once the new tariffs kicked off.

Following its recent approval of the tariffs, the regulator demanded that the Discos should submit a plan aimed at improving their performance in the market, with a process which included a review of the application of the capital expenditure allowances of the Discos in the Multi Year Tariff Order (MYTO).

Dubbed the Performance Improvement Plans (PIPs), the NERC in a document obtained by THISDAY, indicated that it would with the documents individually submitted by each of the Discos and approved by it, observe and follow through the Discos’ investments in their distribution networks.

According to the regulator, the PIPs would prioritise expenditure by the Discos and reflect changes in the operational environment that have occurred since the last tariff review.

It added that one of the overarching objectives of the Power Sector Reform Programme (PSRP) which the federal government initiated with the World Bank was to eliminate tariff shortfalls and enforce market obligations. This, however, would be enforced through the PIPs.

Expected to cover the 2020 to 2024 tariff period, NERC explained that the PIPs would be subjected to the contractual provisions of the performance agreements executed between the core investors of the Discos and the Bureau of Public Enterprises (BPE) with regards to the allowances for capital and operating expenditure in the remaining term of the agreement.

“Upon approval by the commission, the PIP shall form the basis of prioritising and monitoring the capital investment initiatives of the Discos with revenue adjustment for non- implemented projects.

“The approved PIPs will also be the basis for the defining performance standards/KPIs (key performance indicators) for the next five-year tariff period by the commission with emphasis on improvement in energy throughput and delivery by Discos, reduction in aggregate technical/commercial losses and overall improvement in service delivery to customers,” said the NERC.

In addition to its regulatory interface with the commission, the NERC stated that the PIPs would be a public-facing document for the Discos, which their stakeholders will refer to throughout the five-year tariff period.
It said that beyond being a submission to it, Discos would have to produce PIPs that reflect their priorities with robustness.

Regulatory expectation
Detailing its expectations from the Discos, the NERC stated that it wanted output-based plans which explained the target outputs over the planning scope, as well as the programs and activities that will lead to the realisation of the outputs by the Discos.

It also noted that the plans would include the human and material resources required to achieve them, the projected costs and analysis of the risk factors and the proposed mitigation measures.
“The plan should start with an opening chapter consisting of a brief introduction of the Disco’s business, vision, mission, and overall strategy.

“It should give a brief overview of its achievement in the last tariff period and stating its salient strategic goals over the planning horizon and stating the justification for the goals within the context of the wider sectorial goals and national priorities,” said the regulator.

Additionally, NERC expected the Discos to include their PIPs the state of their distribution infrastructure and magnitude of improvement needed for optimal operation, detailed description of programmed projects and activities they expect to execute to improve their networks and services.

As a matter of fact, the regulator indicated it wanted the PIPs to show the Discos’ plans for loss reduction; reliability and availability for service delivery; metering of consumers in their networks; customer satisfaction; new connection and network expansion; safety of their operations and social responsibility.

“The PIP is expected to reflect these priority areas showing baseline situation, projected improvement trajectory, the strategies for attaining such improvement and the expected efficient cost of implementation. The Disco’s PIP will, therefore, be assessed against these expectations,” it added.

Discos’ respond
Following the start of the new tariff in July, NERC disclosed that eight Discos have submitted their draft PIPs to it, from which they plan to invest about N934.905 billion over the next five years, that is between 2019 and 2024 to upgrade the working conditions of their distribution networks.

According to the PIPs of the eight Discos which comprised Ikeja, Eko, Kano, Enugu, Kaduna, Benin, Abuja and Ibadan, obtained by THISDAY, most of the expenditure would be channeled to capital costs on metering, transformers, and other core distribution assets.

The PIPs of the Discos showed that Ibadan would spend N83 billion; Enugu – N118 billion; Benin – N286.71 billion; Ikeja – N105 billion; Kaduna – N117.8 billion; while Eko and Kano Discos would spend N78.6 billion and N49.795 billion respectively. Abuja Disco on its own would spend N56 billion over the period.

It explained for instance, that the key outcomes from the PIP of Ibadan Disco included the reduction of its Aggregate Technical Commercial and Collection (ATC&C) losses to 19 per cent by 2024, 100 per cent metering of all customers by 2024 and the improvement of customer satisfaction.

It noted that the investment requirements to achieve the performance agreement targets of Ibadan Disco would result in a tariff increase which would enable it to successfully deliver the performance plan.
“Over the next five years, IBEDC (Ibadan Disco) plans to invest over N83 billion in its network to expand capacity in line with our demand growth, replace assets and deploy state-of-the-art technology to improve the efficiency of our operations.

“Our strategy over the next years is to aggressively reduce losses by deploying meters across our network to improve energy accountability and collection efficiency.
“Our performance strategy will be achieved by driving our efficiency through innovation,” said the Disco’s PIP.

Ibadan Disco further stated in the PIP that it planned to raise 70 per cent (N60 billion) of its capital expenditure requirement through loan from the Central Bank of Nigeria (CBN) or Bank of Industry (BoI), with the remaining 30 per cent coming through shareholders’ equity investment and funds generated from the business as return on capital investments component.

It explained that its expected interest rate on the loan would be 10 per cent with a 20-year tenure, adding, “this is currently the cheapest source of funds available to IBEDC.”

It is worthy of note that IBEDC would only be able to access this loan if there is adequate government and regulatory support needed to convince lenders against any uncertainty (like the removal of collection loss in 2015) which might affect the loan repayment.

With regards to Enugu, the Disco said it projects that over the period, it would reduce its ATC&C loss level to 30 per cent and to meet the expected loss reduction thresholds as set out, would need a capital expenditure of N40 billion and operational expenditure of N118 billion.

“It is intended to use these funds for network reinforcements and upgrades to increase the capacity of the network to meet the growing demand in our franchise area. It is our target to have availability of over 80 per cent on our network at the end of the period planned and to serve 25.8 per cent more customers as well as increase the reliability so as to reintroduce some of the large industrial customers who have gone off-grid.

“It is expected that the funding for this plan would be raised from shareholder loans as well as the Siemens intervention of the federal government. In the event that there are none of these interventions, there will only be the possibility of funding through IGR (internally generated revenue),” it said.

Similarly, Benin Disco said the N286.71 billion proposed expenditures is be used for additional network maintenance cost, increase in manpower cost, new IT deployment and software expenses, growth in customers service charges, administrative and general expenses.

Ikeja Disco explained that over the next five years that it would invest N105 billion in its network to expand capacity in line with demand growth, replace assets and deploy state-of-the-art technology to improve it efficiency.

Kaduna Disco equally noted that its expenditure is estimated to be N117.8 billion with its distribution management plan (technical upgrade and substations and feeders) taking 60 per cent of the total capital expenditure which would result to reduction of its ATC&C loss level to 25 per cent.

For Kano Disco, it said its N49.795 billion planned investment would be sourced from its surplus or retained revenues as well as available credit from banks, non-banking financial institutions, Export and Import (EXIM) banks, and suppliers’ credit.

Abuja Disco stated that it has a projected capex plan of N56 billion over the next five years, expected to fund its programmes on loss reduction targets according to the performance agreement it signed.

According to it: “Based on financial analysis, the business has identified a debt/equity position of 70/30 as the optimal capital structure to fund its capex requirements. The debt is expected to be financed through a blend of development finance and commercial debt.

“The funding from Development Finance Institutions is expected to come from institutions such as the World Bank that have indicated interest in supporting the Power Sector Recovery Plan (PSRP).”