INDEPENDENT NEWS

Cablegate: Nigerian Power Sector Reform Law Is Signed,

Published: Tue 31 May 2005 10:08 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
311008Z May 05
UNCLAS SECTION 01 OF 03 LAGOS 000806
SIPDIS
EXIM
OPIC
USDOC WASHDC
E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL NI
SUBJECT: NIGERIAN POWER SECTOR REFORM LAW IS SIGNED,
BUT LONG WAY TO GO IN LIBERALIZING SECTOR
1. (U) Summary. After languishing in the National
Assembly more than four years, the Electric Power
Sector Reform Act (EPSRA) has been passed and signed by
President Obasanjo. The Act: 1) Seeks to expedite
privatization of the legendarily dysfunctional National
Electric Power Authority (NEPA); 2) Establishes the
Nigerian Electricity Regulation Commission (NERC), a
regulatory body to license independent power plants
(IPPs), regulate tariffs, and protect consumers; and 3)
Initiates a rural electrification strategy. Industry
watchers and economic analysts applaud the bill's
passage but raise serious doubts about implementation.
The average Nigerian who has suffered record low power
supplies since winter 2004 is unimpressed; their XX and
cry remain "show me the light". End Summary.
--------------------------------------------- ---------
Power Sector Law Finally Signed; NEPA Privatization to
Start 2006 - Really, We Mean It This Time
--------------------------------------------- ---------
2. (U) The Electric Power Sector Reform Act, (EPSRA)
liberalizing Nigeria's power sector was signed into law
March 11. The law seeks to speed privatization of the
state-owned power agency, NEPA, often derisively
referred to as "Never Expect Power Always." The EPSRA
stipulates that an Initial Holding Company (IHC), then
successor companies will generate, transmit and
distribute electricity. The IHC, which will assume
NEPA's assets and liabilities, and the successor
companies, must be incorporated within six and eight
months of the signing of the law, respectively. The
Bureau of Privatization Enterprises (BPE) is currently
processing the IHC's incorporation. The success of
this effort will be significant in the run-up to NEPA's
eventual full privatization.
3. (U) The BPE announced that NEPA privatization which
has been scheduled since 2002, will now finally
commence, in graduated stages, beginning first quarter
2006. In effect, the Act seeks to "unbundled" the
moribund NEPA in hopes that the parts, once separated,
will be more valuable than the whole. In the first
stage, the GON plans to sell four generation companies
(Gencos), four distribution companies (Discos), and its
sole transmission company (Transysco). In stage two,
it hopes to sell an additional four Discos and two
Gencos. The remaining three Discos will be sold in
stage three. The BPE did not specify when the entire
process would be completed.
4. (U) Waclaw Lukowicz, General Manager, Siemens
Nigeria Power Division, has been closely involved in
efforts to upgrade NEPA in preparation for
privatization. Lukowicz has spoken well of the overall
power reform plan. However, he privately acknowledged
to Econoff that only "some" of the projects detailed in
the NEPA upgrade plan will likely happen.
5. (U) In the meantime, the GON is under enormous
public pressure to increase electricity supply - NOW.
It has become a point of political embarrassment for
Nigeria's first citizen. Early in his administration
President Obasanjo pledged to lift NEPA generating
capacity to over 6000 MW. Instead of getting brighter,
the lights have dimmed. Nigeria's generating capacity
is below 3000MW, or 100 percent less than needed to
have a functioning national power supply. Most
companies and financially-able private consumers rely
on external generators to light their homes and operate
their businesses. In the face of the public clamor,
the GON announced it would increase generation to
10,000MW by 2007. As part of this new push, the
President is pressing all major oil companies to build
Independent Power Plants (IPPS) (reftel). However, oil
executives are reluctant to pursue the President's
strategy given the country's subsidized, non-profitable
electricity tariff regime and that their business is
not power generation.
--------------------------------------------- -------
Regulatory Body to License IPPs, Regulate Tariffs, and
Protect Consumers
--------------------------------------------- -------
6. (U) The EPSRA establishes a regulatory body, the
National Electricity Regulation Commission (NERC), with
responsibility for: licensing and regulating
Independent Power Plants (IPPs), regulating tariffs,
and consumer protection, which includes administering a
fund to subsidize indigent power consumers. Ostensibly,
the NERC will be independent and self-funding. The
President appoints the chair and vice chair for a
maximum of two terms, of five years each. The BPE is
currently searching for candidates for the NERC's top
positions.
7. (U) How the tariff regime will be developed for
IPPs and the IHC has not yet been disclosed and indeed
we expect that it is yet to be decided. On the issue
of licenses, the EPSRA stipulates the NERC will process
all IPP applications upon fee submission. It will
approve or reject applications within six months with
licenses valid no more than ten years. In consultation
with licensees, the NERC will develop customer service
standards and procedures for handling customer
complaints and defaults. The NERC will also establish
and manage the money and assets of a customer
assistance fund, to subsidize underprivileged power
consumers.
8. (U) An important thrust of the EPSRA is encouraging
private investment and participation. Depending on
their type of license, independent power producers will
be allowed to sell electrical power to one or more
trading licensees. Following the declaration of a
substantially privatized market, they may also sell
directly to distribution companies and eligible
customers.
(Comment: According to the Act, NERC will wield much
power. A major challenge will be inspiring confidence
in its decision-making processes. The regulator's
fairness and transparency will help dictate the success
of the overall power reform effort. End comment.)
--------------------------------------------- --
Rural Electrification: Lights for the Frontier?
--------------------------------------------- --
9. (U) Finally, the EPSRA mandates the establishment of
a "rural electrification agency" and formulation of a
concomitant strategy. This agency will manage a fund
designed to increase regional access to
electrification. The fund will be directed
specifically towards expanding the national grid and
exploring options of off-grid electrification -- solar,
wind, etc.
--------------------------------------------- --------
Private Business Sector Skeptical; Ordinary Consumers
Willing to Pay for Reliable Power
--------------------------------------------- --------
10. (U) Private business sector contacts are skeptical
about meaningful reform within the power sector. While
they applaud the EPSRA, they note two major obstacles
likely to hamper the law's implementation. First,
vested interests oppose reforming the sector. The GON
points to its successful deregulation of the telecom
sector as proof its capable of taking on such an
endeavor. . However, skeptics counter that interests
in the power sector are more entrenched. Substantial
contracts are periodically given to "rehabilitate"
NEPAs aging and decrepit capital assets. The
importation, sale, and maintenance of generators is big
business in Nigeria. In a recent speech, the Minister
of Power and Steel claimed Nigeria was the world's
second largest importer of generators.
11. (U) Second, Nigeria is still revising its gas
fiscal policy. Gas is needed to fuel thermal power
plants and one of NEPA's primary excuses for constant
outages has been disruption in the gas supply.
Currently the GON provides NEPA an estimated annual gas
subsidy of USD 60 million. Private sector contacts
argue if the GON is serious about attracting foreign
and independent investors to the sector, it must
liberalize gas pricing so that realistic tariffs can be
set and investment plans formulated. They argue if
the GON wants to continue to provide incentives for
power generation in Nigeria after liberalization, it
should do so through other means, such as by providing
write-offs for equipment importation, for example.
12. (U) Diesel baron (and Obasanjo funder), Femi
Otedola doubts President Obasanjo will complete the
power sector reform before the 2007 election. However,
he believes a new administration will not be able to
"un-do" measures put in place by Obasanjo. While a new
president may not be able to reverse what OBJ has done,
he may not continue it either. A parallel example is
the telecom sector. The sector has been substantially
liberalized and there are four GSM operators and over
ten fixed wireless telephone providers in the market.
Yet, state-owned NITEL's (Nigerian Telecommunication
Limited) scheduled privatization is bogged down.
Otedola concluded that in this environment, potential
power investors will be cautious.
13. (U) Vmobile's Chief Regulator, Jean Pierre Snijders
lauded EPSRA and believes its successful implementation
will go a long way in reducing the telecom company's
costs. Presently, Vmobile powers its over four hundred
base stations with two generators each, raising
overhead by over 30 percent.
14. (U) Jide Mike of the Manufacturers Association of
Nigeria (MAN) attributes the non-competitiveness of the
industrial sector to the power sector. MAN puts its
members' annual losses due to power cuts at about USD1
billion. Mike said manufacturers generate between 72 -
100 percent of their own electricity requirements. He
extolled the law, saying the possibility of buying
power directly from independent producers would expand
industrial production, as capital spent on power
generation is freed up.
15. (U) On the consumption side, estate manager, Yemi
Fadoju, told us residents of his estate would be
willing to sign up to an IPP, as a unit. He said each
of the over fifty housing units in the middle-income
earners' estate rely mostly on generators. Fadoju said
a typical household spends USD 90 monthly fuelling a
generator and in addition pay NEPA about USD 38 a
month. Fadoju asserted residents would gladly pay for
constant electricity monthly.
-------
Comment
-------
16. (U) Power, or more accurately the lack thereof,
ranks among the top concerns of all Nigerians. While
passage of the power reform bill is an important step
forward, the GON needs to do a lot more, and a lot
sooner to address this issue which is severely
retarding Nigeria's economic development. Moreover,
this is one reform Nigeria cannot afford to get wrong.
Yet, for reform to have its intended impact, the GON
must also rationalize its gas fiscal policy. This means
it must enact two major liberalizations, electricity
and gas pricing, simultaneously. This will be no small
feat. Successful power sector reform must also ensure
the new power ombudsman agency, the Nigeria Electric
Regulatory Commission (NERC), is staffed with competent
professionals. Finally, the GON must exercise the
political will necessary to displace the vested
interests who benefit from the system of "never expect
power always". In all, there is a long concatenation
of very complex issues that must be correctly resolved
for power sector reform to work. For all this to
happen will take a lot of skill, a lot of luck, and a
fair amount of time.
BROWNE
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