Cablegate: Prospects for Power Sector Remain Dim

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R 101313Z JUL 07
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 9199
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9000
RUEHCV/AMEMBASSY CARACAS 0042
RUEHWR/AMEMBASSY WARSAW 0459
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RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 03 LAGOS 000494

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E.O. 12958: N/A
TAGS: ECPS ECON EINV EIND PGOV PREL NI
SUBJECT: PROSPECTS FOR POWER SECTOR REMAIN DIM

REF: ABUJA 1376

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1. Summary: At an American Business Council (ABC) meeting on
May 28, Chairman of the Nigerian Electricity Regulatory
Commission (NERC), Ransome Owan, discussed plans for the
Nigerian power sector. To an audience of professionals in the
private sector, including stakeholders such as General
Electric (GE) and AES Corporation, Owan explained the
structure and function of NERC in a newly-privatized
environment. Owan also highlighted opportunities for
investment. In spite of the potential for growth, however,
reliable gas supply remains the Achilles heel of the sector.
Independent power projects owned by international oil
companies were touted as one solution. Creating effective
incentives for these has so far proven elusive. End summary.

2. At an American Business Council (ABC) meeting on May 28,
Nigerian Electricity Regulatory Commission (NERC), Ransome
Owan, discussed plans for the Nigerian power sector. To an
audience of professionals in the private sector, including
stakeholders in the power sector, such as General Electric
(GE) and AES Corporation, Owan explained the structure and
function of NERC in a newly-privatized environment. Owan also
highlighted opportunities for investment.

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Autonomy and Regulatory Stability
---------------------------------

3. Owan showcased NERC as an autonomous body with a clear
legal and organizational framework. NERC consists of six
divisions, with seven commissioners in total. The
commissioners are appointed by the President and confirmed by
the Senate, and serve two-year term limits. Tenure is
protected by due process removal. NERC is bound by the
Electric Power Sector Reforms Act of May 2005 (ref) as well
as private contracts, and has the ability to sue and be sued
in the courts.

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Market Development
------------------

4. Established in 2005, NERC's impetus is to oversee the
transition to a competitive energy market. The privatization
of the six generation companies and 12 distribution companies
has yet to be completed, and Owan admits there is no targeted
end date for this. The companies are the following:

Generation Companies
- Shiroro Hydroelectric
- Kainji Hydroelectric
- Sapele Thermal
- Egbin Thermal
- Afam Thermal
- Ughelli Thermal

Distribution Companies
- Abuja Electricity
- Jos Electricity
- Ibadan Electricity
- Benin Electricity
- Enugu Electricity
- Kaduna Electricity
- Kano Electricity
- Eko Electricity
- Ikeja Electricity
- Port Harcourt Electricity
- Yola Electricity

Transmission Company of Nigeria
- The sole transmission company will remain publicly-owned
but privately managed.

5. Owan described the medium-term as characterized by
protecting existing privatization and what he hoped would be
a "fairly competitive" market. In order to progress to a more

LAGOS 00000494 002.2 OF 003

mature market, implementation of metering and information and
communication technology (ICT) infrastructures would be
crucial. Regulatory and legal frameworks, such as vesting
contracts and an efficient settlement system are fundamental
to developing investor confidence. Owan described these as
the building blocks of a competitive and lucrative energy
market.

6. Preconditions for the development of a medium-term market
include NERC's finalizing and issuing directives for
compliance with metering codes and standards; introducing
guidelines regarding the use and installation of electric
meters by distribution companies; and guidelines for
appreciation and effective implementation of metering and ICT
backbone to deal with funding, settlements, and exchange of
power.

----------------------------
Creating Investor Confidence
----------------------------

7. Owan acknowledged that the conditions favorable to
investment were legal protection; customer payment; an
independent judiciary to settle disputes; clear exit rules
for investors; and government and multilateral guarantees. He
assured the audience that these were in place or were in the
process of being implemented. Owan answered to the concerns
enumerated as follows:

-- legal protection can be found in the NERC's legal
structure and in the 2005 Electricity Act;
-- prepaid meters, implemented in some locations, ensure
customer payment;
-- the courts already serve as an efficient means of dispute
resolution;
-- there are no penalties for investment entry/exit;
-- there are some existing government and World Bank
guarantees. (Note: The Bank presently has two projects in the
power sector, focusing on transmission and distribution,
totaling USD 272 million. End note.)

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Widely-Touted Target Is Elusive
-------------------------------

8. Owan admitted Nigeria would likely not reach 8,000
megawatts (MW) of power generation by end-2007, as widely
proclaimed by the Government (Note: A statement by Special
Advisor to the President on Power, Joseph Makoju, to poloffs
in Abuja that Nigeria would miss its 10,000 MW by 2010 goal
confirms this. End note). Numerous problems exist in each of
the generation and distribution plants, as well as in
substations and injection stations. Problems with decaying
infrastructure would be addressed, in part, by generation and
distribution companies as they built new lines connecting to
the transmission company, said Owan. The bigger problem was
maintaining gas supply to the generation companies. This was
the Achilles heel of the power sector, Owan admitted, and he
offered no remedy for this.

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Timeline And Return On Investment Remain Unattractive
--------------------------------------------- --------

9. The timeline for collecting equity, seven to ten years,
was a challenge for investment in the sector. Owan noted
that, even where prepaid metering has been applied, 85% of
the meters were being bypassed. Audience members said that
metering had been successful only in planned, gated
communities. In other areas, meters were tampered with and
meter readers were routinely threatened or chased from the
neighborhood. Availability of meters was also a problem, as
there was a backlog for manufacturers. Owan expected it would
take three years to see a marked improvement in capturing
revenue.

10. In a presentation to the same audience on June 12,

LAGOS 00000494 003.2 OF 003

Special Advisor to the President on Power, Joseph Makoju,
emphasized these problems. Non-technical loss of power, i.e.,
energy theft, was 40% from generation to billings in past
years. (Note: The World Bank estimated in 2001 the energy
sector lost 30-35% from generation to billings and had a
collection rate of 75-80%. End note.) This loss of revenue
was exacerbated by the fact that the last tariff review took
place in February of 2002, suggesting government-set
electricity tariffs did not reflect current market prices.
Audience members acknowledged that the average Nigerian felt
inexpensive access to power was a social good and should be
subsidized by the government.

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New Projects
------------

11. Makoju said Nigeria was currently receiving assistance
from the World Bank to assess its electricity stock and
actual suppressed demand. These data would inform a 25-year
plan for the power sector. Until now, the GON's production
targets have been arbitrary. Many stakeholders argued that
demand is much higher than has been estimated in recent years
and the government's targets do not account for the increased
demand necessary to power a growing economy.

12. Makoju emphasized the importance of investment in
independent power projects (IPPs) by international oil
companies. Such projects possessed advantages such as the
availability and low cost of gas. The cost of gas for NNPC
was much higher, according to Makoju, and NNPC was
responsible for supplying gas to the National IPPs (NIPPs).
IOCs could also locate their IPPs closer to the source of
gas, reducing interruptions in supply.

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Comment
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13. Both stakeholders and observers agree that the potential
for growth in the Nigerian power sector is enormous. While
NERC may be statutorily positioned to steward a competitive
power market, there will be little to regulate if gas cannot
be supplied reliably to the country's power generation
companies. End comment.
MCCONNELL

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