Overview of the Nigerian Electricity Regulatory Commission

1. Overview of the Nigerian Electricity Regulatory Commission Presented by Dr. Alimi Abdul-Razaq Executive Commissioner, Legal, Licensing & Enforcement Division, NERC at NARUC/NERC Workshop July 14- 18 2008

2. Acronyms • NERC – Nigerian Electricity Regulatory Commission • NEPA – National Electric Power Authority • EPSR Act 2005 – Electric Power Sector Reform Act 2005 • NELMCO – Nigerian Electricity Liability Management Company • RE – Rural Electrification • PHCN – Power Holding Company of Nigeria • SCs – Successor Companies • IPPs – Independent Power Producers • FME – Federal Ministry of Energy • REA – Rural Electrification Agency • ECN – Energy Commission of Nigeria

3. Outline • Background • Timeline of Major Industry Development • Make up of the Nigerian Power Sector • Need for Reform • Reform of the Nigerian Electricity Industry • Role, Functions and Structure of NERC under EPSR Act 2005 • NERC Regulatory Instruments • Other Regulatory Instruments • NERC Institutional Autonomy • NERC Financial Autonomy • Relationship between NERC and relevant stakeholders • Current Regulatory Landscape • Challenges • Conclusion

4. Background • Electricity generation began in Nigeria in 1896. • Electricity Corporation of Nigeria (ECN) was established as a central body responsible for electricity supply in 1951 and the first 132KV line was constructed in 1962 linking Ijora Power to Ibadan Power station. • Niger Dams Authority (NDA) was established in 1962 with a mandate to develop hydro power stations. ECN and NDA were merged in 1972 to form the Nigeria Electric Power Authority (NEPA) by virtue of the NEPA Act. • NEPA had monopoly of generation, transmission and distribution until 2005 when EPSR act repealed the NEPA Act and PHCN was formed from NEPA to serve as a transitory holding company prior to the unbundling of the Sector. • The Act further provided for the creation of Successor Companies from PHCN and 18 SCs comprising eleven distribution Companies, six generation Companies and one transmission Company has since been created

5. Time line of Major Industry Development: Installed Capacity 6,000MW 1,030MW 20MW 1972 Formation of NEPA, Abolition of ECN, NDA 2005 Unbundling, NEPA TO PHCN Before 1950

6. Makeup of the Nigerian Power Sector • Generation: • Installed Capacity* (name plate) 6,300MW • PHCN Available useful capacity 4,250MW • Current Generation (11/7/2008) 2,526MW • Peak Generation (Aug 2005) 3,774MW • Transmission: • 330KV Lines 5,000km • 132KV Lines 6,000km • Distribution: • 33KV, 11KV, 415KV, 220KV 60,000km • NATIONAL DEMAND (estimate) 10,000MW • NATIONAL GENERATION DEFICIT 5,750MW * Include PHCN and IPPs installations Source: PHCN

7. Need for Reform • Nigeria • Population – estimated at 140 million • Installed generating capacity - 6,300MW • Available Useful capacity - roughly 4,250MW • National demand – about 10,000MW • Requirements: • About 5 Billion Dollars to raise available capacity to 6,000MW in eighteen months • Government intends to increase power supply to 10,000MW by year 2011 with cost estimate at about 80 Billion Dollars • This informs the reform programme of government in the power sector, as the Nigerian treasury cannot fund this huge requirement • Need to attract substantial private sector investment.

8. OBJECTIVES OF THE POWER SECTOR REFORM PROGRAMME The Nigerian Electric Power Policy (NEPP) was adopted in 2002 in response to the dire shortage of electric power and the need for urgent reform of the sector. The NEPP provides for : • Drafting of a new Electricity law to provide the legal framework for the reform Agenda • Establishment of an independent regulatory agency • Development of a wholesale electricity market • Establishment of a consumer assistance fund to ensure the efficient and targeted application of subsidies to less privileged Nigerians • Establishment of a Rural Electrification Agency (REA) to manage the rural electrification fund and ensure a separate but equally focused application of subsidies for the efficiency distribution of sparse resources in competing rural electrification projects.

9. Reform of the Nigerian Electricity Industry • EPSR Act provides for two stages of market development viz: pre-privatisation stage and post privatisation stage. Pre-Privatization also known as transition period • Pre-transition stage of the electricity sector reform in Nigeria has in addition to policy formulation involved: • Restructuring NEPA to give higher level autonomy to its 7 generating stations, the transmission/dispatch sector and the 11 distribution zones • Legal and regulatory framework review leading to the promulgation of the new sector reform law (Electric Power Sector Act) in March 2005 • EPSR Act also provides for creation of an independent sector regulator (NERC) inaugurated October 31, 2005

10. Reform of the Nigerian Electricity Industry • Transformation of NEPA into : • An initial holding company, PHCN • Creation of a number of successor companies (currently 18 - 6 generation, a transmission & 11 distribution companies) to which the assets and liabilities of PHCN are to be transferred • Creation of the Nigerian Electricity Liability Management Company (NELMCO) • The development of a competitive electricity market for Nigeria with multiple operators and limited entry barriers • Successor companies along with the temporary bulk purchase & resale licensee and IPPs will operate in the market during the transition period • Full competition will follow after privatization of SCs and declaration by Minister (upon NERC’s advice) that the market is ready for full competition

11. LEGAL FRAMEWORK Establishment of NERC • NERC was established under Electric Power Sector Reform Act, 2005 • Officially inaugurated on October 31, 2005 • Established as Independent Regulator to drive the power sector reform programme of FGN through: - ensuring fairness, transparency & level playing ground for all investors - evolving policies to attract private investment from Nigeria and internationally - development and enhancement of indigenous capacity in the electricity sector

12. Role, Function and Structure of NERC • Role of NERC in the restructured industry • Provide a formal independent regulatory framework for the electricity industry • Ensure sustainable growth, development and stability of the sector • Boost investor confidence while protecting the interests of consumers • Promote competition within the industry • Set and enforce quality standards • Enforce consumer service obligations • Provide all necessary regulatory functions for the electricity industry

13. Role, Function and Structure of NERC (cont.) • Functions of NERC • Create, promote and preserve efficient industry and market structures and ensure optimal utilisation of electricity resources • Maximise access to electricity services, by promoting and facilitating consumer connections to distribution systems in both rural and urban areas • Ensure that an adequate supply of electricity is available to consumers • Price regulation • Ensure that regulation is fair and balanced for licensees, consumers; investors, and other stakeholders

14. Role, Function and Structure of NERC(cont.) • License and regulate persons engaged in the generation, transmission, system operation, distribution, and trading of electricity • Approve amendments to the market rules • Monitor the operation of the electricity market • Set up and administer a fund to be used to subsidise underprivileged power consumers as specified by the Minister • Support the preparation of the RE Strategy and Plan, issue the licenses for rural electrification, regulate the rural systems, determine the contribution rates to be sent to the Rural Electrification Fund • Undertake such other activities which are necessary or convenient for the better carrying out of or giving effect to the objects of the Commission

15. Structure of NERC 7 full-time Commissioners Chairman – 5 years Commissioners – 4 years Body of Commissioners - Chairman’s Office Divisions with key functions:- - Engineering, safety & Standards - Legal, Licensing & Enforcement - Market Competition & Rates - Finance & Management Services - Research & Development - Government & Consumer Affairs Regulatory Office

16. NERC REGULATORY INSTRUMENTS • Effective Regulation is the key to effective reform of the power industry • As sector regulator, NERC undertakes technical and economic regulation of the sector • The major instruments of regulatory control adopted by NERC in carrying out its regulatory functions include: • Primary and subsidiary Legislations • licences, • price regulation, • Industry Codes, Rules and Orders of the Commission

17. NERC Regulatory Instruments (cont.) • Primary Instrument – The EPSR Act No.6 2005 • Secondary Instruments:- • Subsidiary Legislations (Rules &Regulations) S.96 of the EPSR Act provides for drafting of the following Regulations: • - Administration of affairs of the Commission** • - Rights, obligations and duties of Licensees** • - License application, modification and cancellation procedures** • - Standards** • - Information required from Licensees • - Tariffs determination procedures** • - Fees, levies and other charges payable by Licensees**

18. NERC Regulatory Instruments (cont.)(Regulations) • -Allowable Licensee assets, properties and investments • - Customer-related matters** • - Licensee mergers, acquisition, affiliate relationships • - Procedures for market power monitoring • - Terms and conditions of system access by Licensees to other entities • - Fines and penalties payable by Licensees • - Such other regulations as may be required • ** Regulations already enacted by NERC

19. NERC Regulatory InstrumentsCont’d (Regulations) • Regulations • Process of Rulemaking • Prepare draft Regulations/Consultation Paper • Send to major stakeholders and publish in national dailies and receive comments and observations from stakeholders • Incorporate relevant comments and prepare final draft of Regulation • Obtain Commission approval to Regulation • Gazette Regulations

20. NERC Regulatory InstrumentsCont’d (Licences) • The regulatory design adopted for Nigeria is one based on Licensing as the primary instrument of regulatory control • A key function of NERC is issuance of licences to market participants • The Act provides that no person except in accordance with a licence shall engage in the business of electricity generation, transmission, system operation, distribution or trading – S.62 of EPSR Act • NERC may issue the following licences under the Act: • Interim licence to PHCN • Interim licences to Successor Companies • Generation licence • Transmission licence • System Operations licence • Distribution licence • Trading licence • Temporary bulk purchase and resale licence

21. NERC Regulatory InstrumentsCont’d (Licences) • The Act excludes the following activities from the requirement for a licence – • captive generation [generation for own use] • Electricity generation not exceeding 1MW in aggregate at a site • Electricity distribution not exceeding 100KW in aggregate at a site • The regulatory licences establish most of the conditions of operation in the individual licence documents • Licences are granted for 10 years and on expiry, may be renewed for another 10 years. Licences may also be extended for a period of not more than 5 years at a time • Licences contain provisions on reporting obligations of licensees as well as conditions under which licences would be cancelled

22. Other Regulatory Instruments(Market Rules) • The Market Rules define the Market organisation and trading arrangements for the Nigerian power sector and set out: • conditions, general procedures and methodologies for the administration of the Electricity Market • Market Rule to be developed by System Operator in consultation with Market participants and approved by the president upon recommendation by the Minister • Amendments to the Market Rules to be approved by NERC • The Market Rule yet to be approved by the President

23. Other Regulatory Instruments(Industry Codes) • NERC is empowered to develop and approve the operating Codes required for safe, secure and reliable operation the of electricity industry throughout the country • The Grid Code, Distribution Code & Metering Code which are now in operation are expected to assist NERC in this regard

24. NERC - Institutional Autonomy • NERC is a body corporate with perpetual succession and a common seal, may sue and be sued in its name, and may do all acts as may be performed by all bodies corporate.- S.31 of EPSR Act • The Minister may give general policy directions which NERC shall take into consideration provided such directions are not in conflict with the Act and the Constitution; • The Commissioners are appointed by President subject to confirmation of the Senate – S.34 of EPSR Act • Tenure of office of Commissioners are fixed to ensure independence. – S.35

25. NERC - Institutional Autonomy (cont.) • Conditions of appointment and vacation of office are fixed by Law. – S.36 • Remuneration of commissioners must be commensurate with that of equivalent experts in the private sector;- S.42 • The Commission, Commissioners and employees are exempt from liability for acts done in good faith in furtherance of their duties under the Act. – S61 • Commission has power to impose penalties under the Act – S.93(3)

26. NERC - Financial Autonomy • Funds of the Commission comprise:- - fees, charges and other income accruing from Licensees excluding penalties and fines - Funds allocated to Commission by the National Assembly (pursuant to a request for additional funds to meet its reasonable expenses by the Commission; - such other moneys as may accrue to or vest in the Commission as a result of its operations or otherwise. • NERC is designed to be financially independent of Government. Its primary source of funds is accruals from licence fees & operating levies payable by licensees. The provisions on allocation of the National Assembly are meant to provide additional support in the event of a shortfall in its funds to meet its operations.

27. Relationship between NERC and Relevant Stakeholders • There are a number of other institutions/agencies involved in the electricity sector, namely: • Federal Ministry of Energy (FME) • Rural Electrification Agency (REA) • Energy Commission of Nigeria (ECN) • Hitherto, FME acted as both policy maker and regulator but with the establishment of NERC as sector regulator, FME role is now limited to policy formulation • Also, the Minister is expected to issue directives to NERC regarding issues like eligible customers and consumer transition charges • NERC is mandated to submit its annual budget to the Minister & other financial documents as the Minister may request • Although NERC is not directly under the FME, there still exists a relationship under which the Minister has some quasi-oversight control over NERC

28. Relationship between NERC and Relevant Stakeholders (cont.) RURAL ELECTRIFICATION AGENCEY (REA) • REA was established under EPSR Act to promote rural electrification programmes through the management of the Rural Electrification Fund & implementation of Rural Electrification Strategy & Plan. • REA Fund to promote, support & provide rural electrification programmes through public and private sector participation primarily to increase access and maximise economic & social development • Rural Electrification Strategy and Plan to be developed by Ministry in Consultation with NERC and REA • Matters arising include: • What regulatory role (if any) should NERC delegate to REA with respect to Rural electrification schemes • REA is responsible for setting eligibility criteria for allocation of funds for RE projects while NERC determines licensing criteria • The requirement for NERC to take into account of subsidies affecting Rural customers in establishing its tariff methodologies. • There is thus need for collaboration between both entities to work out these issues.

29. Relationship between NERC and Relevant Stakeholders (cont.) ELECTRICITY COMMISSION OF NIGERIA (ECN) • ECN plays an advisory role in the Energy industry in Nigeria • Advises government on issues relating to policy formulation in the energy sector • ECN is seeking an amendment of the ECN Act to give it regulatory authority over renewable electricity projects including Hydro Generation Projects • There is need for co-ordination between ECN and NERC to avoid conflict in roles and responsibilities. ECN’s role is clearly focused on policy issues for Energy for while NERC is charged with Electric sector regulation.

30. Current Regulatory Landscape • Power efficiency is one of the seven point Agenda of the present Administration. The President has set a target of 6,000 MW available capacity for the country by 2009 and the maximum capacity required to meet domestic demand and boost industrial growth is estimated to be 10000MW. NERC is taking this into consideration in licensing new IPPs

31. Current Regulatory Landscape (cont.) • NERC has developed a Multi-Year Tariff Order which was approved by the Federal Executive Council on 30th of March 2008. The tariff regime is based upon an earlier published methodology and became operative on the 1st of July 2008. It is applicable to all sector participants. By this new tariff Order, consumers are expected to pay a cost reflective price per kilowatt hour of electricity. However, this price will be subsidized by the Federal Government for the first three years in order to prevent rate shock likely to ensue. This subsidy will be gradually reduced over the years. The Power Consumer Assistance Fund will also be activated to enable lower income consumers pay for power.

32. Current Regulatory Landscape(cont.) FGN is expected to declare a State of Emergency in the Power sector. Meanwhile the following steps are being undertaken by the FGN • FGN to set aside $5BN for the rehabilitation and expansion of the power generation, transmission and distribution systems. • The $5BN will be sourced from the excess crude Account (as stated by the Chairman of the Federation Account Allocation Committee). • The state Governors have consented to this programme and the funding. • The commencement date of the State of Emergency is yet to be announced by the President. • Transition Board for PHCN constituted to oversee the unbundling of PHCN and implementation of Reform Programme

33. CHALLENGES • Reducing general consumers frustration due to inadequate supply • Establishing credibility and legitimacy amongst industry stakeholders and consumers • Ensuring implementation and sustainability of the power sector reform programme • Moving industry towards cost reflective tariffs • Facilitating adequate and sustainable investments across the industry • Cooperation among relevant institutions in the sector • Dealing with political implications of regulatory decisions

34. Conclusion • The Role of NERC with respect to the reform and development of the Nigerian Electricity services industry continues to be of paramount importance as all development in the sector are subject to NERC Regulatory authority as the only Agency statutorily empowered to issue Licenses and to monitor activities in the sector. • Access to electricity a major driver for socio-economic development • NERC must ensure transparency and level playing ground through its regulatory instruments to attract investment and ensure adequate, reliable, safe and affordable electricity for Nigerians

35. THANK YOU.