Liberalizing the metering industry: Regulatory & policy considerations
At the 18th power sector stakeholders meeting which held in Kano on August 14, 2017, the Minister for Power, Works and Housing, Mr. Babatunde Fashola, SAN, announced the Federal Government’s intentions to liberalize the meter services industry in a manner that would allow customers and licensed 3rd party meter services providers (MSP) directly procure and install electricity meters.
While the Minister was categorical in stating that DISCOs still have the obligation of metering their customers, he was specific that no law, including the Electric Power Sector Reform Act (EPSRA) vested a monopoly of meter supply solely on DISCOs. To give effect to his pronouncement, he announced that NERC would soon issue regulations for Meter Service Providers (MSP), (ii) Meter and retail franchise operators (iii) Community aggregation services for the sale of electricity and provision of meters (iv) Low cost meter supply.
Who owns the Meter?
How would the proposed regulation treat ownership of meters financed by either the customer or a meter services provider? By the terms of their operating license, Discos are responsible for providing meters and meter services, thus ownership of the meters is vested in Discos. Ownership of meters also entails carrying the liability of maintaining the meter to ensure it is in good working condition. Thus who takes liability for the cost for maintenance of the meter, meter calibration, repair and even replacement of the meter in the event of a fault, damage or theft? Would electricity customers be allowed to relocate their meters each time they move residence?
Who bears the Meter costs (capital and operating costs)?
Under the current licensing terms for electricity distribution companies, metering is the obligation of DISCOs. To compensate DISCOs for this obligation, the electricity tariff factors in a capital cost component for providing and maintaining meters.
If electricity customers procure their own meters, they are effectively funding the Discos. In the event that the proposed meter services regulations do not vest the ownership of meters with the customer who paid for it, would the proposed policy allow for the customer to recover his capital cost for the meters? What would be the cost recovery mechanism for this?
Who is responsible for the Meter installation?
Who installs the meters? Can customers install the meters themselves or the DISCO are exclusively to handle meter installation? Who audits and certifies the meter installation to ensure the installation was properly done? Would the regulation provide minimum installation standards which any meter installer must meet? Would the regulation provide a penalty against meter installers for poor meter installations?
Meter installation certification and meter sealing are very important processes. The meter installation process is where more than 50 percent of meter bypasses occur.
Meter technology and back-office billing and vending platforms
Would the DISCOs be able to specify the meter types on its network? Or would customers be allowed to procure whatever meter technology from any meter manufacturer they can afford? For instance, one DISCO in the Southwest had up to five different types of meters on its network and five vending platforms for each meter type. Significant resources had to be deployed to integrate these disparate meter back-office billing and vending platforms to ensure that customers with different meters could vend on one vending platform.
Creating a competitive and commercial MSP Market
Funding is at the core of addressing the metering gap and constitutes maybe 90% of any sustainable metering solution. Presently, Discos are unable to fund their metering programs and may still be unable to fund meter roll-outs in the foreseeable future. To address the funding issue, the minister has alluded to the possibility of electricity customers directly purchasing their own meters under special arrangement with DISCOs.
In our view, a more sustainable financing solution is to create a commercial MSP market to provide metering services to the Nigerian electricity market.
Removal of metering from DISCO license obligations
The first step in creating a commercial MSP market is to remove both the responsibility and the obligation of DISCOs to meter their customers and place such responsibility solely on licensed MSPs. MSPs should now be given the license to meter and provide other metering services directly to customers of DISCOs.
Removing the obligation of DISCOs to meter their customers should not be misconstrued to mean that DISCOs would also not have the responsibility for billing, vending and collection of revenues, inclusive of the meter services charge. It only removes the DISCOs’ capital expenditure obligations for meters, and lessens the impact of future meter assets on electricity tariffs.
Sustainable revenue model for MSPs
The main constraint in attracting 3rd party funding for metering is the absence of a revenue model for the recovery of investment in metering. Potential investors in the MSPs want certainty of their meter revenues. By this we mean delineable revenues to MSPs, unbundled from kwh electricity tariffs, and also clarity on who pays for the meter charges – either the Disco or the customer.
To be sustainable, the MSP model must operate commercially, with transparent meter revenues to the MSPs in the form of commercially determined meter charges, either embedded in the tariffs or as a separate standalone charge to electricity consumers who consume the meter services.
We advocate for the introduction of a meter services charge to cover MSPs’ cost of providing electricity meters and the ongoing costs of operating and maintaining meters. The introduction of a meter services charge unbundled from electricity tariffs, provides a transparent way of billing customers for metering services. Introducing a transparent meter services charge would move the power sector towards greater competition in the provision of metering services to the benefit of electricity customers.
Policy & regulatory incentives for MSPs
To spur investments in MSP at the onset of the regulations, MSPs must be protected against DISCO payment risks. Protection for MSPs against DISCO payment risks can be in the form of financial or insurance guarantees or similar instruments. For instance, the proposed N39billion earmarked by the Federal Government for metering could be structured in the form of a guarantee program to backstop any DISCO payment default to the MSP, rather than as a direct loan to MSPs as is being envisaged.
Another way to incentivize MSPs and assure them of revenue certainty is to ensure that MSPs are paid from DISCO topline revenues before payments to other market participants. Indeed, this should actually be the case as the meter is the cashbox of the power sector value chain.
Lastly, any regulations for MSPs must ensure that DISCOs and electricity customers get value-for-money, by including minimum service levels and key performance indicators (KPI) for MSPs, as well as minimum applicable sanctions/penalties against MSPs where such service levels or KPIs are not met by the MSP. The regulations must also give DISCOs the ability to impose additional service level standards, KPIs and penalties on MSPs.
Conclusion
A commercial MSP model has significant benefits to the power sector. A successful implementation of a commercial MSP model “will help to reduce conflict between DISCOs and customers, ensure collection of tariff, reduce losses, improve liquidity and bring some relief to the finances of some DISCOs who cannot afford to fund meters”.
In addition, a commercial MSP model would give rise to competition in electricity metering, attract new and much needed investments into the power sector and has the potential to reduce electricity tariffs in the long run.
The key to liberalizing the metering industry and unlocking a commercial MSP model is first to disaggregate metering from the license obligations of DISCOs and develop sound commercial regulations that assure investors in MSPs of a recovery of their investments in metering.
ODION OMONFOMAN
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. E-mail: orionomon@outlook.com