Conducive business environment, uniform standard, required for efficient Metering

In November 2013, the PHCN successor companies, including the distribution companies (Discos) were successfully privatised (except for the Kaduna Distribution Company). A key requirement for selecting the core investors was the commitment, expressed in a five-year plan, to reduce the aggregate technical, commercial and collection (ATC&C) losses of the respective Discos. Technical losses refer to the loss of electricity in the distribution process usually through damaged or destroyed distribution equipment. Commercial losses are losses of profit which result from several factors including inadequate metering; collection losses are losses incurred as a result of the Discos’ sub-optimal billing arising from inadequate metering, pilferage or illegal connections and internal collusions consequently negatively impacting on revenues that Discos receive for energy supplied.

The commitment to reduce ATC&C losses presupposes that the Discos would invest substantial capital to repair or replace ageing distribution infrastructure. The Discos will have to ensure that new and existing customers are adequately metered. They will need to evolve systems to efficiently manage the metering of customers and ensure that revenue is collected.

Adequate metering is critical to the success of the Discos because it can significantly reduce commercial and collection losses. However, prior to the privatisation of the power sector, metering had been a challenge in the electricity industry. At the time, the government owned PHCN was in the habit of connecting customers without allocating meters. Where meters were allocated, they were not maintained, repaired or replaced when faulty. Over time, the majority of electricity customers have no meters, or have faulty/ outdated meters. The dearth of meters contributed significantly to revenue loss suffered by PHCN. It also led to a lack of trust and transparency between public electricity utilities and the customers.

The expectation of the public, post-privatisation, is that the privatised Discos would meter connection points and bill, only, for the power supplied. This expectation is not misplaced given that NERC has issued the Nigerian Metering Code which provides that “modern accurate meter systems with reliable communication facilities” be deployed across the industry. In particular, the Code requires Discos to “own, install, verify, operate, maintain, inspect and replace all metering systems at metering points on the distribution system.” Also, about mid-year 2013, before the completion of the privatisation process, NERC introduced the Credited Advance Payment for Metering Implementation (CAPMI) scheme to allow willing Discos’ customers make advance payments for the purchase of meters. Such customers were to be repaid via reduced tariff over three years.

Despite the Metering Code requirements and customers’ participation in the CAPMI alternative meter financing initiative, the metering gap has widened. Although customers who subscribed to the CAPMI scheme made advance payments for meters, many of them were not issued meters by the Discos. The failure of the Discos to issue meters to most of the customers who had paid prompted the Minister of Power to announce the cancellation of the CAPMI scheme. The cancellation was implemented by NERC, effective November 1, 2016.

THE METERING CHALLENGE

The main cause preventing the Discos from complying with the metering requirement is funding. The core investors, who had to leverage their existing assets to raise debts to acquire equity in the Discos are, also, obliged to fund the investments required to meet ATC&C loss reduction commitments. Because these core investors are currently over-leveraged and are having difficulties meeting acquisition loan commitments to their lenders, they find it difficult to raise additional financing to ensure, amongst other things, a universal meter roll out. Another difficulty the investors face in this regard, is foreign exchange risk. This is because foreign currency is required to make the investment necessary for meter roll out, but Discos’ revenue is in Naira.

Apart from funding, it will appear that the Discos have gotten used to collection of revenue via the estimated billing process. The estimated billing process allows Discos to charge a cluster of customers an average sum based on the total power supplied to a cluster within a specified period. This billing system avoids the rigour of determining each customer’s consumption. The system does not, transparently, penalise a Disco, if certain customers within a cluster do not have power for a considerable period in a billing cycle due to a malfunction of a Disco’s equipment. If estimated billing is allowed to continue, there would be little to incentivise the Discos to implement an aggressive meter roll out, which would expose them to the ‘cold transparency’ that meters would bring to the Discos’ revenue generation process.

Some Discos have attributed the metering gap to loss of revenue in metered areas. According to sources in the Discos, certain customers either tamper with meters such that they do not provide an accurate measurement of consumption for billing purposes or they bypass the meters altogether. Consequently, the purpose of metering is defeated as ATC&C losses increase instead of being reduced. Unfortunately, where meter tampering occurs, unmetered customers often end up paying for the resultant unbilled electricity. It is, however, valid to posit that increased use of prepaid meters could reduce the incidence of electricity theft.

RECOMMENDATIONS

It appears that the solution to the metering challenge lies in the ownership structure of meters. This could be addressed by either changing the ownership structure, or by retaining it with some amendments.

To retain the current ownership of meters by Discos, the meter finance issue must be addressed. Currently, the Discos are unable to access fresh financing for meter rollout since they are already over-leveraged. As an alternative, the core investors may raise funds to finance meters roll out if they dilute their equity by selling off a portion of their shares to third party investors. The constraint, however, is that under the Performance Agreements between the Discos and the BPE, the investors cannot, within the first five years of the agreement, alienate more than 5% of their interest in the Discos, and even so, they require the consent of the BPE to do so. It is not clear whether funds realised from the sale of 5% would be sufficient to solve the metering problem. It is also possible that Discos may prefer to use funds raised from such divestment to finance other pressing capital commitments.

Another option would be for the BPE to purchase a portion of the shares held by the core investors so that funds realised can be ploughed into metering. However, the Performance Agreements do not contemplate such an exercise. Moreover, any move to increase government’s ownership of the Discos would run contrary to the privatisation scheme. In any event, neither of the options discussed above can be implemented without an amendment of the Performance Agreements.

CONCLUSION

For the metering system to work, there must be a uniform standard for the manufacture, purchase, installation and management of metering devices. In addition, there should be a conducive business environment for all participants in the metering industry to ensure that the potential for profit is adequately maximised.

Metering is invaluable in the electricity supply chain as it provides a reliable database of consumption patterns that would be useful for scheduling and planning at all levels. It also ensures transparency in billing customers and predictability of revenue for the Discos and other service providers in the industry.

Sina Sipasi & Maranatha Abraham (Partner & Associate in the ǼLEX Energy Team

A change in the ownership structure to accommodate customer ownership of meters could also be considered. This option would require an amendment of the Metering Code to remove exclusive ownership of meters by the Discos. Once this is done, existing customers may be given a grace period (about 6 months) within which to procure meters while new customers are directed to get meters as a prerequisite for connection. Such individually owned meters could be maintained and managed by the Discos for a fee, which could be included in the electricity tariff. This, however, might place low-income customers and rural dwellers at a disadvantage where they are unable to bear the costs of metering. In such cases, allowance might be made for continued Disco ownership of meters or a subsidised metering plan undertaken by the government in collaboration with the Discos.

As a third option, provision could be made in the Metering Code to permit third party meter ownership. Obviously, this would also require an amendment of the Metering Code such that third party service providers can own, install and manage meters. As an incentive, metering costs could be factored into electricity tariffs so that the Service Providers can recoup their investments.
CONCLUSION

Sina Sipasi & Maranatha Abraham (Partner & Associate in the ǼLEX Energy Team)