NERC v. NEMSA: why passage of NEMSA Bill may erode investors’ confidence

President Goodluck Jonathan’s administration has performed admirably well in demonstrating utmost sincerity with its desire to privatise the electricity assets in Nigeria. Although this appeared ambitious as privatisation of this magnitude is done in phases, Nigeria (against all odds) on November 1, 2013, formally handed over the Successor companies to their respective owners. This of course, has not come with its own criticisms as the owners of the Successor companies have expressed some dissatisfaction with the quality of assets bought when juxtaposed with its expected returns. The banks who funded the primary acquisitions are also not in a position to keep this exposure far longer than necessary so as to meet up with depositor’s instruction. It is for these reasons that a secondary electricity market becomes inevitable. This will allow new entrants with long term funding acquire interests in the assets; the birth of a new electricity market. To have a vibrant market-driven electricity market therefore, an independent Regulator becomes inevitable.

a) AN INDEPENDENT REGULATOR: A SINE QUA NON

The need to have an independent regulator for a sector such as the Power Sector cannot be over-emphasized. The independent regulator model is derived from English Common Law. The regulator, acting in the public interest, is given considerable discretion to take decisions on tariffs and service issues within a framework of laws and regulations. These decisions are made transparently and with full accountability. Public proceedings are an integral part of this process and stakeholders are pro-actively given opportunities to present their views to the regulator for consideration before the decision is taken. This can only be achieved with an absolute independent minded regulator. Best technical and public interest judgment becomes the only criteria for informed regulatory decisions.

It is international best practice that the regulator, although an appointee (of the President) may not be removed from office during his tenure unless it follows the due process. Although many developing and transitional economies adopted this framework (or leaned heavily in that direction), the functionality of many recently created regulators is still a work in progress.

Whereas the objective was to establish a truly separate and autonomous organization of government that exercises independent regulatory discretion, many so-called regulators are either:

i. Separate regulators” – a functionally separate organization is established within a Ministry that acts with quasi-independence but whose “decisions” are either recommendations to the minister, who has the “final” decision, or decisions that are subject to de facto ministerial review.

ii. Embedded regulators” – one or more functions (e.g., offices, departments, “desks”, etc.) that are set up within a ministry or ministries and perform regulatory duties subject to the review and coordination of higher governmental authorities.

In either of these cases, regulatory decisions are ultimately left to the discretion of a politician who may take or review decisions with a view to achieving purely political objectives.

b) NERC AS THE INDEPENDENT REGULATOR

This regulatory risk (“regulatory capture”) – i.e., the degree to which the regulator is actually given “independence” to take regulatory decisions – is a significant issue for potential investors and this must be what the government had in mind when, in view of the provisions of Section 31 of the Electric Power Sector Reform Act, 2005, CapE7, Laws of the Federation of Nigeria, 2004. The Nigerian Electricity Regulatory Commission was established under the EPSRA as a body corporate with perpetual succession which can sue in its corporate name and subject to the Act, to perform all acts that bodies corporate may by law perform.

In furtherance of ensuring an appreciable level of independence for the regulator, the EPSRA also provides for the following:

i. By the provision of Sec 34(1) of the EPSRA, the board of Commissioners are empowered to make regulatory decisions

ii. By the provision of Sec 96 of the EPSRA, the Board is empowered to make regulations on all matters on which the Commissions have powers.

iii. As regards funding of the Commission, Section 52 of the Act provides that the Commission shall be funded through:

(a) fees, charged and other income accruing to the Commission from licensees and other things done by it in terms of this Act, excluding any fines or penalties recovered pursuant to this Act;

(b) funds allocated to the Commission by the National Assembly, pursuant to a request by the Commission for additional funds required to meet its reasonable expenditures; and

(d) Currently, the Commission collects 1.5% of market revenue as regulatory charge vide the Market Operator

In light of the foregoing, it is clear that the intention of the Act was to give the Commission as much independence as possible. This is further underscored by the establishment of various technical and commercial departments within the Commission to robustly administer/govern the electricity market.

c) NERC AS A ONE-STOP REGULATOR

The Commission is sub-divided into key departments to allow for specialization of functions, efficiency as well as make provision for regulation and supervision of all activities in NESI. These departments are as follows:

• The Renewable Energy, Research & Development- Muhammed Lawal Bello – Vice Chairman/ Commissioner

• Legal, Licensing & Enforcement- Dr. Steven Andzenge / Commissioner

• Engineering, Standards & Safety.- Engr. Mary Eniola Awolokun / Commissioner

• Finance & Management Services.- Mr Patrick Umeh / Commissioner

• Government & Consumer Affairs- Dr Abba Armiya’u Ibrahim / Commissioner

• Markets, Competition & Rates- Mr Ekpo Olagoke Eyo (profile) – Commissioner

d) ACHIEVING NERC’S OBJECTIVES AS AN INDEPENDENT REGULATOR

The principal goals of NERC may be appreciated in the three broad areas of i) boasting private sector participation, ii) stimulating the attainment of an uninterrupted electricity supply and iii) ensuring the protection of consumers in the industry.

As part of its mandate to encourage private sector participation in the electricity market, NERC ensures that regulations which encourage profitable pricing and effective competition among market players are developed and appropriate codes of conduct/ rules of engagement are also enforced to guarantee an efficient and investor-friendly market. It is anticipated that an enhanced participation of the private sector in the industry will significantly impact on the ultimate goal of achieving a steady supply of electricity to consumers, which is fundamental to the geometric progression of the economy.

Whilst expected to cover a wide national footprint to maximise electricity access in Nigeria, NERC is to monitor industry operators and prevent abuse of the market power. This is in tandem with its responsibility of ensuring consumers fulfill their obligations by paying for power used. To this end, it will develop in consultation with licensees, customer service standards, fair pricing rules, and facilitate constant communication with consumers to ensure they understand their rights and obligations.

NERC ensures that materials on consumer rights (safety, service, etc) are up to date, readily accessible and provide an effective dispute resolution mechanism to guarantee consumer protection while actively fostering private sector participation.

THE NEMSA BILL

The NEMSA Bill, which has gone past its 2nd reading at the House of Representatives, proposes to establish the Nigerian Electricity Management Services Authority (NEMSA). The proposed Nigerian Electricity Management Services Authority (NEMSA) is to carry out the functions of enforcement of technical standards and regulations, technical inspection, testing and certification of all categories of electrical installations, electricity meters and instruments. The proposed Authority is to take over the functions of the Electricity Management Services Limited (EMSL) which was created in 2007, as one of the successor companies from the unbundling of the defunct PHCN, to carry out the very exact function of technical inspections, test and certify electrical materials/equipment to ensure they are of right quality and standards.

In addition to assuming the functions of EMSL, the primary functions of the Authority would include the issuance of competency certificates/electrical installation licenses to qualified electrical personnel and contractors working in NESI; carry out electrical inspectorate services for the NESI; and enforcing all statutory technical electrical standards and regulations amongst others.

a) Similarities in the Functions of NERC and the NEMSA

It is important to careful understand the functions of NERC vis-à-vis, the proposed functions of NEMSA to objectively determine whether or not, the proposed Authority is necessary.

b) NEMSA BILL’S OBVIOUS OVERLAP

The Nigeria Electricity Regulatory Commission (NERC) was established pursuant to the Electric Power Sector Reform Act, 2005 as an independent body to undertake technical and economic regulation of the Nigeria Electricity Supply Industry (NESI). The NERC is to ensure adequate, safe, reliable and affordable electricity to Nigerians by acting as an independent regulator and watchdog of the power industry. The commission amongst other things determines operating codes and standards, establish customer rights and obligations, set cost reflective industry tariffs, and the development of market rules. So far, NERC seems to be performing these economic and technical functions satisfactorily.

Consequently, the Commission is made up the 7 Divisions namely – the NERC’s Chairman’s Office, Market Competition and Rates, Legal, Licensing and Enforcement, Finance and Management Services, Government and Consumer Affairs, Research and Development, Engineering, Standards and Safety and Commissioner heads each Division. Each of these divisions is headed by commissioner that handled tasked with the concerned functions. For instance, The Engineering Safety and Standards Division has the task of developing and monitoring compliance of technical codes and standards for all operators in the industry and the technical evaluation of licence applications submitted to the Commission.

On the other hand, the Nigerian Electricity Management Services Authority (NEMSA) Bill as presently being mooted by the National Assembly is projected to establish a body called the Nigerian Electricity Management Services Authority (NEMSA). NEMSA is expected to perform broadly the functions of enforcement of technical standards and regulations, technical inspection, testing and certification of all categories of electrical meters and instruments etc. To ensure the efficient production and delivery of safe, reliable and sustainable electricity power supply and guarantee safety of lives and property in the NESI. Accordingly, the Bill seems to confer the technical functions of the NERC on NEMSA.

This raises the question of whether two regulators are needed to perform the Technical and economic regulations in the NESI. The NERC as a regulator has been performing the function of enforcement of standards for all operators in the industry commendably through its Engineering Safety and Standards Division.

Although, the NERC Engineering Safety and Standards Division, may not be able to perform detailed technical functions such as monitoring and preventing the use of low quality and substandard equipments and materials in the NESI but there exist in the industry the Electricity Management Services Limited (EMSL) that is assigned with that role.

In addition the goal of the power sector privatization is to drive the electricity sector from regulated and bureaucratic nature to private sector led. Consequently, creating two regulators to handle the economic and technical matters in the sector seems a deviation from this objective and is capable of discouraging private sector led market.

In conclusion, existence of two regulators in the NESI may not really be essential considering the stage of the electricity industry. We suggest an amendment of the EPSR Act to accommodate the mischief NEMSA bill seems to achieve as against creating another regulator.

INVESTORS’ PERSPECTIVE OF THE NESI VIS-A-VIS THE NEMSA

Regulation and more regulation have become the siren calls of governments and the general public across the economy especially the Nigerian Electricity Supply Industry (NESI). The curtailment of freedom and greater government oversight of the power sector has been deemed by experts and laymen as the most effective way to prevent another failure/crisis in the sector. Against this backdrop, insufficient questions are being asked about the efficacy of the new regulations and its impact on trade and investment. However, far from being the salvation, over regulation can stiffen an economy/sector from foreign or potential investment as well as the competitiveness of a market sector. In the wake of the recent privatization of the Nigerian electric power sector, the growth of the sector has become a prime objective whilst the Federal Government have adopted an ambitious programme of regulatory reform to address the fundamental weaknesses in the structure of the sector. The objective is to achieve efficient power/electricity delivery. In the quest to achieve this noble objective, little has been said about the impact a tighter regulation will have on competitiveness in the sector.

The currently proposed Nigerian Electricity Management Services Authority (NEMSA) may typically be a quintessence of over-regulation in the sector. NEMSA seeks to carry out the functions of enforcement of technical standards and regulations, technical inspection, testing and certification of all categories of electrical installations, electricity meters and instruments. This function is currently undertaken by the Electricity Management Services Plc (EMSL), which is to be replaced by the NEMSA for yet no crystal clear reason. In essence, it is yet to be shown in all clarity, the defect of the EMSL for which the proposed NEMSA is suppose to remedy. It suffices to submit that the NEMSA will only lead to over-regulation in view of the overlapping function of the NERC. It is important to note that an unnecessary duplication of functions or agencies tend to impose high cost for potential investors.

It is no secret that excessive regulation of any industry or sector can weaken or even kill it. The Power & Energy sector is particularly sensitive to excessive regulation given that capital can flow from one regulatory jurisdiction to another at almost the speed of light. Appropriate regulation can strengthen the sector and the domestic economy by attracting flows of foreign capital/investment. Excessive regulation on the other hand, has the opposite effect when it imposes costs and unnecessary bureaucracy/bottlenecks through the duplication of organs/agencies that cause capital and companies to flee the jurisdiction. There is no question that regulation is needed, but we must strike a balance to remain competitive especially at a time when we seek increased private (foreign or indigenous) participation in the sector.

Whilst undoubtedly, the presence of adequate regulations in a sector tend to infuse more public confidence in the sector’s performance/safety standards, a situation of over-regulation will definitely drive up production costs. This, as can been seen from experiences over the years, serves as a disincentive for foreign investors who are inclined to more competitive jurisdictions with less government regulation/intervention. For a private driven electricity industry (especially one that aims towards competitiveness in the NESI), government must function to lessen its intervention and control through the issuance of regulation/ the creation of governmental departments.

With lesser government restrictions, the resultant free market will force businesses to protect consumers, provide superior products or services, and create affordable prices for everyone (through enhanced competition in the market). Any unnecessary intervention or oversight function by government (either via regulations/policies or the creation of more governmental agencies) will create nothing but a big bureaucracy that increases the cost of doing business. A classic instance in Nigeria that clearly suggests that a relatively free market offer more competitive advantage is the Nigerian Telecommunication Industry.

In conclusion, a regulated sector is encouraged in matters that impact directly on the safety/health of the general public as well as the environment and the stability of the economy. Any intervention by regulation in the electricity sector which does not emanate from the foregoing need can only create a huge government bureaucracy that stifles growth/competition whilst consequently discouraging potential investment in the sector. The aftermath will be huge monopolies that cause consumers to pay more and the absence of innovation in the sector as a result of over-regulation. The key is to strike a balance between free markets and the amount of government regulation needed to protect people and the environment. When this balance is reached, the public interest is protected and private business flourishes.

CONCLUSION

In conclusion and advising against the passage (into law) of the NEMSA Bill, the establishment of a parallel Authority (under the guise of NEMSA) will not only over-regulate the power sector, thereby eroding investors’ confidence, it will also (and needlessly so) cause Federal Government’s overhead expense to increase. This is because, setting up a new Authority as is being contemplated will no doubt require a structure, staff, equipments etc. This will increase government exposure which is contrary to what Government’s public outlook is on cutting Executive spending.

It is for these reasons that we take the view that the NEMSA Bill should not be passed into law as it only seeks to duplicate the efforts of NERC with a financial negative consequence to the government purse.

Finally, we advise that the EPSRA should be amended immediately to specifically direct departments/Commissioners of relevant areas to focus solely on them.

Excerpts from a Memorandum on the review of HB. 685- A bill for an act to establish the Nigerian electricity management services authority (NEMSA), to carry out the functions of enforcement of technical standards and regulations, technical inspection, testing and certification of all categories of electrical installations, electricity meters and instruments etc to ensure the efficient production and delivery of safe, reliable and sustainable electricity power supply and guarantee safety of lives and property in the Nigerian electricity supply industry-

Delivered By Perchstone & Graeys, Nigeria, to the House of Representatives Committee on Power.

Analysis by Perchstone & Graeys