…the CBN Framework for the national mass metering programme (NMMP) should be aligned with extant regulatory orders and regulatory instruments issued by NERC, especially in view of the fact that long term contractual arrangements have been consummated under such regulations.
The Central Bank of Nigeria (CBN) recently released the “Framework for Financing the National Mass Metering Programme” (hereinafter referred to as the “CBN Framework”). According to the CBN, “the current metering gap in the Nigerian Electricity Supply Industry (NESI) is over 10 million,… this comprises of unmetered customers as well as customers with obsolete meters that need to be replaced”. This has necessitated the CBN to develop the intervention programme to provide financing support to enable Electricity Distribution Companies (DisCos) to provide meters for the mass of electricity customers.
I will analyse the relevant clauses of the CBN Framework against existing regulations and the realities in the NESI, with a view to providing guidance to the CBN and market participants in the NESI, who may be impacted by the CBN Framework.
Objectives of the National Mass Metering Programme (NMMP)
The NMMP is yet another intervention programme on the metering of electricity customers by the Federal Government. Besides the twitter announcement by the Nigerian Electricity Regulatory Commission (NERC) in August, communicating the directive of President Buhari for the mass metering of electricity customers, there is no publicly available policy document on the NMMP. It is pertinent to note that the CBN Framework is the first public document about the NPPM. We should note the failure of past metering programmes, such as the National Pre-Payment Metering Programme (NPPMP), the Revenue Cycle Management (RCM) programme, the Credited Advanced Payment for Metering Implementation (CAPMI) scheme, and other national metering efforts of the Federal Government. Hence, for industry transparency and accountability, we advise that the policy document on the NMMP, if there is such, should be made public, so the programme can be scrutinised by electricity customers, consumer rights groups, stakeholders in the power sector, potential investors and in general, tax-paying Nigerians who would bear the cost of the programme should it fail, like previous national metering programmes mentioned above.
Classification of Upstream and Downstream Participants
The CBN Framework classifies DisCos as “downstream” participants, while it classifies Local Meter Manufacturers and Meter Assemblers (LMMA) as “upstream” participants. We understand that this classification was adapted from the N250 billion CBN framework on solar financing, which classifies local solar equipment manufacturers as “upstream participants” and solar project developers as “downstream participants”. In our opinion, while the classification of the LMMA as the upstream participant is right, the Meter Asset Providers (MAP) should be the correct downstream participant and not DisCos, on the basis of the extant MAP Regulations. However, the contractual relationship between the upstream and downstream participants is not defined in the CBN Framework. We propose that the CBN Framework should define the contractual relationship between the upstream participant and downstream participant in the form of a firm meter purchase agreement (or meter off-take agreement) between the LMMA and the MAP. Section 9 of the MAP Regulations stipulates that “MAPs shall source a minimum of 30% of their contracted metering volumes from local meter manufacturing companies in Nigeria”. Thus, the contractual relationship between the LMMA and MAP under the CBN Framework, as proposed herein, will be in consonance with the MAP Regulations if so adopted. There are immense economic benefits to the Federal Government if the above contractual relationship between the LMMA and MAP is adopted. For example, MAPs are tax paying entities, thus government would earn more tax revenues under this contractual relationship.
In Clause 4.1 of the CBN Framework, the “CBN facility will support the procurement, installation and deployment of meters and metering infrastructure by DisCos.” In my opinion, this provision is in conflict with the extant MAP Regulations. We observe that the CBN Framework makes no reference to the MAP Regulations, which are the extant regulations on metering in the power sector. The MAP Regulations provide that all DisCos shall engage the services of Meter Asset Providers who would be responsible for procurement, installation and deployment of prepaid meters to electricity customers. It is to be noted that all DisCos have entered into long term metering services agreements (MSA) with their respective MAPs to meet their metering requirements.
In clause 4.2, the CBN Framework explicitly prohibits the use of the CBN facility to procure fully assembled meters from overseas, “except meters imported by Meter Asset Providers (MAP) (are) already in the country as at September 30, 2020”. In my opinion, this provision of the CBN Framework is in conflict with the MAP Regulations, which allows for 70 per cent of the meters to be imported from overseas, while 30 per cent is to be procured from local meter manufacturers. Nonetheless we concede that the CBN is entirely within its rights to decide on the use of any intervention it provides. However, the objective of the NMMP is to fast track the mass metering of electricity customers and to close the metering gap. Competent industry sources confirm that the existing capacity for local meter manufacturing and assembly of meter components is not sufficient to close the metering gap within the projected timeframe anticipated by the NMMP. Thus to achieve the objectives of the NMMP and the MAP Regulations, it would require a combination of the importation of fully assembled prepaid meters to bridge the deficit in local meter assembly capacity, and massive investments in brownfield and greenfield local meter assembly lines. In this regard, it is suggested that the CBN Framework should allow for the importation of fully assembled prepaid meters by MAPs within a specified period. The power sector cannot afford to continue to bleed revenues while waiting for one hundred per cent local content in the metering implementation.
…adding more regulated debt obligations on the balance sheets of DisCos is counter intuitive. As a matter of fact, the DisCos are technically insolvent. The balance sheets of DisCos are already leveraged and severely impaired, with over N1.5 trillion unpaid obligations to the NESI and to the CBN, arising from tariff shortfalls…
The provisions of clause 5.1 of the CBN Framework indicates that the CBN intervention will be a regulated debt obligation to DisCos, which would be repaid from retail electricity tariffs paid by all electricity customers. As collateral for providing the loan to DisCos, the CBN intends to take a second line charge over all energy collections by DisCos. It should be noted that the CBN already has a first line charge over the energy collections of DisCos under the N213 billion Nigeria Electricity Market Stabilisation Facility (NEMSF). In our view, the provisions of clause 5.1 are perhaps the most contentious aspects of the CBN Framework and they throw up several pertinent issues, which require further clarification by NERC and the CBN.
First, adding more regulated debt obligations on the balance sheets of DisCos is counter intuitive. As a matter of fact, the DisCos are technically insolvent. The balance sheets of DisCos are already leveraged and severely impaired, with over N1.5 trillion unpaid obligations to the NESI and to the CBN, arising from tariff shortfalls and under remittance by DisCos (market debt). In addition, several sovereign loans by the Federal Government in the power sector, such as the the $1.2 billion Siemens power deal and the US$1.5 billion World Bank loan to the power sector, are envisaged to be put on the balance sheets of DisCos as well, to be paid by electricity customers. Former President Olusegun Obasanjo is consistently accused of spending circa $16 billion dollars in the power sector with nothing to show for it. Unfortunately, President Muhammadu Buhari may be unwittingly enacting a similar legacy of creating unsustainable debt in the power sector.
Secondly, the provision of clause 5.1 of the CBN Framework conflicts with the MAP Regulations, which specifically excludes metering as a regulated cost to be recovered by DisCos from electricity tariffs. The core objective of the MAP Regulations, inter alia, is to provide bankable, off-balance sheet financing solution to DisCos to enable them roll-out prepaid meters to electricity customers on a sustainable basis. To achieve this, the MAP Regulations made the efficient cost of metering transparent and excluded from energy tariffs. Due to the bankability provisions of the MAP Regulations, a number of innovative financing solutions are being developed to finance meter roll-outs. As an example, Bloomberg recently reported plans by FBNQuest Merchant Bank and other co-sponsors for a national meter asset finance and management SPV that would issue bonds and other financial securities backed by prepaid meter assets to investors in both the Nigerian and international Capital Markets. In this regard, the CBN Framework negates the current and long term gains of the MAP Regulation in providing a bankable framework for financing mass meter roll out by DisCos.
Furthermore, implementing the provisions of clause 5.1 of the CBN Framework will require the NERC and DisCos to revise the MYTO electricity tariffs to now include the true cost of metering. Specifically, clause 10.4 (iv) of the CBN Framework directs the NERC to “approve the repayment of loans through NESI collections with the requisite seniority as detailed above”. It is my opinion that rolling the cost of metering back into the MYTO electricity tariffs is both a policy and regulatory somersault and will be catastrophic to the NESI. Without doubt, it would lead to further increases in retail electricity tariffs. Customers are already complaining of high electricity tariffs, which necessitated a three-month freeze of the service based tariffs (SBT) just three weeks after it was introduced. It is doubtful that DisCos would be able to meet scheduled loan repayments to Participating Financial Institutions (PFI) and ultimately the CBN, if repayment of the CBN facility is from energy tariffs. Moreover, the CBN Framework would subject all electricity customers in NESI to an interest charge of 9 per cent per annum for the next ten years, in addition to the 10 per cent per annum interest that they are already paying for the N213 billion NEMSF. This is most unfair and unacceptable to electricity customers, who already have prepaid meters, or are willing to pay for their prepaid meters under the MAP scheme.
The NESI suffers from high ATC&C losses. Thus, CBN’s decision to take a second charge over all energy collections will worsen the liquidity situation in the NESI. It would also put the CBN ahead of other market participants in the NESI. The Electric Power Sector Reform Act (EPSRA) did not envisage that the CBN would take first and second charges over the entire revenues of the NESI to the detriment of upstream market participants, particularly to the Transmission Company of Nigeria (TCN), the Nigerian Bulk Electricity Trading Plc. (NBET) and the power generation companies (GenCos). Given the dire impact on their revenues, we believe that DisCos and other market participants would make a strong push-back against this provision of the CBN Framework, as it conflicts with the existing NERC order on the baseline remittance targets by DisCos to the NESI.
Nonetheless, in the unlikely event that the NERC is aligned with the provisions of the CBN Framework, it would necessitate either an amendment or a wholesale repeal of the extant MAP Regulations and the likely termination of the long term metering service agreements (MSA) between MAPs and DisCos. Since the MSA is underpinned by the MAP Regulations, a repeal of the MAP Regulations by the NERC would be both contentious and possibly ultra vires.
I propose that MAPs should be included in the CBN Framework to also import SKD meters, which can then be fully assembled in Nigeria by a local meter assembly company under a meter assembly contract. This structure would prevent wastage of scarce capital in setting up new meter assembly plants by MAPs…
However, beyond the repeal of the MAP Regulations and adjustments to the MYTO, the unintended consequences of regulatory flip flops by NERC are significant, and would further validate the widely held perception that the NERC is not independent in its regulatory functions.
Clause 6.1 details the application procedure for DisCos to access the CBN facility. DisCos are required to apply for the CBN facility through their Guarantee Bank (GB). The application process is quite cumbersome and needs to be made simpler. Notwithstanding, I do not see DisCos applying for the CBN facility until the regulatory and tariff issues highlighted above are suitably addressed by NERC. In addition, given the parlous state of the power sector and non-performing loans to the sector, the risk appetite of commercial banks for the power sector is very low. Consequently, many banks may shy away from providing their bank guarantees to DisCos to access the CBN facility.
Exclusion of MAPs from the CBN Framework
The CBN intervention facility is targeted at only DisCos and LMMAs. MAPs are excluded from accessing it. However, several LMMA are MAPs, thus the wholesale exclusion of MAPs from participating in the CBN Framework is anti-competitive and would confer significant market advantage on these LMMAs who are MAPs. Since the implementation of the MAP scheme in 2019, MAPs have deployed significant investments and resources under their respective long term contracts with DisCos. I believe that the exclusion of MAPs from the CBN Framework would be a huge set-back to the successful implementation of the national mass metering programme.
I propose that MAPs should be included in the CBN Framework to also import SKD meters, which can then be fully assembled in Nigeria by a local meter assembly company under a meter assembly contract. This structure would prevent wastage of scarce capital in setting up new meter assembly plants by MAPs, and also maximise the utilisation of new meter assembly lines funded by the CBN.
Directives To NERC
Clause 10.4 of the CBN Framework gives several directives to the NERC. From a regulatory perspective, the CBN Framework can be deemed a policy directive by the CBN to the NERC on how prepaid meters should be financed by DisCos and also what NERC should allow as regulated debt on the balance shee of DisCos. In section 33 of the Electric Power Sector Reform Act (EPSRA) 2005, only the minister of Power can issue general policy directives to the NERC. The CBN is not under the minister of Power and cannot issue policy directives to the NERC. As a regulatory organisation, the CBN is also not superior to the NERC. In general, recent policy announcements by government on the power sector indicate a deliberate and gradual usurpation of the powers of NERC by policy makers not recognised by the EPSRA. NERC is the apex regulator in the power sector, and needs to act as such.
While there is no clarity on the NMMP, the CBN intervention to provide financing for the NMMP is a step in the right direction. In concluding, I affirm CBN’s right to develop financial interventions for specific sectors of the economy it wishes to support. However, the power sector is quite unique, and is regulated by the NERC as the apex independent regulator in the sector. Thus the CBN Framework for the national mass metering programme (NMMP) should be aligned with extant regulatory orders and regulatory instruments issued by NERC, especially in view of the fact that long term contractual arrangements have been consummated under such regulations. Lastly, the NMMP policy document should be subjected to public scrutiny to ensure it does not turn out to be another failure like past national mass metering programmes.
Osawese Esamah is an energy lawyer with a background in the Capital Markets.