Fresh electricity subsidy crisis looms

A FRESH electricity subsidy crisis over the administration of the Multi Year Tariff Order (MYTO) funds may soon hit the country, according to an investigation by The Guardian. This is coming as KPMG Professional Services, a Nigerian partnership and a member firm of KPMG international cooperative, in a 101-page audit of the sector indicted government for alleged non-adherence to the electricity tariff framework.
According to sources, the audit report has been sent to the Ministry of Power for necessary actions. But the ministry, it was learnt, has not considered the recommendations.
One of the primary functions of the Nigerian Electricity Regulatory Commission (NERC) as contained in Section 32 (d) of the Electric Power Sector Reform (EPSR) Act, 2005 is to ensure that the prices charged by licencees are fair to consumers and sufficient to allow the licencees to finance their activities and to allow for reasonable earnings for efficient operation. Section 76 of the EPSR Act further empowers the commission to set up one or more tariff methodologies for regulating electricity prices.
NERC adopted a holistic and scientific approach to correct pricing of electricity to ensure a fair and cost-reflective tariff regime, which will sustain the current operators while at the same time attract investment into the sector. The key principles of cost reflectivity and affordability were taken into consideration in evolving the new tariff regime. This formed the basis of the MYTO methodology. The MYTO further provides for continuous reduction in transmission and distribution/retail loses. Revenue earned by operators is made dependent on achieving these performance improvements.
The former Chairman of the NERC, Ransome Owan, and six commissioners were suspended and arrested by the Economic and Financial Crimes Commission (EFCC) on February 3, 2009 for allegedly misappropriating N1.54 billion in 2008. In what appeared a political calculation to instill confidence in the electricity reform agenda, the Federal Capital Territory High Court in Maitama in September 2010 discharged and acquitted Owan and the six other NERC commissioners arraigned before it over alleged fraud.
This followed an application by the EFCC for the termination of the case on the orders of the Federal Government through the then Attorney General and Minister of Justice Mohammed Bello Adoke (SAN).
In what may be a fresh concern as regards the MYTO, sources within the power sector told The Guardian that N178 billion was approved as electricity subsidy in 2008, to last for three years.  The disbursement of subsidy claims by operators was based on their collection efficiency, subject, however, to a cap.
A source said: “The subsidy was to be used to pay for costs of power, capacity expansion and maintenance of the distribution networks. Sadly, there is very little to show for this. Distribution networks are still very weak; generation beyond 4,500 megawatts cannot be evacuated and distributed without critical upgrades to the networks. There are huge unpaid energy bills owed to the market participants (Agip, AES, Afam, Egbin, Sapele) and the Transmission Company of Nigeria (TCN).
“Bottom-line is that nothing less than N200 billion worth of unpaid energy bills is owed to market participants, plus another N16 billion for gas. So, where has the subsidy fund gone? The Federal Government set aside N46 billion for electricity subsidy for the year 2012; N11.5 billion was released two months ago and the balance was released some weeks ago.”
The major bone of contention, The Guardian learnt, is that the market operator has done a major turnaround to pronounce that the N46 billion subsidies do not apply to MYTO-2, which came into effect in June 2012, citing a technicality that since the tariff regime began mid-year, the funds would no longer apply.
“The market operator and the Ministry of Power, it was gathered, have said that the N46 billion will instead be used to offset historical debts of PHCN. So, what happens to NELMCO (the Nigeria Electricity Liability Management Limited)? Debt settlement shouldn’t be a bad thing but imagine if Egbin suddenly found itself with N5 billion – the possibilities are huge. This may create a conduit for misappropriation. But more importantly, the industry will experience a setback. Eko Distribution Company, for instance was able to settle all its financial obligations to the industry in November 2012. They have asked for an urgent release of subsidy due to it since the introduction of MYTO-2 in June 2012. They plan to procure more materials and accessories needed for network maintenance, as well as purchase and install meters for customers.”
The source continued: “Eko Disco recently demonstrated that a Disco can actually be self-sustaining, that is, settle its financial obligations all without additional funding from either subsidy disbursement or from government coffers. The current cost of total metering gap in the country is N106 billion. The subsidy money can be used to considerably close this gap.”
And despite a KPMG audit report of the sector with recommendations, the ministry has not done anything so far.
“It appears that this subsidy recommendation should never have been made in the first place, as there is, if anything, very little to show for it,” the source noted.
NERC proposes electricity subsidy in the MYTO to Federal Government, which in turn mandates the Central Bank of Nigeria to pay subsidy amount to the Market Operator (MO). In the MYTO-1 framework, settlement statement was prepared by the market operator and sent to the Ministry of Power, which transmits it to NERC and then to the Ministry of Finance for payment to the market operator.
MYTO-2 eliminates the former modalities such that a settlement statement is prepared by the MO and sent to the Ministry of Finance. The Ministry of Finance sends it to the CBN which pays to MO. NERC and Ministry of Power, however, have reserved rights to audit the MO to establish acts of irregularities.
To determine the efficiency of the subsidy disbursement processes and the general efficiency of the market settlement process, the NERC in 2012 engaged KPMG to assist with the reconciliation of the market operator’s account, with a view to proffering recommendations to improve the efficiency and effectiveness of the market settlement process.
The audit report obtained by The Guardian revealed that the market operator did not adhere to the MYTO financial management procedure mechanisms since 2008.
The KMPG audit unearthed substantial irregularities perpetrated in the market from 2008 to 2010.  The result of this, according to the report, was over N200 billion worth of unpaid energy bills owed to market participants.
The audit report observed: “We noted that MO did not commence the application of MYTO guidelines until April 2009, even though the MYTO became effective from 1 July, 2008. During the period from April 2009 to March 2010, when MYTO was applied by the MO, the rates were wrongly applied in the computation of amounts due to and from market participants. Our re-computation of the value of invoices issued by the MO from July 2008 to March 2010 using the MYTO rates indicated that amount due to NERC was overstated by N73.8 million, amount due from the DISCOs was understated by N34 billion, amount due to GENCO, TCN and MO was understated by N85 billion, N16.5 billion and N273 million respectively.”
The report continued: “Market participants were billed charges not provided for by the MYTO. Such charges include pension fund contribution, VAT, meter maintenance fund, outstanding debt factor and loan repayment. These charges were inadvertently omitted from MYTO and charges provided for in the MYTO were wrongly applied to market participants other than those specified in the order. For example, the total value of settlement statements issued by MO to GENCOs is inclusive of N5 billion charged to hydroelectric plants for gas, which they do not consume. Based on our review, we observed that there was some lack of clarity and understanding of some components of the MYTO which were not clearly specified.”
The KPMG report added that the Power Holding Company of Nigeria Corporate Headquarters (CHQ) was overpaid by about N6.17 billion based on the invoice re-calculated in line with MYTO.
“Therefore CHQ owes this amount to the market as refunds, receivables from the DISCOs amount to N124.17 billion; N68.7 billion relates to subsidies requested from the Ministry of Power up to March 2010, while N55.3 billion relates to DISCO outstanding on collection at the retail market, payments to gas suppliers were reviewed for the period of July 2008 to March 2010 as N11, 071,649,681 and the amount owed to IPPs is $207,767,525.”
The Operator of the Nigerian Electricity Market (ONEM) is licensed to function as the market operator of the wholesale electricity market of the Nigerian Electricity Supply Industry.
The Electricity Power Sector Reform Act (EPSR) provides for the restructuring of the electricity industry, the creation of the NERC, the development of the electricity market of Nigeria and private sector participation.
To ensure an efficient and transparent electricity market in Nigeria, two special entities have been created: The market operator and the system operator.
The market operator is responsible for the administration of the electricity market, promoting efficiency and where possible competition. The system operator is responsible for the planning, dispatch and operation of the transmission system, protecting system security and reliability. Market operation was therefore set up in April 2004.
To achieve a sustainable electricity industry, the electricity market has been designed with a staged approach, moving from one stage to the next with increasing competition and diversification of trading arrangements as investment and private participation grows.
The market operation initiated the first stage of the electricity market, the pre-transitional market, in January 2005. The participants are the distribution zones and power stations of PHCN, buying and selling at transfer prices. Transmission is providing wheeling services and the system operator is providing system operation services.
Meanwhile, following the resolution of its contract with the Federal Government, Manitoba Hydro International has appointed Mr. Alejandro Core as the new market operator for Nigeria.
Alejandro is a project management professional.
Manitoba is coming with about eight expatriate managers to run the Transmission Company for a period of three years in the first instance.