New power assets owners propose improved revenue in interim market

PHCN15 October 2013, Abuja – The new investors of successor distribution companies created from the unbundling of the Power Holding Company of Nigeria, PHCN, have picked holes in the proposed “allowable revenue” to be adopted in the interim electricity market by the Nigeria Electricity Regulatory Commission (NERC).

Four of the successor PHCN distribution companies that collectively made a presentation in Abuja argued that the proposal has not made provision for enough liquidity in their operations.
The allowable revenue contained in the interim rule, is expected to guide the operations of the Nigerian Electricity Supply Industry (NESI) for at least four months.

The distribution companies: Yola and Ibadan, which was bought by the Integrated Energy Distribution and Marketing Company, Abuja owned by Kann Consortium, and Jos bought by Aura Energy, were all represented by an official known as Robert Yates at the just-concluded public hearing on interim rules to guide the sector before the eventual declaration of the Transition Electricity Market (TEM).

Yates, in his presentation, insisted the distribution companies needed more than what NERC had suggested in the interim framework to cover salaries, other cash outgoings, Transmission Service Provider (TSP) costs and interest payments on monies borrowed to finance their purchase of the PHCN assets.

The companies indicated that the framework was however good in principle but would need to be amended to take in their concerns.

NERC has however maintained that it would initiate an amendment to the rules but would not allow the market participants to write the rules for the industry.

For instance, allowable revenue in NERC’s Multi Year Tariff Order (MYTO-2) sets that each distribution company will get 100 per cent for administration, 20 per cent for fixed and variable costs, 50 per cent for return on capital and 10 per cent for depreciation to which the distribution companies objected to and would rather prefer 100, 70, 60 and 10 per cents allocation respectively.

Yates stated that in view of the expected cash waterfall, the distribution companies have covenants with their lenders that require collections to be paid into designated bank accounts and lenders have first call on this cash.

He also said arrangements suggested by NERC for full payment for energy and then a top up back to the distribution companies from the Market Operator (MO) would breach covenants with their lenders, adding that accepting the MO’s bill in full as a liability without the means to pay it would lead to a breach of lending covenant ratios.

They thus proposed, amongst others, that from its collections, distribution companies keep cash to cover “allowable revenue”, allow a part pay for energy received to the MO with certainty there will be minimum payments agreed between each distribution company and NERC, which will reflect recent performance on billings and collections, while heavy interest payments for default and an audit at the end of the period to confirm compliance by each distribution companies will be adopted.

Asides these, Yates explained that the formula would struggle to capture additional complexities, which NERC would need to agree with each distribution companies on a table of minimum payments, adding that: “It is in everyone’s interests to ensure liquidity.

On incentives, he said: “We propose, if tariffs are rebased in March 2014, the loss reduction clock will have been ticking for four months; this is not the deal that investors agreed with Bureau of Public Enterprises (BPE).

“Therefore we believe that the “Start of the Race” for losses reductions remains at November 1-the original deal should not be upset. This is the incentive originally designed for the deal and it remains sufficient to ensure that investors pursue the reduction of ATC&C losses.”
Yates also spoke on expected shortfalls saying: “Over the four months there will be a difference between the MYTO allowed revenue and the revenue the disco will receive from the interim market- we have termed this shortfall.

Added to this needs to be interest for monies paid to BPE on August 21 through to handover. The NERC proposal indicates that this shortfall will be recovered by the disco once the tariffs have increased but the exact mechanism is not clear.

“We believe the recovery mechanism needs to be very precise and certain. NERC are asking the discos to be ‘bankers’ to the sector in the next four months and the conditions of repayment need to be concrete,” he added.

– This Day

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