A Review of the Nigerian Energy Industry

Unstable progress in privatised power sector

23 December 2014, Abuja – It is mostly accepted across board that the rule of thumb for an industrial nation’s power usage is circa 1 megawatt (MW) for every thousandth of its population, this therefore puts Nigeria’s electricity need somewhere around 160,000MW given its population of 160 million people.

But the seeming inability of the country to muscle up these resources-financial and managerial resources needed to generate this quantum electricity led to the initiation and execution of an all-inclusive electricity reform, which included the unbundling of defunct Power Holding Company of Nigeria (PHCN) and privatisation of successor generation and distribution companies heaved off the PHCN.
Power1As was the case in 1999 when Nigeria returned to democratic governance, her electricity supply had reached the lowest point in its 100 year history. Only 19 out of the 79 generation units, which were largely owned by the vertically integrated PHCN were reportedly operational then while daily available generation capacity averaged only about 1,750MW. The country had witnessed the lowest cost recovery regime considering that only 30 per cent of historical costs were recovered in the tariff. The sector by this time was adjudged to be moribund with no new infrastructure built to support its expansion alongside the country’s population between 1989 and 1999.
As it were, the last set of generating plants built in the country was commissioned in 1990, including a transmission line that was built in 1987. Over 90 million Nigerians were by implication, without access to the national electricity grid.

It was the decision of the government to at the turn of democratic governance, embark on one of the most sweeping policy changes in the country’s electricity sector that gave birth to the Electric Power Sector Reform Act 2005 (EPSR), which in turn produced a roadmap that was launched in 2010 to serve as a guide to the planned reform exercise.

These new policy procedures created six generation companies, one transmission company and 11 distribution companies to retail electricity to Nigerians. Additionally, the exercise sought to establish a phased competitive wholesale electricity market, an independent industry regulator in the Nigerian Electricity Regulatory Commission (

It is mostly accepted across board that the rule of thumb for an industrial nation’s power usage is circa 1 megawatt (MW) for every thousandth of its population, this therefore puts Nigeria’s electricity need somewhere around 160,000MW given its population of 160 million people.

But the seeming inability of the country to muscle up these resources-financial and managerial resources needed to generate this quantum electricity led to the initiation and execution of an all-inclusive electricity reform, which included the unbundling of defunct Power Holding Company of Nigeria (PHCN) and privatisation of successor generation and distribution companies heaved off the PHCN.
As was the case in 1999 when Nigeria returned to democratic governance, her electricity supply had reached the lowest point in its 100 year history. Only 19 out of the 79 generation units, which were largely owned by the vertically integrated PHCN were reportedly operational then while daily available generation capacity averaged only about 1,750MW. The country had witnessed the lowest cost recovery regime considering that only 30 per cent of historical costs were recovered in the tariff. The sector by this time was adjudged to be moribund with no new infrastructure built to support its expansion alongside the country’s population between 1989 and 1999.
As it were, the last set of generating plants built in the country was commissioned in 1990, including a transmission line that was built in 1987. Over 90 million Nigerians were by implication, without access to the national electricity grid.

It was the decision of the government to at the turn of democratic governance, embark on one of the most sweeping policy changes in the country’s electricity sector that gave birth to the Electric Power Sector Reform Act 2005 (EPSR), which in turn produced a roadmap that was launched in 2010 to serve as a guide to the planned reform exercise.

These new policy procedures created six generation companies, one transmission company and 11 distribution companies to retail electricity to Nigerians. Additionally, the exercise sought to establish a phased competitive wholesale electricity market, an independent industry regulator in the Nigerian Electricity Regulatory Commission (NERC), a cost reflective tariff regime in the Multi Year Tariff Order (MYTO) as well as a private management contractor, Manitoba Hydro International to manage the newly created Transmission Company of Nigeria (TCN).

In privatising the successor companies, the government also established the Nigerian Bulk Electricity Trading Company (NBET), which is otherwise called the Bulk Trader to act as a power procurement and sales intermediary between the generation and distribution companies through the instruments of vesting contracts and power purchase agreements as the case may be.
having paid off the total severance and pension dues of all 47,913 staff of defunct PHCN to give the new owners of the power assets a clean operational slate, the government, after about 14 months of negotiations with the unions, handed over the electricity market to private operators who from November 30, 2013 took up the task of growing the sector.

But midway into their management of the sector, every doubt that there is indeed real job needed to create a competition-driven electricity market, was not in doubt; from obvious financial illiquidity to constant gas supply shortfalls, weak transmission system and of course, extant dearth of corporate governance practices within the retail end of the industry, the challenges of living out the “quick return” promised by the government to buy supports from Nigerians in the runoff to the  privatisation became obvious and somewhat difficult for stakeholders to contend with.

Fears that the market may be heading for an unanticipated halt and requires quick bailout to keep it afloat were variously expressed few months after the November handover but it was a watershed for Nigeria that the November 30 handover happened at all considering that the electricity reform had balked overtime on grounds of vested interests. It took about eight years for the country to actually implement the contents of the EPSR Act, thus transcending the governments of Presidents Olusegun Obasanjo, the lateUmaruYar’Adua and Goodluck Jonathan.

Early challenges, early responses
As it were, NERC within its regulatory capacity was quick to respond to some of these challenges. The regulator developed and put into use an interim rule to guide market transactions until such a time that all the precedent conditions for the commencement of a Transitional Electricity Market (TEM) are met.
The commission also activated various regulatory tools to consciously alter the mindset of a market in transition and put forward what operators considered an apt guidance of the market, notwithstanding, the market still lags behind in a number of vital indices.

Lingering challenges
Current field reports from the market indicate that the generation capacities of generation plants are still under-utilised from poor gas supply, the transmission system still shows off elements of weakness and consumers still complain of poor service culture from some distribution networks; this is regardless of NERC’s earlier caveat to distribution companies improve on their service delivery.
Even with NERC’s regulations to cap hyped electricity bills to consumers without standard metering devices, it is still accepted norms for consumers to get poorly calibrated electricity bills that extort monies for services poorly rendered. Consumers equally report unfair padding of electricity load allocated to them with no proper assessment from the distribution companies.
Pointing to two crucial issues, the field reports indicate that stability in gas supply to generation plants and chronic market illiquidity has continued to impact negatively on the market.

Not minding the diverse debates that have continued to greet the true status of the market, an expert report of the Nigeria Infrastructure Advisory Facility (NIAF), which THISDAY obtained in July, showed that the market was indeed contending with some financial risks, a development that has prompted some good response from NERC, which earlier denied the development.
Only recently, the regulator settled to stand in gap for a N213 billion hybrid financial package for the market from the Central Bank of Nigeria (CBN). The intervention fund will be expended on gas related debts amongst others.
Having considered the inherent risks, the government finally came forth with what it termed a market-based solution in the intervention but industry experts suspect the package.

CBN intervention fund
In announcing the N213 billion facility for the market, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke said that the CBN fund was planned to address current revenue shortfalls of the market, boost gas supply to power plants as well as provide reasonable solutions to the struggles of electricity generation companies.
Alison-Madueke stated that the facility was tailored to address three key challenges of the market: inadequate gas supply, misalignment between electricity tariff and the true cost of running electricity business as well as the inability of power generation companies to reliably produce the electricity that is possible as a result of reduced volumes of gas.
“With most of the operators having just acquired PHCN successor generation companies, they could hardly afford the reduced income due to the shortfall in revenues for reasons that I have just set out.
The newly privatised companies have borne the brunt of these issues and consequent revenue shortfalls in revenue, since handover last November. This is hampering much needed investment in the sector and has slowed down efforts to improve electricity supply,” Alison-Madueke had said.

The NIAF report
The NIAF report, which was captioned, “dealing with the financial shortfall in Nigeria’s electricity market” and prepared for the Operator of the Nigerian Electricity Market (ONEM), succinctly said that there are real risks of payment defaults and precipitous loss of confidence, all which could lead to an unexpected collapse of the electricity market.
It explained further that the financial risks were real and proximate and recommended possible support options that could help buoy the market into TEM-a contract-based trading regime.

The report also mirrored views that had been expressed by other experts, stating clearly that there are attendant serious risks to banks that had financed purchase of power assets in the liberalisationprogramme and as such chronic illiquidity now appears to be the central challenge of the sector.

From its analysis, only about half of power generated in the sector is paid for, thus leading to chronic monthly shortfalls between generators’ bills for wholesale energy to distribution companies and actual payments.

“Monthly receipts are only about half of monthly total billings for bulk power supply which is approximately N24 billion. Improving payment performance is crucially important to the viability and commercial sustainability of the privatised market,” the report said.
Going further on the finances of the market, the report added: “At present rates, it could take up to five years to eradicate the recurring monthly shortfall. Cumulative payment arrears would amount to approximately $4 billion.

It is far from clear that all companies in the sector can continue to self-fund a significant proportion of their operations over such an extended period. Significant losses are being registered by the many banks funding the power sector. Without action, this trend seems likely to worsen.”

In its consideration of the broader effects of the development to the market, the report indicated that delay in start of a contract-based market beyond 2014 could lead to the market’s loss of gained momentum especially with the imminent general elections of 2015 and subsequent re-establishment of government.

“This alone, risks serious ebbing of investor confidence. The accruing losses are starting to throttle the ability of generation companies to meet their own funding requirements and pay for fuel.

This will reduce further the amount of bulk supply available to sell to distribution companies; creating the beginnings of a vicious, downward spiral,” the report added.
It however recommended possible options to avert the risks of prolonged market stagnation and or collapse, parts of which include contingent arrangements for liquidity support to distressed companies, a fast-track pathway to re-finance distressed companies, phased tariff adjustments and scrutiny of distribution companies’ finances.

“This package is required ahead of the launch of TEM; the fiscal and or monetary authorities could consider a contingent facility accessible by selected distribution companies to augment their remittances for bulk power supply.
To avoid risks of moral hazards, such a facility would be a loan, not grant or subsidy and companies’ eligibility would be subject to agreement on their financial condition and be pegged to an agreed trajectory of improving retail collections, hence improving ability to pay for bulk power,” it stated.

NIAF additionally proposed that the NERC, CBN and Ministry of Power could sit to develop a plan to re-finance such distressed companies and that NERC should undertake full review of distribution companies’ finances to ascertain their level of financial prudence; that proposal has been adopted.

However, global energy expert, Mr. Dan Kunle feels that the CBN intervention was not an end in itself and should not be considered the ultimate solution to the problems of the sector.

He said in addition to the recent upward review in gas price by NERC to encourage investment in gas production, repayments of the financial intervention when factored into the tariff could hurt the growth trajectory of the market if not properly managed.

Kunle told THISDAY in an interview that as usual, such market costs will be passed through to electricity consumers but that the capacity of consumers to pay for services that are poorly rendered remained a priority factor to be considered by the market.
“If care is not taken the reflective cost of the increase per kilowatt hour could be N40; which domestic consumer will pay that in this country.”

“If what we are paying currently for gas is $1.50 and consumers are paying about N14 and N25 depending on their classes, by the time it is escalated to $3.30 what will be the price that domestic consumer will pay?

Will the distributors be asked to pass the cost or will they be asked to take the cost and sell electricity at the old price?” Kunle asked.
He further said: “I haven’t seen the arithmetic but if what we are paying with the current price of gas is anything to consider, what will be the price that domestic consumer will pay with the escalation of the price of gas?

The sector is currently in a financial deficit that is in excess of about $2.2 billion and that is scientifically. How will this be underwritten for the industry to be free of the deficit and when that is done, you have cut the curtain and then the sector can grow but how do you avoid further accumulation of such financial deficits?”

Vandalism of gas, power assets
In addition to the financial illiquidity and gas supply shortfalls, frequent cases of vandalism of power assets and gas pipelines have equally contributed to the challenges of the sector in 2014.
The country recordedincessant cases of pipeline bursts on three of its key petroleum pipelines; trans-forcados, trans-niger and Escravos, which affects quantity of gas supplied to thermal plants at various times and of course quantity of electricity produced.

Electricity metering
Another serious challenge before the sector is the seeming reluctance of the distribution companies to provide metering facilities to consumers and continuous estimation of bills paid by consumers.

Meter complaints of consumers are widespread and upsetting, even the NERC has found it quite difficult to find a lasting solution to it.
Moving forward, NERC has said that the seeming lack of clarity in electricity contracting framework within the market remains one of the few challenges to the declaration of TEM and expectation of growth in market capacity.

It also said that the quasi-autonomy of the System Operator (SO) and its Market Operator (MO) counterpart from the Transmission Company of Nigeria (TCN), inadequate electricity generation capacity as well as the inability of distribution companies to meet up with their revenue remittance owing to a non-cost reflective tariff were other impediments to the declaration of TEM.
Its chairman, Dr. Sam Amadi said recently that the market was gradually overcoming its illiquidity challenges with the fresh injection of N213 by CBN. He added that the TEM was thus close to call.

“We are almost about to solve the financial shortfalls in the market,” he said, adding that, “You must understand that this market has withstood the test of crisis and we believe that this crisis is too good to be wasted.”
“If you conduct a stress test in this market, you will probably discover that it is probably the best in comparison with other markets that have undergone reforms.

Going into TEM, we have also benchmarked 100 per cent remittance and that means that as we move into TEM, other participants who cannot cope with the trading arrangements have an exit route,” Amadi noted.

NERC’s General Manager for Market Rates and Tariff, AbdulkadirShettima also noted that the market could begin contract-trading towards expected growth once it is sure of adequate securitisation arrangements as expected from participants-what that means is that participants are expected to show their commitments to the market by activating extant contracts such as vesting contracts, gas supply agreements and power purchase agreements, mostly with the bulk trader.

Shettima in addition, explained that shadow trading to identify any errors and gaps for immediate resolution, review of tariff to reflect all costs of producing and supplying electricity as well as adequate monitoring of licensees particularly the TCN and distribution companies to ensure minimisation of losses and improvement in customer service delivery were necessary inputs towards TEM and ultimately growth in the market capacity.

From a regulatory point of view however, Nigeria’s electricity market stands to grow its capacity when the two critical challenges of inadequate revenue and gas supply are comfortably addressed. The sector in addition, needs to embrace standard corporate governance practice in dealing with its retail end.

), a cost reflective tariff regime in the Multi Year Tariff Order (MYTO) as well as a private management contractor, Manitoba Hydro International to manage the newly created Transmission Company of Nigeria (TCN).

In privatising the successor companies, the government also established the Nigerian Bulk Electricity Trading Company (NBET), which is otherwise called the Bulk Trader to act as a power procurement and sales intermediary between the generation and distribution companies through the instruments of vesting contracts and power purchase agreements as the case may be.
having paid off the total severance and pension dues of all 47,913 staff of defunct PHCN to give the new owners of the power assets a clean operational slate, the government, after about 14 months of negotiations with the unions, handed over the electricity market to private operators who from November 30, 2013 took up the task of growing the sector.

But midway into their management of the sector, every doubt that there is indeed real job needed to create a competition-driven electricity market, was not in doubt; from obvious financial illiquidity to constant gas supply shortfalls, weak transmission system and of course, extant dearth of corporate governance practices within the retail end of the industry, the challenges of living out the “quick return” promised by the government to buy supports from Nigerians in the runoff to the  privatisation became obvious and somewhat difficult for stakeholders to contend with.

Fears that the market may be heading for an unanticipated halt and requires quick bailout to keep it afloat were variously expressed few months after the November handover but it was a watershed for Nigeria that the November 30 handover happened at all considering that the electricity reform had balked overtime on grounds of vested interests. It took about eight years for the country to actually implement the contents of the EPSR Act, thus transcending the governments of Presidents Olusegun Obasanjo, the lateUmaruYar’Adua and Goodluck Jonathan.

Early challenges, early responses
As it were, NERC within its regulatory capacity was quick to respond to some of these challenges. The regulator developed and put into use an interim rule to guide market transactions until such a time that all the precedent conditions for the commencement of a Transitional Electricity Market (TEM) are met.
The commission also activated various regulatory tools to consciously alter the mindset of a market in transition and put forward what operators considered an apt guidance of the market, notwithstanding, the market still lags behind in a number of vital indices.

Lingering challenges
Current field reports from the market indicate that the generation capacities of generation plants are still under-utilised from poor gas supply, the transmission system still shows off elements of weakness and consumers still complain of poor service culture from some distribution networks; this is regardless of NERC’s earlier caveat to distribution companies improve on their service delivery.
Even with NERC’s regulations to cap hyped electricity bills to consumers without standard metering devices, it is still accepted norms for consumers to get poorly calibrated electricity bills that extort monies for services poorly rendered. Consumers equally report unfair padding of electricity load allocated to them with no proper assessment from the distribution companies.
Pointing to two crucial issues, the field reports indicate that stability in gas supply to generation plants and chronic market illiquidity has continued to impact negatively on the market.

Not minding the diverse debates that have continued to greet the true status of the market, an expert report of the Nigeria Infrastructure Advisory Facility (NIAF), which THISDAY obtained in July, showed that the market was indeed contending with some financial risks, a development that has prompted some good response from NERC, which earlier denied the development.
Only recently, the regulator settled to stand in gap for a N213 billion hybrid financial package for the market from the Central Bank of Nigeria (CBN). The intervention fund will be expended on gas related debts amongst others.
Having considered the inherent risks, the government finally came forth with what it termed a market-based solution in the intervention but industry experts suspect the package.

CBN intervention fund
In announcing the N213 billion facility for the market, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke said that the CBN fund was planned to address current revenue shortfalls of the market, boost gas supply to power plants as well as provide reasonable solutions to the struggles of electricity generation companies.
Alison-Madueke stated that the facility was tailored to address three key challenges of the market: inadequate gas supply, misalignment between electricity tariff and the true cost of running electricity business as well as the inability of power generation companies to reliably produce the electricity that is possible as a result of reduced volumes of gas.
“With most of the operators having just acquired PHCN successor generation companies, they could hardly afford the reduced income due to the shortfall in revenues for reasons that I have just set out.
The newly privatised companies have borne the brunt of these issues and consequent revenue shortfalls in revenue, since handover last November. This is hampering much needed investment in the sector and has slowed down efforts to improve electricity supply,” Alison-Madueke had said.

The NIAF report
The NIAF report, which was captioned, “dealing with the financial shortfall in Nigeria’s electricity market” and prepared for the Operator of the Nigerian Electricity Market (ONEM), succinctly said that there are real risks of payment defaults and precipitous loss of confidence, all which could lead to an unexpected collapse of the electricity market.
It explained further that the financial risks were real and proximate and recommended possible support options that could help buoy the market into TEM-a contract-based trading regime.

The report also mirrored views that had been expressed by other experts, stating clearly that there are attendant serious risks to banks that had financed purchase of power assets in the liberalisationprogramme and as such chronic illiquidity now appears to be the central challenge of the sector.

From its analysis, only about half of power generated in the sector is paid for, thus leading to chronic monthly shortfalls between generators’ bills for wholesale energy to distribution companies and actual payments.

“Monthly receipts are only about half of monthly total billings for bulk power supply which is approximately N24 billion. Improving payment performance is crucially important to the viability and commercial sustainability of the privatised market,” the report said.
Going further on the finances of the market, the report added: “At present rates, it could take up to five years to eradicate the recurring monthly shortfall. Cumulative payment arrears would amount to approximately $4 billion.

It is far from clear that all companies in the sector can continue to self-fund a significant proportion of their operations over such an extended period. Significant losses are being registered by the many banks funding the power sector. Without action, this trend seems likely to worsen.”

In its consideration of the broader effects of the development to the market, the report indicated that delay in start of a contract-based market beyond 2014 could lead to the market’s loss of gained momentum especially with the imminent general elections of 2015 and subsequent re-establishment of government.

“This alone, risks serious ebbing of investor confidence. The accruing losses are starting to throttle the ability of generation companies to meet their own funding requirements and pay for fuel.

This will reduce further the amount of bulk supply available to sell to distribution companies; creating the beginnings of a vicious, downward spiral,” the report added.
It however recommended possible options to avert the risks of prolonged market stagnation and or collapse, parts of which include contingent arrangements for liquidity support to distressed companies, a fast-track pathway to re-finance distressed companies, phased tariff adjustments and scrutiny of distribution companies’ finances.

“This package is required ahead of the launch of TEM; the fiscal and or monetary authorities could consider a contingent facility accessible by selected distribution companies to augment their remittances for bulk power supply.
To avoid risks of moral hazards, such a facility would be a loan, not grant or subsidy and companies’ eligibility would be subject to agreement on their financial condition and be pegged to an agreed trajectory of improving retail collections, hence improving ability to pay for bulk power,” it stated.

NIAF additionally proposed that the NERC, CBN and Ministry of Power could sit to develop a plan to re-finance such distressed companies and that NERC should undertake full review of distribution companies’ finances to ascertain their level of financial prudence; that proposal has been adopted.

However, global energy expert, Mr. Dan Kunle feels that the CBN intervention was not an end in itself and should not be considered the ultimate solution to the problems of the sector.

He said in addition to the recent upward review in gas price by NERC to encourage investment in gas production, repayments of the financial intervention when factored into the tariff could hurt the growth trajectory of the market if not properly managed.

Kunle told THISDAY in an interview that as usual, such market costs will be passed through to electricity consumers but that the capacity of consumers to pay for services that are poorly rendered remained a priority factor to be considered by the market.
“If care is not taken the reflective cost of the increase per kilowatt hour could be N40; which domestic consumer will pay that in this country.”

“If what we are paying currently for gas is $1.50 and consumers are paying about N14 and N25 depending on their classes, by the time it is escalated to $3.30 what will be the price that domestic consumer will pay?

Will the distributors be asked to pass the cost or will they be asked to take the cost and sell electricity at the old price?” Kunle asked.
He further said: “I haven’t seen the arithmetic but if what we are paying with the current price of gas is anything to consider, what will be the price that domestic consumer will pay with the escalation of the price of gas?

The sector is currently in a financial deficit that is in excess of about $2.2 billion and that is scientifically. How will this be underwritten for the industry to be free of the deficit and when that is done, you have cut the curtain and then the sector can grow but how do you avoid further accumulation of such financial deficits?”

Vandalism of gas, power assets
In addition to the financial illiquidity and gas supply shortfalls, frequent cases of vandalism of power assets and gas pipelines have equally contributed to the challenges of the sector in 2014.
The country recordedincessant cases of pipeline bursts on three of its key petroleum pipelines; trans-forcados, trans-niger and Escravos, which affects quantity of gas supplied to thermal plants at various times and of course quantity of electricity produced.

Electricity metering
Another serious challenge before the sector is the seeming reluctance of the distribution companies to provide metering facilities to consumers and continuous estimation of bills paid by consumers.

Meter complaints of consumers are widespread and upsetting, even the NERC has found it quite difficult to find a lasting solution to it.
Moving forward, NERC has said that the seeming lack of clarity in electricity contracting framework within the market remains one of the few challenges to the declaration of TEM and expectation of growth in market capacity.

It also said that the quasi-autonomy of the System Operator (SO) and its Market Operator (MO) counterpart from the Transmission Company of Nigeria (TCN), inadequate electricity generation capacity as well as the inability of distribution companies to meet up with their revenue remittance owing to a non-cost reflective tariff were other impediments to the declaration of TEM.
Its chairman, Dr. Sam Amadi said recently that the market was gradually overcoming its illiquidity challenges with the fresh injection of N213 by CBN. He added that the TEM was thus close to call.

“We are almost about to solve the financial shortfalls in the market,” he said, adding that, “You must understand that this market has withstood the test of crisis and we believe that this crisis is too good to be wasted.”
“If you conduct a stress test in this market, you will probably discover that it is probably the best in comparison with other markets that have undergone reforms.

Going into TEM, we have also benchmarked 100 per cent remittance and that means that as we move into TEM, other participants who cannot cope with the trading arrangements have an exit route,” Amadi noted.

NERC’s General Manager for Market Rates and Tariff, AbdulkadirShettima also noted that the market could begin contract-trading towards expected growth once it is sure of adequate securitisation arrangements as expected from participants-what that means is that participants are expected to show their commitments to the market by activating extant contracts such as vesting contracts, gas supply agreements and power purchase agreements, mostly with the bulk trader.

Shettima in addition, explained that shadow trading to identify any errors and gaps for immediate resolution, review of tariff to reflect all costs of producing and supplying electricity as well as adequate monitoring of licensees particularly the TCN and distribution companies to ensure minimisation of losses and improvement in customer service delivery were necessary inputs towards TEM and ultimately growth in the market capacity.

From a regulatory point of view however, Nigeria’s electricity market stands to grow its capacity when the two critical challenges of inadequate revenue and gas supply are comfortably addressed. The sector in addition, needs to embrace standard corporate governance practice in dealing with its retail end.

 

– Chineme Okafor, This Day

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