Privatised Electricity Distribution Companies: A Bankable Prospect?A Presentation at the Bankers’ Committee/BPE Technical

Workshop on Nigerian Power Sector Reform

Eyo O. EkpoCommissioner, Market Competition & Rates, NERC

Abuja, 25th May 2011

Table of Contents

1. Background

2. Value of MYTO

3. 2010 – 2011 MYTO Major Review

4. Return on Investment

5. MYTO – Incentive Based Regulation

6. Privatisation

7. Way forward

2

Background

3

Tariff Structure

Framework

Investor Return

Benchmark

Returns

1

2

3

4

5

EPSRA requires NERC to establish cost-reflective tariffs

NERC has adopted a MYTO framework

MYTO balances investor return with consumer welfare

MYTO’s benchmarks for calculating revenue requirements focus on the EFFICIENT OPERATOR

Via MYTO, all licensees recover depreciation, achieve a fair ROI and recover efficient O & M costs

Value of MYTO

4

Key Investment Tool

Cash Flow Forecast and Return

MYTO is the NESI financial model Enables any capital provider to take an

investment decision

Available cash flow (based on the tariffs) – MYTO calculates the total revenue requirement for the industry and derives average tariffs therefrom

Attractive ROI – A utility is entitled to earn an above average return on its investments used to provide service to its customer

2010 – 2011 MYTO Major Review

5

The MYTO allows for minor and major reviews

The 2013 major review brought forward to in view of economic realities and policy considerations

The Commission has issued the Major Review Consultation Paper

Full MYTO model by end June and new Order by 31st July

MYTO 2 takes effect from 1st January 2012 FG tariff subsidy continues to mid-2014 PCAF for distributing lifeline tariffs will be set up

Industry Cost and Revenue Requirement

6

Regulated costs (nominal) (NGN '000) 2011 2012 2013 2014 2015

N'000 Total Generation Vesting contract costs + PPAs 294,165,820 430,946,075 539,673,505 671,356,117 736,287,629

Annual NERC Licence charge 4,412,487 6,464,191 8,095,103 10,070,342 11,044,314Total 298,578,307 437,410,267 547,768,607 681,426,459 747,331,943

Transmission Opex Var O&M Costs 1,245,661 1,689,766 2,123,121 2,454,170 2,679,054Admin costs (fixed) 8,419,276 9,745,312 11,356,943 13,329,005 15,759,228Fixed O&M Costs 513,322 513,322 513,322 513,322 513,322Total 10,178,259 11,948,400 13,993,386 16,296,496 18,951,604

Return on Capital 29,472,353 30,928,939 54,328,351 77,916,887 101,973,724Return of Capital 3,791,970 13,017,228 13,355,523 11,323,499 16,127,449Annual Corpoarate HQ Admin charge on TCN 0 0 0 0 0NERC charge 651,639 838,419 1,225,159 1,583,053 2,055,792Ancillary service charge 1% 434,426 558,946 816,773 1,055,369 1,370,528Total 44,528,647 57,291,931 83,719,191 108,175,304 140,479,095

All Discos Opex O&M Costs 16,029,772 24,201,472 34,073,939 44,448,294 55,161,464Admin costs (fixed) 33,488,062 38,762,432 45,172,769 53,016,738 62,683,064Fixed O&M Costs 4,832,163 5,025,450 5,226,468 5,435,526 5,652,948Total 54,349,998 67,989,353 84,473,175 102,900,558 123,497,476

Return on Capital 67,570,763 71,317,879 72,905,345 75,365,730 77,551,343Return of Capital 58,979,799 61,838,364 65,166,040 68,621,023 72,170,242Bulk Trader charge 964,211 833,043 859,030 796,165 794,543Market and System Operator charges 7,249,720 8,631,938 10,207,789 11,761,241 13,578,381NERC charge 2,836,717 3,159,159 3,504,171 3,891,671 4,313,880Total 191,951,207 213,769,736 237,115,549 263,336,389 291,905,866

Total 535,058,161 708,471,933 868,603,348 1,052,938,152 1,179,716,904Energy consumption

2011 2012 2013 2014 2015Billed sales (all discos) (GWh) 28,294 36,905 45,599 51,808 55,563Revenue collected sales (all discos) (GWh) 26,030 34,691 43,775 50,772 54,452Regulated Tariff

Average tariff (NGN/MWh) (billed sales) 18,910.81 19,197.22 19,048.57 20,323.66 21,232.12

Average tariff (NGN/MWh) (Revenue collected sales) 20,555.22 20,422.57 19,842.26 20,738.43 21,665.43Total 20.56 20.42 19.84 20.74 21.67

MYTO – Incentive based Regulation

• MYTO uses budget caps to incentivise efficiency

• Licensees are pushed to incur costs below budget and thereby earn rewards for better performance through the tariff, thus improving their bankability

• A clear example of this is with the projections for losses in the MYTO model

7

Loses Projection in MYTO

8

Load 2011 2012 2013 2014 2015Sent-out from stations (GWh) 97,131 109,272 115,829 122,778 130,145Transmission Losses % of SO 8.05% 8.05% 8.05% 8.05% 8.05%Delivered to Distribution GWh 89,312 100,476 106,504 112,895 119,668Distribution Losses % of DD 11.00% 11.00% 10.00% 10.00% 10.00%Delivered to customers GWh 79,488 89,423 95,854 101,605 107,701Non-technical losses (non-billed energy) % of DC 14% 12% 10% 8% 6%Billed to Customers GWh 68,359 78,693 86,269 93,477 101,239 Revenue Collection losses % of 8% 6% 4% 2% 2%Sales where Revenue is collected GWh 62,891 73,971 82,818 91,607 99,215 Revenue based sales as % of Sentout energy 65% 68% 72% 75% 76%Total technical and non technical losses % of SO 29.6% 28.0% 25.5% 23.9% 22.2%

Privatisation• BPE’s process of transferring assets to private sector management

and funding is driven by clear strategic objectives, that is:– Increase generation output and efficiency– Reduce loss levels in distribution– Retain ownership of TCN but introduce world-class

management and access to independent private sector-led funding

• BPE has received 331 EoIs for all SCs; at least 40% will pre-qualify

• Successful Disco privatisation is key to growth and all Disco bidders will require sound financial guarantees/backing, mostly domestic

• Neither privatisation nor medium term M & A, divestiture and other activity can occur without full commitment from banks

9

Conclusion

10

Discos

Regulation

Tariffs

Investment

1

2

3

4

Discos collect all the revenue generated within the industry

Successful privatisation and competent, nuanced regulation, especially of TCN and Discos, will bring about the ultimate goal of a responsive, competitive and bankable market

NERC realises that sensible tariffs are the single most important element in creating such a market and driving sustained investment into it

NERC is determined that MYTO will incentivise investment and will secure stakeholder buy-in across the board

Eyo O. EkpoMarket Competition and Rates,

NERCMobile: (+234) (0) 803 400 5858

E-mail: eekpo@nercng.org

THANK YOU

Website: www.nercng.org

11