US embassy cable - 05LAGOS806

UNCLAS SECTION 01 OF 03 LAGOS 000806 
 
SIPDIS 
 
EXIM 
OPIC 
USDOC WASHDC 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, PREL, NI 
SUBJECT: NIGERIAN POWER SECTOR REFORM LAW IS SIGNED, 
BUT LONG WAY TO GO IN LIBERALIZING SECTOR 
 
 
1. (U) Summary.  After languishing in the National 
Assembly more than four years, the Electric Power 
Sector Reform Act (EPSRA) has been passed and signed by 
President Obasanjo.  The Act: 1) Seeks to expedite 
privatization of the legendarily dysfunctional National 
Electric Power Authority (NEPA); 2) Establishes the 
Nigerian Electricity Regulation Commission (NERC), a 
regulatory body to license independent power plants 
(IPPs), regulate tariffs, and protect consumers; and 3) 
Initiates a rural electrification strategy. Industry 
watchers and economic analysts applaud the bill's 
passage but raise serious doubts about implementation. 
The average Nigerian who has suffered record low power 
supplies since winter 2004 is unimpressed; their XX and 
cry remain "show me the light".  End Summary. 
 
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Power Sector Law Finally Signed; NEPA Privatization to 
Start 2006 - Really, We Mean It This Time 
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2.  (U) The Electric Power Sector Reform Act, (EPSRA) 
liberalizing Nigeria's power sector was signed into law 
March 11.   The law seeks to speed privatization of the 
state-owned power agency, NEPA, often derisively 
referred to as "Never Expect Power Always."  The EPSRA 
stipulates that an Initial Holding Company (IHC), then 
successor companies will generate, transmit and 
distribute electricity. The IHC, which will assume 
NEPA's assets and liabilities, and the successor 
companies, must be incorporated within six and eight 
months of the signing of the law, respectively. The 
Bureau of Privatization Enterprises (BPE) is currently 
processing the IHC's incorporation.  The success of 
this effort will be significant in the run-up to NEPA's 
eventual full privatization. 
 
3. (U) The BPE announced that NEPA privatization which 
has been scheduled since 2002, will now finally 
commence, in graduated stages, beginning first quarter 
2006. In effect, the Act seeks to "unbundled" the 
moribund NEPA in hopes that the parts, once separated, 
will be more valuable than the whole.  In the first 
stage, the GON plans to sell four generation companies 
(Gencos), four distribution companies (Discos), and its 
sole transmission company (Transysco).  In stage two, 
it hopes to sell an additional four Discos and two 
Gencos.  The remaining three Discos will be sold in 
stage three.   The BPE did not specify when the entire 
process would be completed. 
 
4. (U) Waclaw Lukowicz, General Manager, Siemens 
Nigeria Power Division, has been closely involved in 
efforts to upgrade NEPA in preparation for 
privatization.  Lukowicz has spoken well of the overall 
power reform plan.  However, he privately acknowledged 
to Econoff that only "some" of the projects detailed in 
the NEPA upgrade plan will likely happen. 
 
5. (U) In the meantime, the GON is under enormous 
public pressure to increase electricity supply - NOW. 
It has become a point of political embarrassment for 
Nigeria's first citizen.  Early in his administration 
President Obasanjo pledged to lift NEPA generating 
capacity to over 6000 MW.  Instead of getting brighter, 
the lights have dimmed.  Nigeria's generating capacity 
is below 3000MW, or 100 percent less than needed to 
have a functioning national power supply.  Most 
companies and financially-able private consumers rely 
on external generators to light their homes and operate 
their businesses.  In the face of the public clamor, 
the GON announced it would increase generation to 
10,000MW by 2007.  As part of this new push, the 
President is pressing all major oil companies to build 
Independent Power Plants (IPPS) (reftel).  However, oil 
executives are reluctant to pursue the President's 
strategy given the country's subsidized, non-profitable 
electricity tariff regime and that their business is 
not power generation. 
 
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Regulatory Body to License IPPs, Regulate Tariffs, and 
Protect Consumers 
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6. (U) The EPSRA establishes a regulatory body, the 
National Electricity Regulation Commission (NERC), with 
responsibility for: licensing and regulating 
Independent Power Plants (IPPs), regulating tariffs, 
and consumer protection, which includes administering a 
fund to subsidize indigent power consumers. Ostensibly, 
the NERC will be independent and self-funding.  The 
President appoints the chair and vice chair for a 
maximum of two terms, of five years each.  The BPE is 
currently searching for candidates for the NERC's top 
positions. 
 
7.  (U) How the tariff regime will be developed for 
IPPs and the IHC has not yet been disclosed and indeed 
we expect that it is yet to be decided.  On the issue 
of licenses, the EPSRA stipulates the NERC will process 
all IPP applications upon fee submission.  It will 
approve or reject applications within six months with 
licenses valid no more than ten years. In consultation 
with licensees, the NERC will develop customer service 
standards and procedures for handling customer 
complaints and defaults. The NERC will also establish 
and manage the money and assets of a customer 
assistance fund, to subsidize underprivileged power 
consumers. 
 
8. (U) An important thrust of the EPSRA is encouraging 
private investment and participation. Depending on 
their type of license, independent power producers will 
be allowed to sell electrical power to one or more 
trading licensees.  Following the declaration of a 
substantially privatized market, they may also sell 
directly to distribution companies and eligible 
customers. 
 
(Comment:  According to the Act, NERC will wield much 
power. A major challenge will be inspiring confidence 
in its decision-making processes. The regulator's 
fairness and transparency will help dictate the success 
of the overall power reform effort. End comment.) 
 
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Rural Electrification: Lights for the Frontier? 
--------------------------------------------- -- 
 
9. (U) Finally, the EPSRA mandates the establishment of 
a "rural electrification agency" and formulation of a 
concomitant strategy.  This agency will manage a fund 
designed to increase regional access to 
electrification.  The fund will be directed 
specifically towards expanding the national grid and 
exploring options of off-grid electrification -- solar, 
wind, etc. 
 
 
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Private Business Sector Skeptical; Ordinary Consumers 
Willing to Pay for Reliable Power 
--------------------------------------------- -------- 
 
10. (U) Private business sector contacts are skeptical 
about meaningful reform within the power sector.  While 
they applaud the EPSRA, they note two major obstacles 
likely to hamper the law's implementation.  First, 
vested interests oppose reforming the sector.  The GON 
points to its successful deregulation of the telecom 
sector as proof its capable of taking on such an 
endeavor. .  However, skeptics counter that interests 
in the power sector are more entrenched.  Substantial 
contracts are periodically given to "rehabilitate" 
NEPAs aging and decrepit capital assets.  The 
importation, sale, and maintenance of generators is big 
business in Nigeria.  In a recent speech, the Minister 
of Power and Steel claimed Nigeria was the world's 
second largest importer of generators. 
 
11. (U) Second, Nigeria is still revising its gas 
fiscal policy.  Gas is needed to fuel thermal power 
plants and one of NEPA's primary excuses for constant 
outages has been disruption in the gas supply. 
Currently the GON provides NEPA an estimated annual gas 
subsidy of USD 60 million.  Private sector contacts 
argue if the GON is serious about attracting foreign 
and independent investors to the sector, it must 
liberalize gas pricing so that realistic tariffs can be 
set and investment plans formulated.  They argue  if 
the GON wants to continue to provide incentives for 
power generation in Nigeria after liberalization, it 
should do so through other means, such as by providing 
write-offs for equipment importation, for example. 
 
12. (U) Diesel baron (and Obasanjo funder), Femi 
Otedola doubts President Obasanjo will complete the 
power sector reform before the 2007 election. However, 
he believes a new administration will not be able to 
"un-do" measures put in place by Obasanjo.  While a new 
president may not be able to reverse what OBJ has done, 
he may not continue it either.  A parallel example is 
the telecom sector.  The sector has been substantially 
liberalized and there are four GSM operators and over 
ten fixed wireless telephone providers in the market. 
Yet, state-owned NITEL's (Nigerian Telecommunication 
Limited) scheduled privatization is bogged down. 
Otedola concluded that in this environment, potential 
power investors will be cautious. 
 
13. (U) Vmobile's Chief Regulator, Jean Pierre Snijders 
lauded EPSRA and believes its successful implementation 
will go a long way in reducing the telecom company's 
costs. Presently, Vmobile powers its over four hundred 
base stations with two generators each, raising 
overhead by over 30 percent. 
 
14. (U) Jide Mike of the Manufacturers Association of 
Nigeria (MAN) attributes the non-competitiveness of the 
industrial sector to the power sector. MAN puts its 
members' annual losses due to power cuts at about USD1 
billion. Mike said manufacturers generate between 72 - 
100 percent of their own electricity requirements. He 
extolled the law, saying the possibility of buying 
power directly from independent producers would expand 
industrial production, as capital spent on power 
generation is freed up. 
 
 
15. (U) On the consumption side, estate manager, Yemi 
Fadoju, told us residents of his estate would be 
willing to sign up to an IPP, as a unit. He said each 
of the over fifty housing units in the middle-income 
earners' estate rely mostly on generators. Fadoju said 
a typical household spends USD 90 monthly fuelling a 
generator and in addition pay NEPA about USD 38 a 
month. Fadoju asserted residents would gladly pay for 
constant electricity monthly. 
 
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Comment 
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16. (U) Power, or more accurately the lack thereof, 
ranks among the top concerns of all Nigerians.  While 
passage of the power reform bill is an important step 
forward, the GON needs to do a lot more, and a lot 
sooner to address this issue which is severely 
retarding Nigeria's economic development.  Moreover, 
this is one reform Nigeria cannot afford to get wrong. 
Yet, for reform to have its intended impact, the GON 
must also rationalize its gas fiscal policy. This means 
it must enact two major liberalizations, electricity 
and gas pricing, simultaneously.  This will be no small 
feat.  Successful power sector reform must also ensure 
the new power ombudsman agency, the Nigeria Electric 
Regulatory Commission (NERC), is staffed with competent 
professionals.  Finally, the GON must exercise the 
political will necessary to displace the vested 
interests who benefit from the system of "never expect 
power always".  In all, there is a long concatenation 
of very complex issues that must be correctly resolved 
for power sector reform to work.  For all this to 
happen will take a lot of skill, a lot of luck, and a 
fair amount of time. 
 
BROWNE