The key to liberalising the metering industry and unlocking a commercial MSP model is first to disaggregate metering from the the license obligations of DisCos and develop sound commercial regulations that assure investors in MSPs of a recovery of their investments in metering.
At the 18th power sector stakeholders meeting which held in Kano on August 14, 2017, the minister for Power, Works and Housing, Mr. Babatunde Fashola (SAN) announced the federal government’s intentions of liberalising the meter services industry in a manner that would allow customers and licensed third party meter services providers (MSP) directly procure and install electricity meters. While the minister was categorical in stating that power distribution companies (DisCos), still have the obligation of metering their customers, he was specific that no law, including the Electric Power Sector Reform Act (EPSRA) vested a monopoly of meter supply solely on DisCos. To give effect to his pronouncement, he announced that Nigerian Electricity Regulatory Commission (NERC) would soon issue regulations for meter service providers (MSP), (ii) meter and retail franchise operators, (iii) community aggregation services for the sale of electricity and provision of meters, (iv) low cost meter supply.
The above statement by the minister is quite important and is good news for a power sector plagued by poor metering across all customer categories, with increasing revenue shortfalls across the entire value chain. Liberalising the metering industry is an important step in not only addressing the huge metering gap, but also in opening up electricity retail distribution and sale to electricity customers.
In addition, a liberalised metering industry would allow for the replacement of thousands of electro-mechanical electricity meters installed decades ago that have long passed their useful lives but are still in service, as well as the first and second generation of pre-paid meters that now need to be replaced with more recent and accurate meter technologies. Lastly, a liberalised metering industry would generate employment for thousands of meter installers and the ancillary crew needed to install meters. There would be employment for meter readers and meter maintenance technicians. Perhaps, the managers of the N-Power programme need to take note of these developments in the power sector with a view to further engaging the Nigerian youth in gainful employment.
However, and as with every policy, there are germane concerns that need to be considered as NERC puts together the various regulations that would open up the meter services space and potentially the retail distribution of electricity. This article attempts to dissect some of these concerns and also provide additional considerations to the regulator and policy makers in developing the necessary regulations that would underpin a commercial and competitive meter services industry.
Who Owns the Meter?
How would the proposed regulation treat ownership of meters financed by either the customer or a meter service provider? By the terms of their operating license, DisCos are responsible for providing meters and meter services, thus ownership of the meters is vested in DisCos. Ownership of meters also entails carrying the liability of maintaining the meter to ensure it is in good working condition. Thus who takes liability for the cost for maintenance of the meter, meter calibration, repair and even replacement of the meter in the event of a fault, damage or theft? Would electricity customers be allowed to relocate their meters each time they move residence, if they paid for this?
Who Bears the Meter Costs (Capital and Operating Costs)?
Under the current licensing terms for electricity distribution companies, metering is the obligation of DisCos. To compensate DisCos for this obligation, the electricity tariff factors in a capital cost component for providing and maintaining meters.
If electricity customers procure their own meters, they are effectively funding the DisCos. In the event that the proposed meter services regulations do not vest the ownership of meters with the customer who paid for it, would the proposed policy allow for the customer to recover his capital cost on the meters? What would be the cost recovery mechanism for this? The Credited Advance Payment for Metering Implementation (CAPMI) scheme had some form of cost recovery, including an interest rate of 12 percent per annum, to customers through a rebate in their actual tariffs. To the best of our knowledge, DisCos are yet to implement this rebate. As a personal example, I still have not been reimbursed via lower electricity payments for the cost of the three-phase meter I purchased in 2007 from the defunct PHCN but which was installed in 2011.
Besides the capital cost of meters, how would the cost of meter maintenance be addressed by the new regulations? Meter maintenance is a very important aspect of revenue assurance and ensures that meters live out their useful lives. Lack of proper meter maintenance shortens the useful life of a meter and creates huge sunk costs to the industry. In addition, the losses from unbilled energy arising from faulty, or poorly calibrated meters are also significant and contribute to the revenue shortfalls plaguing the electricity market.
Solving the metering gap is not about meter technology. Funding is at the core of addressing the metering gap and constitutes maybe 90 percent of any sustainable metering solution. Presently, DisCos are unable to fund their metering programmes and may still be unable to fund meter roll-outs in the foreseeable future.
Who Is Responsible for the Meter installation?
Who installs the meters? Can customers install the meters themselves or the DisCos are exclusively to handle meter installation? Who audits and certifies the meter installation to ensure the installation was properly done? Would the regulation provide minimum installation standards which any meter installer must meet? Would the regulation provide a penalty against meter installers for poor meter installations?
Meter installation certification and meter sealing are very important processes. The meter installation process is where more than 50 percent of meter bypasses occur. Miss these two processes and that is a huge financial loss to the industry.
Meter Technology and Back-office billing and Vending Platforms
Would the DisCos be able to specify the meter types on their networks? Or would customers be allowed to procure whatever meter technology from any meter manufacturer they can afford?
As a background to this concern, upon privatisation, a number of DisCos had several meter hardware technologies and back-office platforms for billing and vending from different manufacturers due to the defunct PHCN’s haphazard procurement processes. For instance, one DisCo in the South-West had up to five different types of meters on its network and five vending platforms for each meter type. Significant resources had to be deployed to integrate these disparate meter back-office billing and vending platforms to ensure that customers with different meters could vend on one vending platform. Some DisCos had to re-meter some areas as the back-office platforms for the existing meters could not be integrated with newer meter technologies being rolled out.
Creating a Competitive and Commercial MSP Market
Solving the metering gap is not about meter technology. Funding is at the core of addressing the metering gap and constitutes maybe 90 percent of any sustainable metering solution. Presently, DisCos are unable to fund their metering programmes and may still be unable to fund meter roll-outs in the foreseeable future. To address the funding issue, the minister has alluded to the possibility of electricity customers directly purchasing their own meters under special arrangement with DisCos. But this nonetheless does not solve the metering gap, as the major flaw, as with the CAPMI scheme, is that it relies on customers who are willing to pay for their meters and have the resources for this. Besides the huge cost of meters, which is a disincentive to customers who desire to purchase their meters, those customers who benefit from not being metered would definitely not pay for meters. In addition, this solution does not address the issue of meter maintenance costs.
In our view, a more sustainable financing solution is to create a commercial MSP market to provide metering services to the Nigerian electricity market. We have described the MSP model in previous write-ups on metering.
Removal of Metering from Disco License Obligations
Removing the obligation of DisCos to meter their customers should not be misconstrued to mean that DisCos would also not have the responsibility for billing, vending and collection of revenues, inclusive of the meter services charge. It only removes the DisCos’ capital expenditure obligations for meters, and lessens the impact of future meter asset on electricity tariffs.
Removing metering services from DisCos’ license obligation is quite positive to them, as it should actually free up more room to grow their regulatory asset base (RAB) to cover more network related asset (distribution transformers, poles, etc).
…any regulation for MSPs must ensure that DisCos and electricity customers get value-for-money, by including minimum service levels and key performance indicators (KPI) for MSPs, as well as minimum applicable sanctions/penalties against MSPs where such service levels or KPIs are not met by the MSP.
Sustainable Revenue Model for MSPs
The MSP revenue model is an important consideration when crafting the proposed MSP regulations. The main constraint in attracting third party funding for metering is the absence of a revenue model for the recovery of investment in metering. Potential investors in the MSPs want certainty of their meter revenues. By this we mean delineable revenues to MSPs, unbundled from kwh electricity tariffs, and also clarity on who pays for the meter charges – either the DisCo or the customer. The regulations should assure investors in MSPs of a recovery of their investment at a reasonable rate of return.
In other words, to be sustainable, the MSP model must operate commercially, with transparent meter revenues to the MSPs in the form of commercially determined meter charges, either embedded in the tariffs or as a separate stand alone charge to electricity consumers who consume the meter services.
Thus we advocate for the introduction of a meter services charge to cover MSPs’ cost of providing electricity meters and the ongoing costs of operating and maintaining meters. Now, this should not be viewed as a new cost because metering charges are included in the existing MYTO tariffs. However, the MYTO tariff is a dis-incentive to investments in metering as the cost of meter services is very opaque and indeterminable. The meter costs in the present MYTO tariffs do not cover the actual cost of providing meter services to customers. Thus, the introduction of a meter services charge unbundled from electricity tariffs, provides a transparent way of billing customers for metering services. Introducing a transparent meter services charge would move the power sector towards greater competition in the provision of metering services to the benefit of electricity customers.
Policy and Regulatory Incentives for MSPs
In a nascent privatised power sector market plagued by persistent energy shortages and revenue shortfalls across the entire value chain, to spur investments in MSP at the onset of the regulations, MSPs must be protected against DisCo payment risks. Protection for MSPs against these payment risks can be in the form of financial or insurance guarantees or similar instruments. For instance, the proposed N39 billion earmarked by the federal government for metering could be structured in the form of a guarantee programme to backstop any DisCo payment default to the MSP, rather than as a direct loan to MSPs, as it is being envisaged. Putting such a guarantee programme in place for MSPs would certainly attract both local and foreign direct investments into MSPs and the metering industry. Another way to incentivise MSPs and and assure them of revenue certainty is to ensure that MSPs are paid from DisCo topline revenues before payments to other market participants. Indeed, this should actually be the case as the meter is the cashbox of the power sector.
Conclusion
A commercial MSP model has significant benefits to the power sector. Borrowing Mr. Fashola’s words, a successful implementation of a commercial MSP model “will help to reduce conflict between DisCos and customers, ensure collection of tariff, reduce losses, improve liquidity and bring some relief to the finances of some DisCos who cannot afford to fund meters”.
In addition, a commercial MSP model would give rise to competition in electricity metering, attract new and much needed investments into the power sector and has the potential to reduce electricity tariffs in the long run.
The key to liberalising the metering industry and unlocking a commercial MSP model is first to disaggregate metering from the the license obligations of DisCos and develop sound commercial regulations that assure investors in MSPs of a recovery of their investments in metering.
Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached on orionomon@outlook.com.
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