Privatised Electricity Distribution Companies: A Bankable Prospect?

1. Privatised Electricity Distribution Companies: A Bankable Prospect? A Presentation at the Bankers’ Committee/BPE Technical Workshop on Nigerian Power Sector Reform Eyo O. Ekpo Commissioner, Market Competition & Rates, NERC Abuja, 25th May 2011

2. Table of Contents • Background • Value of MYTO • 2010 – 2011 MYTO Major Review • Return on Investment • MYTO – Incentive Based Regulation • Privatisation • Way forward

3. Background Tariff Structure 1 • EPSRA requires NERC to establish cost-reflective tariffs Framework 2 • NERC has adopted a MYTO framework Investor Return • MYTO balances investor return with consumer welfare 3 Benchmark • MYTO’s benchmarks for calculating revenue requirements focus on the EFFICIENT OPERATOR 4 Returns • Via MYTO, all licensees recover depreciation, achieve a fair ROI and recover efficient O & M costs 5

4. Value of MYTO Key Investment Tool • 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 Cash Flow Forecast and Return

5. 2010 – 2011 MYTO Major Review • 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

6. Industry Cost and Revenue Requirement

7. 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

8. Loses Projection in MYTO

9. 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

10. Conclusion Discos Discos collect all the revenue generated within the industry 1 Successful privatisation and competent, nuanced regulation, especially of TCN and Discos, will bring about the ultimate goal of a responsive, competitive and bankable market Regulation 2 NERC realises that sensible tariffs are the single most important element in creating such a market and driving sustained investment into it Tariffs 3 Investment NERC is determined that MYTO will incentivise investment and will secure stakeholder buy-in across the board 4

11. THANK YOU Eyo O. Ekpo Market Competition and Rates, NERC Mobile: (+234) (0) 803 400 5858 E-mail: eekpo@nercng.org Website: www.nercng.org