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

Table of Contents 1.Background 2.Value of MYTO – 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 EPSRA requires NERC to establish cost-reflective tariffs NERC has adopted a MYTO framework MYTO balances investor return with consumer welfare MYTOs 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 1 st January 2012 FG tariff subsidy continues to mid-2014 PCAF for distributing lifeline tariffs will be set up

Industry Cost and Revenue Requirement 6

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

Privatisation BPEs 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 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. Ekpo Market Competition and Rates, NERC Mobile: (+234) (0) THANK YOU Website: 11