• Sunday, March 03, 2024
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BusinessDay

Why Nigeria needs multiple electricity markets (I)

Stable and transparent policymaking is essential to reach Nigeria’s electrification targets

On Friday, 17th March, President Muhammadu Buhari assented to the constitutional amendment made to Paragraph 14, Part II, Second Schedule to the 1999 Constitution. Given the national focus on the recent elections and the general misunderstanding of how Nigeria’s electricity is structured, regulated and operated, Nigerians, especially proponents of “fiscal federalism” and “restructuring”, will be forgiven for not recognising this watershed moment and its far-reaching implications.

So, first, what was amended? The enactment of laws for the electricity sector has been a concurrent legislative responsibility for the past 44 years since the promulgation of the 1979 Constitution. Paragraph 13 of the 1979 Concurrent Legislative List provided, amongst other things, that the National Assembly may make laws for the federation with respect to “the generation and transmission of electricity in or to any part of the federation and from one state to another state…” Paragraph 14 went on to provide that a House of Assembly may make laws for the state with respect to “the generation, transmission and distribution of electricity within that state.”

In plain words, the 1979 Constitution empowered states to enact laws to create electricity markets within their territories. Practically, however, this was just seven years after the nationalisation of the sector in 1972 by the federal military government with the establishment of the National Electric Power Authority (NEPA) to take over the assets and operations of the both the Electricity Corporation of Nigeria that operated in the South and the Niger Dams Authority, which owned and operated the Kainji hydroelectric dam in Northern Nigeria.

Emerging from 13 years of unitary military rule, with almost the entire electricity sector workforce being federal employees (except for a few states like the old Kano and Mid-West States that had Rural Electrification Boards (REBs)) and no private sector experience whatsoever, with the banking sector having no project finance capability at the time, and with the private sector itself still very much fledgling, it is no surprise that none of the 19 states at the time bothered to take up the idea of creating electricity markets in their territories.

At best, they copied the examples of the Kano and Mid-West States’ REBs and concentrated on locating small oil-fired generators and low voltage reticulation in a number of towns and villages in their territories.

This was the situation when the 1999 Constitution was enacted, based literally on its 1979 predecessor. So much so that its Paragraphs 13 and 14, Part II, Second Schedule, are the same as in 1979, but with a single curious modification. Paragraph 14(b), 1999 read: “A House of Assembly may make laws for the state with respect to: ‘the generation, transmission and distribution of electricity to areas not covered by a national grid system within that state…’”

Since there had never been any ambiguity in the simple wording of the 1979 concurrent powers or controversy over their interpretation, one must conclude that the introduction of the phrase “areas not covered by a national grid system” into the 1999 Constitution, and the obvious ambiguity or uncertainty raised by the definition of the phrase, was designed for some perverse reason to deter the evolution of state electricity markets.

The constitutional amendment, recently assented to by Mr President, was to delete the word “not” from paragraph 14(b) so that it now reads that states may make laws for the generation, transmission and distribution of electricity “to areas covered by a national grid system”.

In other words, however you wish to define it, this is a reversion to the 1979 situation that empowered states to make electricity laws for their respective territories. This amendment has a liberating effect because the only way to secure a favourable interpretation of the previous version of paragraph 14(b) was for a state to sue the federal government in the Supreme Court and argue persuasively that “areas not covered by a national grid system” effectively means the entire territory of the state. With this constitutional amendment, the need for adversarial contention is removed.

Unfortunately, the far-reaching value of this amendment is in danger of being lost. It has been widely reported, even by the Presidency itself, that the amendment “allows” states to engage in the generation, transmission and distribution of electricity.

Indeed, in an article that exemplifies the widespread total misunderstanding of the nature of this constitutional amendment, a well-known national daily (not BusinessDay) said categorically that the Lagos Enron Barge project was frustrated because Lagos State “did not have constitutional backing as electricity generation, transmission and distribution were on the exclusive (legislative) list.”

In fact, the Enron/AES Barge IPP promoted by Lagos State in 1999 ran for the full term of its power purchase agreement with NEPA and its successors, Power Holding Company of Nigeria and Nigerian Bulk Electricity Trading Plc. It also did not have a single share held by the Lagos State Government and was 100 percent privately-owned and operated.

The actual reason why it could not expand and did not continue in operation beyond its initial 15-year term is the incipient controversy over the question whether Lagos State, deficient as it was, and still is, in quality and quantity of supply from the national grid, could be considered as an “area not covered by the national grid” under paragraph 14(b), Concurrent Legislative List, such that it could set up by state law its own state electricity market with private sector-owned and operated generation and distribution players regulated by a Lagos State electricity regulator.

Read also: Analysts say State electricity market game is changer

The erroneous view continues to be widely held, even amongst lawyers, that electricity is an exclusive matter reserved to the federal government. This is why it is very easy to give the wrong impression that the states never had this power before and that a benevolent federal government has now magnanimously permitted states into the electricity arena so that state governments can enter the electricity business themselves.

Proponents of this view forget that Nigeria’s state governments, weighed down by N4.3 trillion of domestic debt and $4.6 billion of external debt, cannot consider, speak less of undertake, going into commercial electricity operations. In fact, what the amendment has done is to clarify the states’ unfettered power to make policies and laws that establish, regulate and promote electricity markets into which investments by private sector players can be made. This, in itself, is a major development with huge potential to recreate Nigeria.

Speaking of “markets”, this constitutional amendment highlights a fundamental issue that explains why reliable universal electricity access still eludes Nigeria. Simply put, Nigeria still does not have an electricity market anywhere in the country. We do have an electricity sector but not an electricity market or markets. The distinction is not merely semantic.

An “electricity market” is set up and run based on contracts and rules of trade established by suppliers, buyers, transporters and traders, with the operation of its contracts and rules overseen by a single, identifiable regulator, and disputes between market participants resolved either by an independent dispute resolution body or by the courts of law.

An “electricity sector”, on the other hand, is one in which market participants are set up and/or dominated by governments, driven by politically-determined interests and not, as markets are, by the interplay of engineering, technological innovation, economics, law and finance.

Ekpo is the CEO of Excredite Consulting Limited; former commissioner, Nigerian Electricity Regulatory Commission; past head, Power Sector Reform Team, Bureau of Public Enterprises; and past attorney-general/commissioner for justice, Cross River State