Independence of the Nigerian Electricity Regulatory Authority

I.

Introduction

Independence of national regulatory authorities has maintained a significant status in the electricity and gas sector reform venture of most countries. This is basically as a result of the generally held notion that an independent regulatory authority is fundamental to achieving a successful regulatory regime and also attracting private sector investment in utilities.

According to Brown et al, ‘some preliminary empirical evidence shows that the independent regulator governance model, when adopted in both law and practice, leads to better sector outcomes’.1 Nigeria is one of such countries that also share this sentiment.

The purpose of this essay is to take a critical analysis into the Independence of the National Regulatory Authority in Nigeria and its effect on securing private investment. It establishes that the Nigerian Electricity Regulatory Commission (NERC) is by law formally independent.

However, it submits that the Commission is actually dependent on the government but argues that the actual dependence of the Commission on the government would not forestall the ingress of private investment. It begins by first explaining what is meant by the concept of the Independence of National Regulatory Authorities. It then takes an indepth look into the Independence of NERC in light of the Electricity Power Sector Reform (ESPR) Act (2005), the law establishing the NERC, drawing comparison with what is obtainable in other jurisdictions, particularly the United States and the EU. Finally, it considers the actual dependence of the NERC on the government and its effect on the government’s desire to attract private investment.

II.

Understanding the concept of Independence of National Regulatory Authorities

There is no doubt that the word ‘independence’ could have a variety of meanings depending on the context in which it is used. This variance in meaning could lead to a misunderstanding of a concept or phrase wherein the word is included. Thus, the concept of the Independence of National Regulatory Authorities is one of such concepts that are not saved from the probalitity of being misunderstood as a result of the presence of the word ‘independence’. The next question that ordinarily should follow is: independence from 1

AC Brown, J Stern and B Tenenbaum, ‘Handbook for Evaluating Infrastructure Regulatory Systems’, pg 51 <http://siteresources.worldbank.org/EXTENERGY/Resources/3368051156971270190/HandbookForEvaluatingInfrastructureRegulation062706.pdf> accessed 27 March, 2012

what? To Jon Stern,2 Independence entails independence from government. According to him, ‘the critical feature of independence is independence from government intervention’. 3 On the other hand, the second Electricity and Gas Directive of the European Union provided for the independence of regulatory authorities,4 but it was independence from the electricity and gas industries and not from the government.5 Independence of National Regulatory Authorities entails the insulation of such authorities from ‘immediate forms of influence and interference’.6 This means that the regulatory authority is autonomous from the private sector, (including the regulated firms, consumers, and other private interests) the public sector, (including the government, ministries and the system operators) and also has organizational and fiscal autonomy.7 By organizational autonomy, it is meant that the regulatory authority is ‘separate from existing ministries and departments’,8 and by fiscal autonomy it is meant that the regulatory authority has access to an ‘earmarked, secure, and adequate source of funding’.9 It is expedient to differentiate formal independence from actual independence. Formal independence is used to describe a situation where the regulatory authority is declared to be independent by the legislation establishing it, as opposed to a situation where the independence of the regulatory authority is not granted by the enabling legislation, for

2

J Stern, ‘What makes an independent regulator independent?’ Business Strategy Review (1997), Vol 8 No. 2, pp 67-74 3 ibid at p 69 4

Article 23 of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003

concerning common rules for the internal market in electricity, repealing Directive 96/92/EC and Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC 5

See the ‘Interpretative Note On Directive 2009/72/EC Concerning Common Rules For The Internal Market In Electricity And Directive 2009/73/EC Concerning Common Rules For The Internal Market In Natural Gas’ <http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/implementation_notes/2010_01_21_t he_unbundling_regime.pdf > accessed 12 March 2012 6 J A Beecher, ‘The Prudent Regulator: Politics, Independence, Ethics, and the Public Interest’, Energy Law Journal (2008), Vol 29 No. 2 p 577 < http://www.felj.org/docs/elj292/577_-_prudent_regulatorclean_final_print_11-2-08.pdf> accessed 22 March 2012 7

W Smith, ‘Utility Regulators – The Independence <http://www.ictregulationtoolkit.org/en/Document.2848.pdf> accessed on 22 March, 2012 8 AC Brown, J Stern and B Tenenbaum, (n 1) pg 50 9 ibid

Debate’

example the Federal Tariff Service (FTS) which is the national regulatory authority of the Russian Federation. The FTS is not independent of the Russian government because management of the Federal Tariff Service is performed by the government of the Russian Federation.10 This would however be distinguished from a case of actual independence, and the purpose for the distinction lies in the fact that some regulatory authorities which have been declared independent by their establishing legislation are in reality not independent.

This is the situation prevalent in most developing and transition economies, like Argentina and the Orissa State of India.11 III.

The Nigerian Regulatory Authority

The regulatory authority for electricity in Nigeria is the Nigerian Electricity Regulatory Commission (NERC). Nigeria at present does not have a seperate body regulating the gas market because the gas sector in Nigeria is not yet fully developed and has not gotten to a stage of requiring a separate regulator.

III (i). The NERC: A brief introduction The NERC was one of the offsprings of the Electicity and Power Sector Reform (EPSR) Act of 2005, the other being the liberalisation and privitisation of the electricity sector. Prior to the ESPR Act, the electricity sector in Nigeria was controlled by a government monopoly, the National Electric power Authority (NEPA), often ridiculed as ‘Never Expect Power Always’.

This regime was characterised by gross failure in the entire electricity chain, ie from generation down to supply. With a maximum average generation output of 3,500 mws for a population of about 150 million people, it was obvious that the system was in dire need of investment and proper regulation. This propelled the on-going reform of the electricity sector and led to the creation of the NERC which was inaugurated on October 31st, 2005.

In view of the desperate need of the government to transform the power sector and attract private investment, the issue of the independence of the NERC thus becomes a very important issue, as a country’s regulatory framework is one of the factors taken into consideration by private investors in making investment decisions.

10

Article 1.3 of the Order of the Federal Tariff Service No. 37 of 21 February, 2006 J Stern (n 2). See also IN Keesides, ‘Infrastructure Privitization and Regulation; Promises and Perils’ Oxford Journals (2005) Vol 20, Issue 1, pp 81-108 <http://wbro.oxfordjournals.org/content/20/1/81.full.pdf> accessed 24 March 2012 11

III (ii). NERC: The Uncertainty of its Independence The ESPR Act creating the NERC never formally referred to it as an â&#x20AC;&#x2DC;independentâ&#x20AC;&#x2122; regulatory authority. This is unlike the case in other legislations establishing various regulatory authorities where they are expressly declared to be independent. For instance, the Federal Energy Regulatory Commission (FERC) of the US is expressly declared to be an independent regulatory authority by the establishing legislation.12 This omission creates fear as to the actual status of the Commission. Our fear is futher hightened by the fact that unlike similar legislations, like the US Code13 and the Third Electricity and Gas Directive14 which specifically provides that the respective regulatories shall not be subject to the supervision of or take instruction from any government body, the ESPR Act is silent as to whether the body is subject to the supervision of a government body or whether it should take instructions from them. Also, the Act seems to give the government some level of control over the Commission. Examples include the power of the Minister for Power and Steel to issue policy directions which the Commission is mandated to take into consideration in the discharge of its duties15; the power of the Minister to request the submission of any report of the Commission and which the Commission is also mandated to submit;16 and the requirement of the Commission to submit to the President quarterly reports of their activites.17 III (iii) NERC: A Formally Independent Regulator: Inorder to ascertain the actual status of the NERC, the ESPR Act would have to be considered and compared with other legislations that have established independent regulatory authorities.

First is the issue of the appointment of Commissioners of the Commission. The ESPR Act provides that the Commission shall consisit of seven (7) full time Commissioners to be appointed by the President subject to the confirmation of the Senate. 18 Such appointments should be based on experience or professional qualifications in the relevant field. However, 12

Code of Laws of the United States of America (US Code), Chapter 84 Subchapter IV Title 42, s 7176 Ibid, s 7171 (d) 14 Article 35 (4) (b) of Directive 2009/72/EC and Article 39 (4) (b) of Directive 2009/73/EC 15 Electricity Power Sector Reform Act 2005 (ESPR Act 2005) s 33 16 Ibid, s 59 17 Ibid, s 32 (1) (g) 18 Ibid, s 34 (1) 13

persons or relatives of persons with interest in any of the segments of the electricity chain cannot be appointed to the office of Commissioners. 19 The tenure of the Commissioner is fixed for five (5) years and that of the Vice-Commissioner and other Commissioners for four (4) years. 20 The Act empowers the President to remove any of the Commissioners; however the power is subject to the confirmation of a simple majority of the Senate.

21

This is a

provision common in the legislation establishing various independent national regulatory authorities. In the US for instance, the FERC is composed of five (5) members appointed by the President by and with the advice and consent of the Senate. They shall hold office for five (5) years and cannot be removed arbitrarily. 22 Also, they are forbidden from involving in any another business, occupation or trade.23 Similar provisions are also contained in the EU Third Electricity and Gas Directive which seeks to ensure that the regulatory authorities are not only independent from the regulated entities but also from the government. Member States are required to ensure that the members of the board of the regulatory authority are appointed for a fixed term and that they are not removed arbitrarily, but in accordance with the stipulations of the Directive.24 Secondly, the Commission is given the powers to appoint such persons as it deems fit as its staff, and the terms of employment of such persons including remuneration and other benefits is left to the Commission to determine.25 Inherently, such persons to be appointed by the Commission as its staff must be persons who donâ&#x20AC;&#x2122;t have any interest in the regulated sector. This is because â&#x20AC;&#x2DC;[r]egulation depends not only on independent commissioners, but [on] an independent staff in the tradition of professional civil serviceâ&#x20AC;&#x2122;.26 Similar powers are also given to the FERC, where the Chairman of the Commission is empowered to appoint such personnels as it deems fit and also to fix their remuneration and compensation.27

19

ESPR Act 2005, s 36 (1) Ibid, s 35 (1) 21 Ibid, s 38 (1) 22 US code, s 7171 (b) 23 ibid 24 Article 35 (5)(b) of Directive 2009/72/EC 25 ESPR Act 2005, s 60 20

26

J A Beecher, (n 7) pg 595

27

US code, s 7171 (c)

Thirdly, the remuneration, expenses and allowances of the Commissioners are to be paid from the funds of the Commission based on the recommendation of the National Salaries; Incomes and Wages Commission (NSIWC).28 In making their recommendation, the NSIWC is to take into regard, amongst other things, the need to ensure the financial sufficiency of the Commissioners and also the salaries paid to those in the private sector with similar responsibility, qualification or expertise. As regarding the budget of the Commission, the Commission is expected to prepare its budget and submit it to the Minister on a date specified by the Minister

29

for subsequent presentation to the National Assembly. The

Commission is not given the privilege of having its budget seperate from the State budget.

However, this appears to be the general practice. In the US, the FERC is also required to submit its budget to the Secretary of the Department of Energy. The law requires the Secretary to include and identify it in its authorization and appropriation request. The position is similar in the EU. The Third Electricity Directive allows the budgets of regulatory authorities to be part of the Statesâ&#x20AC;&#x2122; budgets.30 Finally, the Commission is to be funded from fees, charges and other incomes accruing from licences. However this does not include fines or penalties recovered by the Commission. The Commission could also request for additional funds from the National Assembly to meet its reasonable expenditures.31 Thus, the Commission is not dependent on the Executive for financial survival but rather is provided with an independent and reliable source of funding, and â&#x20AC;&#x2DC;[p]roviding the agency with a reliable source of funding, usually earmarked levies on regulated firms or consumersâ&#x20AC;&#x2122;32 was identified by Smith as one of the formal safeguards for an independent regulator.

III (iv). The actual dependence of the NERC and its effect on private investment: As already established above, the NERC is formally an independent regulator. However, as a result of the desperacy of the government to deliver on its power reform promises, the independence of the NERC has been sacrificed. They have become an extension of the Ministry of Power and Steel and also receive orders from the government. For instance, the 28 29

30 31

ESPR Act 2005, s 42 (1) Ibid, s 51

(n 5)

ESPR Act 2005, s 52 32 W Smith (n 8) pg 4

commencement date for the Multi-Year Order Tariff 2 (MYTO-2) was postponed from January 2012 to June of the same year on the direction of the President due to the increament in the pump price of petrol and the attendant civil protest, even though the Commission alleged that the postponement was as a result of absence of the requisite legal frame work. This has led them to being referred to as an agency of the government.

Despite the actual dependence of the NERC on the government, investor confidence would not be affected nor would the ingress of private investment be forestalled. This is because first, the government would not wield its rod of influence so as to scare away private investment which they desperatly crave for. The government has insisted on the enforcement of the MYTO-2 despite the public outcry against it. Upon been summoned by the Senate, the Minister for Power and Steel noted that the increase in electricity tariff was in line with government’s power sector reform inorder to attract private investment. If there is any party to be scared of the government’s influence over the regulator, then it’s not the regulated utilities but the consumers.

Secondly, effectiveness of the regulator is also very crucial in boosting investors’ confidence.33 Brown et al34 uses the Meta-principle criteria of Credibility, Legitimacy and Transparency as a yardstick for determining the effectiveness of a regulator. Credibilty relates to the confidence the investor has that the regulator would honour its obligations; Legitimacy entails the consumers’ conviction that the regulator would protect them from the exercise of monopoly power, whether through high prices, poor services or both; and Transparency to ensure that the investors and the consumers ”know the terms of the deal”.35 It needs be noted that high prices would not undermine the effectiveness of a regulator where such prices are justifiable and reasonable. Thus, telling the average Nigerian consumer to pay 14 naira (6 pence) p/kWh as against the present average of 8 naira (3 pence) is reasonable and justifiabe. Going by these yardsticks, it is safe to conclude that the NERC is an effective regulator.

Finally, the form of control exercised by the government over the Commission is not unusual and is common of most governments in other jurisdictions wherein private investment has 33

W Smith (n 8) AC Brown, J Stern and B Tenenbaum, (n 1) 35 Ibid, pg 55 34

thrived. In most Latin American countries where privitisation started in the early 1990s and where the independent regulator model was introduced, the government interference in the independence of the regulator did not operate to forestall the ingress of private investment.36 III.

Conclusion:

The use of the word ‘independence’ in describing National Regulatory Authorities could be misleading if not defined. However, the consensus among authors is that it means autonomy from the government, the regulated utility, including consumers and other private interest and also one with organizational autonomy. This independence could be formal or actual. The NERC has the status of a formally independent regulatory authority but in reality, it is an agency of the government towards actualising the government’s power sector reform. But this interference by the government would not forestall the ingress of private investment. This is because for the power sector reform to be successful, the powers of the regulator must be exercised to the disfavour of the government, the regulated entity or the consumers. With the government inteferring, it is obvious that the scape goat would be the consumers. But this is welcomed, afterall, ‘[i]n all things political, regulation included, some animals are more equal than others’.37

36

IN Keesides, (n 11)

37

JE Beecher (n 6) pg 590

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