VZCZCXRO8166
RR RUEHMA RUEHPA
DE RUEHOS #0494/01 1911313
ZNR UUUUU ZZH
R 101313Z JUL 07
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 9199
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 9000
RUEHCV/AMEMBASSY CARACAS 0042
RUEHWR/AMEMBASSY WARSAW 0459
RUEHCD/AMCONSUL CIUDAD JUAREZ 0438
RUEHIT/AMCONSUL ISTANBUL 0437
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 03 LAGOS 000494 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO OPIC 
DEPT PLEASE PASS TO TDA 
 
E.O. 12958: N/A 
TAGS: ECPS ECON EINV EIND PGOV PREL NI
SUBJECT: PROSPECTS FOR POWER SECTOR REMAIN DIM 
 
REF: ABUJA 1376 
 
LAGOS 00000494  001.2 OF 003 
 
 
¶1. Summary: At an American Business Council (ABC) meeting on 
May 28, Chairman of the Nigerian Electricity Regulatory 
Commission (NERC), Ransome Owan, discussed plans for the 
Nigerian power sector. To an audience of professionals in the 
private sector, including stakeholders such as General 
Electric (GE) and AES Corporation, Owan explained the 
structure and function of NERC in a newly-privatized 
environment. Owan also highlighted opportunities for 
investment. In spite of the potential for growth, however, 
reliable gas supply remains the Achilles heel of the sector. 
Independent power projects owned by international oil 
companies were touted as one solution. Creating effective 
incentives for these has so far proven elusive. End summary. 
 
¶2. At an American Business Council (ABC) meeting on May 28, 
Nigerian Electricity Regulatory Commission (NERC), Ransome 
Owan, discussed plans for the Nigerian power sector. To an 
audience of professionals in the private sector, including 
stakeholders in the power sector, such as General Electric 
(GE) and AES Corporation, Owan explained the structure and 
function of NERC in a newly-privatized environment. Owan also 
highlighted opportunities for investment. 
 
--------------------------------- 
Autonomy and Regulatory Stability 
--------------------------------- 
 
¶3. Owan showcased NERC as an autonomous body with a clear 
legal and organizational framework. NERC consists of six 
divisions, with seven commissioners in total. The 
commissioners are appointed by the President and confirmed by 
the Senate, and serve two-year term limits. Tenure is 
protected by due process removal. NERC is bound by the 
Electric Power Sector Reforms Act of May 2005 (ref) as well 
as private contracts, and has the ability to sue and be sued 
in the courts. 
 
------------------ 
Market Development 
------------------ 
 
¶4. Established in 2005, NERC's impetus is to oversee the 
transition to a competitive energy market. The privatization 
of the six generation companies and 12 distribution companies 
has yet to be completed, and Owan admits there is no targeted 
end date for this. The companies are the following: 
 
Generation Companies 
- Shiroro Hydroelectric 
- Kainji Hydroelectric 
- Sapele Thermal 
- Egbin Thermal 
- Afam Thermal 
- Ughelli Thermal 
 
Distribution Companies 
- Abuja Electricity 
- Jos Electricity 
- Ibadan Electricity 
- Benin Electricity 
- Enugu Electricity 
- Kaduna Electricity 
- Kano Electricity 
- Eko Electricity 
- Ikeja Electricity 
- Port Harcourt Electricity 
- Yola Electricity 
 
Transmission Company of Nigeria 
- The sole transmission company will remain publicly-owned 
but privately managed. 
 
¶5. Owan described the medium-term as characterized by 
protecting existing privatization and what he hoped would be 
a "fairly competitive" market. In order to progress to a more 
 
LAGOS 00000494  002.2 OF 003 
 
 
mature market, implementation of metering and information and 
communication technology (ICT) infrastructures would be 
crucial. Regulatory and legal frameworks, such as vesting 
contracts and an efficient settlement system are fundamental 
to developing investor confidence. Owan described these as 
the building blocks of a competitive and lucrative energy 
market. 
 
¶6. Preconditions for the development of a medium-term market 
include NERC's finalizing and issuing directives for 
compliance with metering codes and standards; introducing 
guidelines regarding the use and installation of electric 
meters by distribution companies; and guidelines for 
appreciation and effective implementation of metering and ICT 
backbone to deal with funding, settlements, and exchange of 
power. 
 
---------------------------- 
Creating Investor Confidence 
---------------------------- 
 
¶7. Owan acknowledged that the conditions favorable to 
investment were legal protection; customer payment; an 
independent judiciary to settle disputes; clear exit rules 
for investors; and government and multilateral guarantees. He 
assured the audience that these were in place or were in the 
process of being implemented. Owan answered to the concerns 
enumerated as follows: 
 
-- legal protection can be found in the NERC's legal 
structure and in the 2005 Electricity Act; 
-- prepaid meters, implemented in some locations, ensure 
customer payment; 
-- the courts already serve as an efficient means of dispute 
resolution; 
-- there are no penalties for investment entry/exit; 
-- there are some existing government and World Bank 
guarantees. (Note: The Bank presently has two projects in the 
power sector, focusing on transmission and distribution, 
totaling USD 272 million. End note.) 
 
------------------------------- 
Widely-Touted Target Is Elusive 
------------------------------- 
 
¶8. Owan admitted Nigeria would likely not reach 8,000 
megawatts (MW) of power generation by end-2007, as widely 
proclaimed by the Government (Note: A statement by Special 
Advisor to the President on Power, Joseph Makoju, to poloffs 
in Abuja that Nigeria would miss its 10,000 MW by 2010 goal 
confirms this. End note). Numerous problems exist in each of 
the generation and distribution plants, as well as in 
substations and injection stations. Problems with decaying 
infrastructure would be addressed, in part, by generation and 
distribution companies as they built new lines connecting to 
the transmission company, said Owan. The bigger problem was 
maintaining gas supply to the generation companies. This was 
the Achilles heel of the power sector, Owan admitted, and he 
offered no remedy for this. 
 
--------------------------------------------- -------- 
Timeline And Return On Investment Remain Unattractive 
--------------------------------------------- -------- 
 
¶9. The timeline for collecting equity, seven to ten years, 
was a challenge for investment in the sector. Owan noted 
that, even where prepaid metering has been applied, 85% of 
the meters were being bypassed. Audience members said that 
metering had been successful only in planned, gated 
communities. In other areas, meters were tampered with and 
meter readers were routinely threatened or chased from the 
neighborhood. Availability of meters was also a problem, as 
there was a backlog for manufacturers. Owan expected it would 
take three years to see a marked improvement in capturing 
revenue. 
 
¶10. In a presentation to the same audience on June 12, 
 
LAGOS 00000494  003.2 OF 003 
 
 
Special Advisor to the President on Power, Joseph Makoju, 
emphasized these problems. Non-technical loss of power, i.e., 
energy theft, was 40% from generation to billings in past 
years. (Note: The World Bank estimated in 2001 the energy 
sector lost 30-35% from generation to billings and had a 
collection rate of 75-80%. End note.) This loss of revenue 
was exacerbated by the fact that the last tariff review took 
place in February of 2002, suggesting government-set 
electricity tariffs did not reflect current market prices. 
Audience members acknowledged that the average Nigerian felt 
inexpensive access to power was a social good and should be 
subsidized by the government. 
 
------------ 
New Projects 
------------ 
 
¶11. Makoju said Nigeria was currently receiving assistance 
from the World Bank to assess its electricity stock and 
actual suppressed demand. These data would inform a 25-year 
plan for the power sector. Until now, the GON's production 
targets have been arbitrary. Many stakeholders argued that 
demand is much higher than has been estimated in recent years 
and the government's targets do not account for the increased 
demand necessary to power a growing economy. 
 
¶12. Makoju emphasized the importance of investment in 
independent power projects (IPPs) by international oil 
companies. Such projects possessed advantages such as the 
availability and low cost of gas. The cost of gas for NNPC 
was much higher, according to Makoju, and NNPC was 
responsible for supplying gas to the National IPPs (NIPPs). 
IOCs could also locate their IPPs closer to the source of 
gas, reducing interruptions in supply. 
 
------- 
Comment 
------- 
 
¶13. Both stakeholders and observers agree that the potential 
for growth in the Nigerian power sector is enormous. While 
NERC may be statutorily positioned to steward a competitive 
power market, there will be little to regulate if gas cannot 
be supplied reliably to the country's power generation 
companies. End comment. 
MCCONNELL