NARUC/NIGERIA ELECTRICITY
REGULATORY PARTNERSHIP
"BLINDED BY THE LIGHT"
BY
NOEL A. OBIORA
A PRESENTATION ON THE
IMPLEMENTATION OF A TRANSITIONAL
ELECTRICITY MARKET BETWEEN
PRIVATIZATION AND A COMPETITIVE
MARKET
1
DISCLAIMER
The opinions expressed in this presentation are those of the
author, not necessarily the opinions of the California Public Utilities
Commission
A NOTE ON THE TITLE
The title of this presentation was borrowed from an article by Mary
Bushnell on restructuring; as used in this presentation, it is
intended to reflect the notion that, that those who see an
unfettered free market competition as the panacea for all that ails
regulated electricity monopoly companies are blinded by the light,
because restructuring holds on to and embraces effective
regulation
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PRESENTATION OUTLINE
1. Basic architecture of all models for restructured electricity
markets
2. Basic architecture of Nigeria's restructuring model
3. Applying traditional restructuring architecture in the African
Context
4. Examining the gap between the current state of
privatization and the objective end state of competition in
Nigeria
5. What should a transitional electricity market consist of?
6. Conclusion
3
THE BASIC ARCHITECTURE OF ALL
MODELS FOR RESTRUCTURED
ELECTRICITY MARKETS
• Vertical Separation of Generation, Distribution, Transmission
Segments –
• Horizontal Integration of Transmission and Network Operations
Covering the Geographic Area of the Intended Wholesale Market
• Creation of Wholesale Spot Energy and Operating Reserve Markets to
Serve the Network
• Creation of Relevant Institutions to Facilitate and Oversee Access To
Network, Market Operations, Forward Supply Commitments …
• Unbundling Retail Tariffs to Reflect the Separated Segments
Vertical Separation
• Most Critical Element of Restructuring
• Generation
– Privatized and made competitive;
– Focus on development of forward market
• Transmission
– Government or privately owned, but regulated
– Focus on building networks to facilitate market
• Distribution
– Privately owned but regulated
– Focus on expanding network access to facilitate free
flow
HORIZONTAL INTEGRATION; WHOLESALE
SPOT MARKET; INSTITUTIONS; UNBUNDLING
TARIFFS
• Single Independent System Operator
– Dispatch functions vs. Market Operations
– Transmission planning and costing, Congestion
Management, Responsibility for reliability
• Determining the Model for Pricing
– Load Aggregated Pricing; Ex-post Pricing; Exante Pricing
• Market Monitoring, Rules; Market Power
Mitigation
– Establishing Market Rules and Market Power
Mitigation and Other Opportunistic Behavior
• Effective, Alert, Fully Staffed Institutions
RE-TOOLING THE BASIC ARCHITECTURE OF
THE RESTRUCTURING MODEL
“Any market you start with
is going to be the wrong
market. That has been the
case everywhere there was
“If you are not cheating you
a market”
are not trying to win”
Frank Wolak
Holbrook Working Professor of
Commodity Price Studies,
Department of Economics
Stanford University
Marty McSorley
Professional Hockey Player
BASIC ARCHITECTURE OF
NIGERIA’S RESTRUCTURING MODEL
• MARKET RULES 6.3
– 6.3.1 All electricity trading arrangements during the Transitional
Stage will be consummated through contracts, and there will be
no centrally administered balancing mechanism for the
Transitional State Market
– 6.3.2 The Market Operator shall develop a Market Procedure for
management of inadequate supply and shortage conditions
during the Transitional Stage. This Market Procedure will
allocate generation shortages proportionally among Load
Participants and will be tested and improved during the
Transitional Stages, and shall become part of the Grid Code at
the start of the Medium Term Market
• (a) This allocation of generation shortages shall take account
of Load Participations’ contractual rights
APPLYING TRADITIONAL
RESTRUCTURING ARCHITECTURE IN
AFRICA
1. TECHNOLOGICAL CHALLENGE
2. INSTITUTIONAL CHALLENGES
3. BARRIERS TO ENTRY
4. RURAL FLIGHT AND URBAN
CONGESTION
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TECHNOLOGICAL CHALLENGE
- THE AFRICAN CONTEXT
The very attributes of electricity, such as that it can’t
be stored, must be delivered in as close to real time as
possible, which involves managing known generation
to address uncertainties coupled with known demand,
technical demands of addressing imbalances and loop
characteristics of Network systems that require clearing
purchases at several nodal points make the transition
to a wholesale competitive industry a very technical
challenge in the developed world. In Africa this
challenge is even more daunting.
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INSTITUTIONAL CHALLENGES
The development of competitive wholesale markets requires
the establishment of several new functioning institutions that
did not exist with regulated monopolies, in place of
entrenched bureaucratic interests that may not relinquish
their roles too easily or may do so by influencing the design to
carve out and retain some aspects of the new institution’s
roles in a different guise. Forming one of these institutions is
difficult enough but creating three or four while the regulator
itself is a nascent development is very challenging.
Much of the problems of transitioning from traditional
monopolies to restructured markets in America have come
from political pressures that forced deviations from otherwise
known architecture to result in flawed processes designed
more by lobbyists and labour unions than by regulators and
economists. One study suggested that in every state where
wholesale markets were adopted, Enron was heavily involved
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in lobbying State politicians to influence the design
BARRIERS TO ENTRY
BARRIERS TO ENTRY ENSURE THAT ENTITIES AND
INDIVIDUALS CAPABLE OF ACQUIRING THE
PRIVATIZED UTILITIES ARE THEMSELVES RICH
POWERFUL “INSTITUTIONS” THAT CAN EXERT
POLITICAL AND ECONOMIC PRESSURES OF THEIR
OWN; WITH A LARGE VULNERABLE CLASS OF
RATEPAYERS AND LOW PER CAPITA INCOMES
ACROSS THE COUNTRIES, THE ABILITY OF THESE
INSTITUTIONS TO INFLUENCE THE NEW MARKET
GOES BEYOND “MARKET POWER MANIPULATIONS”
AND REQUIRE A STRONG AND DEDICATED
REGULATOR TO PROTECT RATEPAYERS
RURAL FLIGHT AND URBAN
CONGESTION
THE DISTRIBUTION OF POPULATION IN AFRICA
MOSTLY ALONG ECONOMIC NEEDS WITH SPARSE
RURAL POPULATIONS AND LARGE URBAN
POPULATIONS MEANS THAT EXISTING ELECTRICITY
INFRASTRUCTURE WOULD HAVE BEEN DESIGNED
FROM A PERSPECTIVE FAR FROM THE COMPETITIVE
RESTRUCTURED MARKET CURRENTLY BEING
INTRODUCED AND DELIBERATE CONSIDERATION
MUST BE MADE TO UNDERSTAND THE
IMPLICATIONS, NOT JUST FROM A LEGACY
TRANSMISSION INFRASTRUCTURE PERSPECTIVE,
BUT IN CONSIDERING WHO PAYS FOR THE
DEVELOPMENT OF NEW INFRASTRUCTURE AND
HOW
THE GAP BETWEEN CURRENT STATE OF
PRIVATIZATION AND COMPETITION
1.
2.
3.
4.
5.
6.
UNIQUE NATURE OF NIGERIA’S TRANSITION
THE GOAL OF RESTRUCTURING
RESOURCE ADEQUACY
INSTITUTIONAL CHALLENGES
BUILDING INVESTOR CONFIDENCE
RESOLUTIONS: THINKING OUTSIDE THE BOX
THE GOAL OF RESTRUCTURING
• BRING BENEFITS OF COMPETITIVE WHOLESALE
MARKETS TO CONSUMERS:
– LOWER TRANSMISSION AND GENERATION COSTS
• More efficient transmission network platforms because the must
be kept at optimum performance level to deliver an effective
market conditions
• Breaking up component segments of the electricity markets make
market signals for the investment in each segment clearer and
distinguishable
– By contrast regulated monopolies are forever robbing Peter to pay
Paul
• SHIFT CERTAIN RISKS APPROPRIATELY TO PRODUCERS
• ATTRACT INVESTMENT IN NEW INFRASTRUCTURE
• ELIMINATE INEFFICIENCY
GAP ANALYSIS OF TRANSMISSION
AND DISTRIBUTION COSTS
• LEGACY TRANSMISSION ISSUES
– COST OF DEVELOPING EFFICIENT NETWORK
• INVESTMENT DECISION DRIVEN BY POLITICAL
PRESSURES RATHER THAN MARKET SIGNALS
– WHAT IS THE TRUE MARGINAL COST OF DISTIRBUTION
PLANTS THAT SHOULD BE PASSED ON TO RATEPAYERS
• LACK OF EMPERICAL DATA
– EXPONENTIALLY INCREASES THE PROBLEM OF
ASSYMETRIC INFORMATION
•
EMPERICAL DATA
RESOURCE ADEQUACY
Resource adequacy measures the amount of capacity necessary to
maintain reliability on the system in real time within a particular
time frame, measured as a percentage of Peak Load.
Consists of:
1) Operating Reserves; and 2) Planning Reserves.
• Operating Reserves = Sufficient capacity to meet peak demand
(+) reserves for unplanned outages
[(Dependable Capacity – Reasonably Expected Resource
Outages)/Peak Load] – 1} x 100%.
• Planning Reserves = Operating Reserves over the long-term +
Reasonably Expected Outages, which then includes planning for
additional uncertainties such as hot weather
PRM = [ (Dependable Capacity/Peak Load) – 1] x 100%
RESERVE MARGIN
The delta between the amount of resources necessary
to achieve resource adequacy and the amount of
resource necessary to meet Peak Load is the reserve
margin
Factors Modeled In Determining Reserve Margin
Include:
1.
2.
3.
4.
5.
Historical Plant Outage Rates;
Size of Plants;
Thermal De-rates;
Weather Conditions;
Transmission Contingencies
Plant as used here refers also to transmission lines
INSTITUTIONAL CHALLENGES
NIGERIA
• Regulated vs. Competitive Segments
– Are institutions sufficiently staffed and equipped to address the
needs of these different segments
– Jurisdictional Considerations in the American Context
– Economic Strength Considerations in Nigeria – [The Enron
Problem]
• Divestiture vs. Operational Boundaries
– Incentives for New Generation Resources
– “Chinese Wall”
– Hybrid Markets and Utility Ownership of Transmission
• Regulatory Commission vs. Bulk Trader
– Administration of Contracts of Regulated Entities
– Planning and Approval of Needed Generation
– Allocation of costs and scarcity
INESTOR CONFIDENCE
“Ambiguities in retail procurement responsibilities,
competitive retail market imperfections and
regulatory opportunism and uncertainty affects
contracting incentives and behavior and leads to too
much short-term forward contracting and too little
long term contracting. This undermines the
development of liquid forward markets for energy
and operating reserves which in turn reduces the
ability of investors in new generating capacity to
hedge market risks and increases their financing
costs above what they would be if consumer and
supplier risk preferences could be better matched.”
Paul Joskow
Professor, Massachusetts Institute of Technology
RESOLUTION: THINKING
OUTSIDE THE BOX
• IN TANZANIA THE MARKET PRICE OF GAS IS BASED ON THE NEW
YORK MERCANTILE EXCHANGE BOARD (NYMEX) INDEX
• RURAL FLIGHT AND URBAN CONGESTION: WOULD RELOCATION OF
GOVERNMENTAL FACILITIES FROM CONGESTED CAPITALS TO RURAL
AREAS HELP ADDRESS THE INFRASTRUCTURE GAP BETWEEN RURAL
AND URBAN AREAS
• RURAL FLIGHT AND URBAN CONGESTION: INSISTING THAT UTILITY
CUSTOMER SERVICE CENTERS MUST BE LOCATED WITHIN
PARTICULAR DISTANCES OF SERVED POPULATION
• COORDINATING WITH OTHER AGENCIES AND POLICY MAKERS IN
OTHER AREAS WHOSE DECISIONS MIGHT AFFECT THE POPULATION
IN WAYS THAT INCREASE THE VALUE STREAM OF NASCENT
ELECTRICITY UTILITIES, THEREBY SUBSIDIZING THE COST TO THE
VULNERABLE POPULATION
• REDEFINING RESOURCE ADEQUACY AND ESTABLISHING STEPS FOR
ATTAINING A TRADITIONAL RESERVE MARGIN AS A PERCENTAGE OF
PEAK LOAD AS TIME GOES ON
WHAT SHOULD A TRANSITIONAL
ELECTRICITY MARKET LOOK LIKE
• READINESS AND COORDINATION OF
GOVERNANCE INSTITUTIONS
• TRANSPERENT SCHEDULES
• REGULAR STAKEHOLDER CONSULTATION AND
UPDATES
• DATA ADEQUACY
• NETWORK AND INFRASTRUCTURE TEST RUNS OF
THE MARKET DESIGN
• MEDIUM TO LONG-TERM PLAN SCHEDULES FOR
ENSURING THE EXISTENCE AND VIABILITY OF A
LONG-TERM FORWARD MARKET
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CONCLUSION
“Electricity restructuring and competition
programs have inevitably been a process that
invites a lot of learning by doing and ongoing
challenges to market rules, regulatory
arrangements and governance institutions”
Paul Joskow
MIT