ANALYSIS OF THE NERC METER ASSET PROVIDER (MAP) REGULATIONS 2018

OVERVIEW

The regulatory framework on Meter Asset Provider (MAP) came into effect on the 8th of March 2018 and became enforceable by the Nigerian Electricity Regulatory Commission (NERC) from April 3rd 2018. The regulation which sets out to govern the relationship between Distribution Companies (DisCos) and third-party meter vendors was conceived by NERC to address the issues of estimated billing of customers, protection of the revenue stream of the DisCos and ultimately foster and accelerate an energy accounting system for the Nigerian Electricity Supply Industry (NESI) through the engagement of Meter Assets Providers (MAPs), for effective metering of customers.

The main objectives of the regulation are as follows:

1.      Encourage the development of independent and competitive meter services in NESI;

2.      Eliminate estimated billing practices in NESI;

3.      Attract private investment to the provision of metering services in NESI;

4.      Close the metering gap through accelerated meter roll out in NESI;

5.      Enhance revenue assurance in NESI.

Therefore the underlying aim of the regulation is to enable DisCos focus on their core business which is the distribution of power whilst meeting their metering targets through third party alliance. It is envisioned that this innovative approach will accelerate investment in meter production and services which is estimated to attract over 200 Billion Naira investment into the NESI over the next few years of full implementation. However, it is worthy to note that the regulation fails to recognize the existing metering targets of the DisCos as set out in the Performance Agreement which is the primary transaction agreement governing the operation of the DisCos in the NESI.

The regulation provides that within 120 days of the regulation taking effect, NERC shall develop an order to cap the estimated bill of unmetered customers to address the issue of estimated billing in the NESI (Section 31). The target for the commencement of the enforcement of the proposed cap is however ambitious (4 months following the date on which the regulation comes into effect) and should ideally align with the meter roll out schedule/deployment programs of the respective DisCos.  

The regulation anticipates that the DisCos will be expected to start meeting their metering targets by an arrangement (based on a procurement process) entered between the DisCos and Meter Asset Providers (MAPs), which will be 120 days from the 3rd of April 2018. To this end, DisCos will have to enter into Meter Service Agreement (MSA, which shall be for a tenure of 15 years, and should cover the life cycle of meters procured) with MAPs to provide specified number of meters to cover a target area within the timeframe of the agreement. While the metering responsibility has been acceded to the MAPs, there would still be a significant level of metering effort required on the part of the DisCos which will in effect require additional expenditure beyond the current provisions in the Multi Year Tariff Order (MYTO). DisCos will need to ramp up their respective networks to ensure they are suitable for tamper resistant metering, thus requiring additional CAPEX and ongoing OPEX for payments to MAPs especially considering the fact that the regulation anticipates the MAPs to be paid in full the Meter Service Charge (MSC) by customers during each billing cycle, without taking account of instances where the DisCos receive only partial payment from customers or instances of non-payment by customers.

The DisCos will be responsible for requesting for bids from qualified and NERC Certified Meter Service Providers (MSPs) under a transparent process while NERC will be responsible for issuing a permit to the successful bidder who shall execute a Meter Service Agreement (MSA) with the DisCos to cover target areas during a specified timeframe. While the MAP is not restricted from acquiring several permits under distinctive procurement processes conducted by the DisCos, the regulation is unclear as to whether DisCos on the other hand can engage multiple MAPs to cater to different segments of the metering process, which will more than likely be the preferred choice for DisCos as the regulation seems to make reference to a single bidder and single procurement process (Regulation 8(10)) without also taking cognizance of the fact that the MAP may have multiple meter manufactures.

Significantly, the DisCos will be expected to provide guarantee or payment security and make periodic payments to the MAPs for the cost of the installed meters over a period of 10 years (which is the tenure of the MAP permit in the first instance according to the regulation) whilst the MAPs are supposed to execute a performance bond (under a Service Level Agreement) in favour of the DisCos. Upon default of payment by the DisCos, the MAPs will be entitled to draw down on the guarantee or payment security depending on the payment structure adopted between parties as captured in the regulation.

The regulation allows customers to exercise the choice of providing customer-financing for meter installation which will entitle the customers who have funded the meter installation to enjoy energy credit to cover the amount expended by the customer. Customers in this instance will be precluded and exempt from paying the MSC to the DisCos.

The regulation provides for the rights and obligations of the parties, i.e. the DisCos, the MAPs (Third Party Vendor), and the Customers.

Whilst the regulation gives DisCos the right to access the installed meters in order to carry out its operations, it confers ownership rights of the asset on the MAP until payment has been fully amortised via the MSC by beneficiary customers.

PROCEDURE TO UNDERTAKE METERING SERVICES AS METER ASSET PROVIDER (MAP)

While the regulation anticipates a burgeoning local industry for meter production and services, it lays down procedures a prospective MAP will have to comply with to effectively provide services to the DisCos.

The regulation requires that the prospective MAP will have to apply for a permit along with meeting certain technical, technological and documentation requirements, after which NERC will convey a decision granting a permit or otherwise within twenty-one days (21 days) of submission of the required documentation to NERC (Section 8). It is hoped that the technological capabilities of the MAPs will underpin the migration of the NESI into a smart meter driven industry.

The DisCos will be expected to issue bidding process for the procurement of MAPs, which procurement process is required to be concluded within one hundred and twenty days (120 days).

To participate in the procurement process, NERC must issue a “No Objection Approval” upon the application of a prospective participant in the procurement process. When a successful applicant emerges from the concluded procurement process, the applicant (i.e. prospective MAP) must apply to NERC for a Meter Asset Provider (MAP) permit. The DisCos are required to place in two newspaper publications the successful bidder for the specific areas, the monthly Metering Service Charge (MSC) and a detailed roll out plan (Section 8).

Before the grant of a MAP permit, the following documentation as stipulated in Section 5 must be submitted to NERC:

1.      Completed application form;

2.      Certificate of incorporation, memorandum and articles of association;

3.      Tax clearance certificates;

4.      Certified audited financial statements for three (3) consecutive years prior to the years in which the application is made;

5.      Detailed resumes of the Applicant’s board of directors, management and technical staff;

6.      Ten years business plan;

7.      Applicant relevant experience in asset finance, metering and other relating business.

Prospective MAPs will be required to show evidence of technical and technological capabilities in maintaining and retrieving records of financial, inventory, customer data and monitoring usage of deployed infrastructure on an online real time basis, which technology systems shall be capable of interfacing with the vending platforms of DisCos (Section 7).   

The regulation requires that upon the grant of MAP permit, the DisCos can enter a Meter Service Agreement (MSA) with the successful applicant which will provide the contractual framework underpinning the relationship, rights and obligations of the parties. The contractual structure as captured in the regulation anticipates indexation provisions over the tenure of the MSA to address variability in applicable macro-economic conditions (Section 19(1)(d)). This contractual indexation should also be tied to the MYTO and tariff provisions considering the fact that DisCos OPEX will be tied to prevailing MYTO provisions, otherwise there would be a disparity in cost components as is currently the case with the PPA’s and the MYTO in NESI.   

LOCAL INDUSTRY

In order to unlock the local industry for meter production and services, the regulation requires MAPs to source a minimum of thirty percent (30%) of contracted metering volumes from local meter manufacturing companies in Nigeria, which minimum threshold requirement shall be determined by NERC from time to time (Section 9). This provision of the regulation therefore reinforces the imperative of local content development within the NESI. Thus it is anticipated that there will be need for capacity development to unleash the full benefits in terms of job creation and other economic opportunities that will flow as a result of this provision of the regulation.

RIGHTS AND OBLIGATIONS

Statutorily, the regulation encapsulates some of the rights and obligations of the DisCos, MAPs and customers under this third-party metering arrangement scheme. It provides that the DisCos shall have the right to access the meters installed, use and query data derived from the meters for monitoring, billing, auditing and planning purposes. The DisCos also have the right to include in a bill the Meter Service Charge (MSC) which shall be separate from the energy charge and based on the outcome of the procurement process approved by the NERC (Section10). The regulation also anticipates certain obligations from the DisCos.

On the other hand, the regulation provides amongst others that the MAPs shall have full legal ownership of the meters until full payment has been made by the beneficial customers. It is however unclear how a beneficial customer can claim full legal ownership of the meter(s) in its entirety as the regulation prohibits movement of the meters by customers (Section 17(5)). Traditional DisCo meter procurements ensures that title of the assets are passed across to a DisCo after the meters are certified as properly supplied and installed. DisCos lose asset ownership rights if their metering programs are contracted under the new regulatory environment.  If ownership does not revert to the DisCo, customer moves between DisCo territories becomes very complicated under the current arrangement.

The regulation also obligates on the MAPs to conform to specifications for meter assets and standard of installation, obtain all necessary certifications and approvals for meters in line with extant regulations and industry requirements, and engage only certified Meter Service Providers (MSPs) for the provision of meters in line with the Meter Service Agreement (MSA).

OBLIGATION OF MAP’S TO CUSTOMERS

The regulation imposes certain obligations on the MAPs towards customers and in line with the Service Level Agreement (SLA) between the DisCos and the MAPs. It requires the MAPs to ensure the accuracy of meter readings and imposes an obligation to replace or repair faulty meters at no cost to the customer (unless the fault is from the customer) within two (2) working days of being notified by customers or DisCos, failure of which the customer affected will not be obliged to pay the charges for that billing period.

CUSTOMER FINANCING OPTION

The regulation provides for the option of customers to pay for the meters which shall be installed by the MAP within ten (10) working days of the receipt of the full payment in which case such customers won’t be liable to pay Meter Service Charges (MSCs). It does appear that once full payment has been made by the customer for the meters, the customer qualifies for energy credit from the DisCo servicing the area untilthe cost of purchase by the customer is fully defrayed. This financing option however does not seem to consider the ongoing costs of operating and maintaining the meter.

TRANSITIONAL PROVISIONS

The regulation provides a “Limited Grandfather Clause” as it shall not override existing metering contracts (Section 24). However, meters installed / deployed by the Distribution Licensee beyond December 31, 2018 under a subsisting contract shall be structured under the MAP regulatory framework (Section 2: Transitional Arrangements).

NERC is effectively breaking subsisting DisCo metering contracts / agreements into meters installed / deployed pre and post 31 Dec 2018. All existing contracts with installations scheduled after 31 Dec 2018, must be renegotiated into the “newly prescribed” MAP regulatory construct.

The MAP Regulatory constructs says meters are “owned” by MAPs. As such from 1 Jan 2019, all meters acquired shall not be included in the DisCo’s Regulatory Asset Base which feeds into the Tariff Reset.

DisCos may need to seek clarification on the applicable commencement date - 8 March 2018 vs 3 April 2018 to ensure existing contracts fall outside the full bandwidth of the MAP regulations and is only subject to transitional arrangements.

CONCLUSIONS, CONCERNS AND IMPLICATIONS

One of the major concerns arising from this regulation stems from how the DisCos will be able to fund the metering infrastructure gap. Historically DisCos were required to meet meter supply obligations to all customers who made advance payments in line with the Credited Advance Payment Metering Initiative (CAPMI) pursuant to an Order issued by the NERC in 2013, however this scheme failed which necessitated the need for the MAP regulation.

The metering gap for all DisCos as at December 31, 2017 has been put at 4,740,275 meters (Section 4(2)) and will presumably increase significantly upon the conclusion of ongoing customer enumeration thereby revealing huge metering deficit in the NESI which will most likely stretch the financial elasticity of the meter funders in the long run, if not carefully managed.

Arising from this development, the million dollar question is whether this regulation has fully addressed the financial incapacity of the DisCos in implementing the meter roll out project as part of their performance obligations whilst tariff remains below the cost reflective price for the NESI. The non-cost reflective tariff constitutes one of the major drawbacks in the NESI and indeed accounts for the inability of some of the DisCos in raising funds or accessing loans from financial institutions.

Although the regulation provides that the DisCos shall within thirty (30) days of the execution of the MSA issue a payment security and lays out flexible options available for the DisCos such as:

1.      Irrevocable letters of credit executable on demand by the MAP;

2.      Back-office structure mutually agreed by parties where Meter Service Charges (MSCs) paid by customers are received into a dedicated account for the MAP;

3.      Any securitization arrangement for such purpose in collaboration with Development Finance Institution (DFI), Central Bank of Nigeria (CBN), Infrastructure Bank, e.t.c.;

4.      Any other agreed payment security option or structure between the parties.  

What the regulation seeks to achieve is the introduction of a third party vendor (Meter Asset Provider) to finance and raise capital for meter roll out which will be paid for by the DisCos over a period of 10 years, upon condition that a guarantee or payment security will be provided by the DisCos for the meter roll out project to be commercially viable. The challenge will be how this will pan out from the DisCos perspective, given the general financial conditions of DisCos when compared to the increased level of metering effort that will be required by the DisCos within the ambit of the regulation, in terms of additional expenditure to ramp up their networks (CAPEX) and ongoing OPEX for payments to MAPs.

It is unclear as to what would obtain in instances where customers are unable to sustain partial of full payments of the Meter Service Charges (MSCs) over a protracted period of time, even though the regulation anticipates the disconnection of such customer. Perhaps some form of subsidy would be worked out in securing payment obligations to the MAPs via the DisCos.

A concerted effort or policy initiative should be considered by the Federal Government of Nigeria (FGN) to provide guarantee under this third party regulatory framework through the CBN and or DFIs,. It has been suggested within the government circle that guarantees for financing options could come from the World Bank or a N39 billion proposed metering loan facility recently disclosed by the Federal Government to drive the initiative.

Again the rationale for the regulation is perhaps to provide the DisCos flexibility in arrangement with a third party approved by NERC to defray the cost of the meters over a long period (10 years) in order not to adversely impact on the business of the DisCos.

Viewed against this background, where the ultimate goal will be to meter customers whilst removing the financial burden on DisCos, then arguably it can be agreed that the regulation is a welcome development for the NESI.

It is also interesting that the regulation specifically prohibits DisCos, subsidiaries, directors and their relatives from setting up a MAP or having links with MAP. The rationale behind this provision remains unclear as metering constitutes a license obligation within the respective DisCo licenses.

It is noteworthy that the sui generis nature of this regulation is designed to eliminate the possibility of denying liability through a plea of non-privity of contract between the customers and the MAPs. While the MAP regulation allows the parties to determine appropriate dispute resolution methods in their agreements (Section 27), it must be stressed that MAPs and DisCos will need to obtain adequate legal guidance in drafting their SLAs and MSAs to cater for all possible incidents of dispute.

Although the regulation gives a timeline of one hundred and twenty days (120 days) to complete the MAP engagement by the DisCos, one wonders what will be the fate of MAPs where an application for MAP permit has been made to NERC and no result conveyed on the outcome of the application within twenty one days (21 days) by NERC as required by the regulation. Does this circumstance translate to a deemed grant of MAP permit? Only time will tell as the regulation becomes enforceable and tested.

In the final analysis, the consensus of stakeholders remains that the regulation aims to accelerate the deployment of meter roll out which is condition precedent to driving a transparent and less-disputatious NESI.  Stakeholdershowever have to pay attention to the transitional arrangements under the MAP regulation as well as the applicable dates for restructuring pre-existing contracts to conform to the MAP regulation.