A SWOT ANALYSIS OF THE NEW ELECTRICITY TARIFF IN NIGERIA (Part 1)
By Idowu Oyebanjo
The Nigerian Electricity Regulatory Commission (NERC) has finally succumbed to pressure from investors in the Nigerian Electricity Supply Industry (NESI) to increase the tariff regime in the absence of steady power supply and at a time of economic downturn. Consumers, organised labour and affected stakeholders have expressed dissatisfaction. As painful as this may appear, it is suffice to examine the Strengths, Weaknesses, Opportunities and Threats inherent in the increased tariff structure planned for the 1st of February 2016.
Government’s Responsiveness and Support
In every regulated electricity business, the price of electricity as a commodity needs to be cost-reflective. This among other requirements means that price must cover the cost of efficient delivery of electricity through the value chain. Before now, the price or electricity tariff in Nigeria is one of the lowest in the world and one of the lowest in West Africa. Electricity as a commodity is produced worldwide following roughly the same process so cost should within reasonable limits be reflective and comparable. The usual dilemma in a regulated business is the requirement for government, by means of the regulator, to seek to be fair to all stakeholders especially consumers, while maintaining a fair profit margin for investors. This is generally a conflicting role. However, the government showed leadership in trying to accede to the plight of the investors by setting new guidelines that will enable increased availability of supply albeit with increase in tariffs to large consumers.
Most Nigerians are exempted from the increased tariffs
The increased tariff regime exempts consumers in the R1 and R2 categories who make up the largest number of residential consumers (albeit for six months only) whose consumption of electricity is strictly for non-commercial, but regular day-to-day home use. Most homes, and therefore the bulk of workers and citizens, are therefore unaffected for now. However, it must be stated that consumers who engage in commercial activities either in their residence or in a separate facility along with industrial consumers who consume a significant amount of electricity (high end users) have been directly targeted by the increased tariffs.
Estimated bill & Fixed charges to be history
Abolition of fixed rate that is charged consumers whether electricity is consumed or not is a welcomed development. This of course varies from place-to-place but it is about 750 Naira on the average. Also, Discos have been mandated to meter all customers so that consumers will only pay for electricity they have used. Consumers can technically insist on settling payments only if they have meters. Estimated billing should become history!!!
This of course will force all distributors to aggressively pursue the metering issue (if NERC performs its duty). It is a blessing in disguise as estimated bills through the hitherto dubious estimate regime forced most consumers into the illegal theft of electricity in conveyance. This has fostered large scale corruption in the power sector from consumers to staff of electricity companies who collude to short change their employers. This move is expected to block the massive leakage in electricity described as commercial and collection losses.
A more customer-friendly dispute resolution strategy.
In the meanwhile, there will continue to be disputes over electricity bills. The good news is that the dispute resolution process has been revised to be more customer-friendly and consumers need to be aware of this. Unlike before where the consumer is expected to continue to pay both disputed and future bills whilst the dispute resolution process is on-going, the new dispute resolution mechanism allows the consumer to continue to use electricity until the resolution of contested electricity bill. So they cannot be disconnected unfairly. This will force the distributors to improve in their customer engagement obligations. Customer-friendly initiatives like this will make consumers experience better customer service.
NERC misled and disgraced the nation
A significant portion for the charges paid by consumers is the cost for losses. Therefore one expects that the baseline values to be used would be determined as accurately as possible. However, in arriving at the charging methodology used for the Multi-Year Tariff Order (MYTO), NERC got it all wrong. Baseline levels of losses were wrongly determined leading to over/under estimation of charges to consumers. This is what happens when you put square pegs in round holes – Try hard as you may, it won’t fit. How long do we want to experience policy somersaults before we hear the cry of power system engineers that electricity is not a commodity like in economics? Someone who lacks understanding of power systems was responsible and accepted on behalf of the nation the baseline levels, ruined the image of the nation, and extorted consumers for many years. NERC is culpable in this national embarrassment as Lawyers and economists will never be in position to regulate electricity business. They do not understand power systems (and rightly so), and do not understand the reports provided by consultants who carry out studies for them anyway – Can we say again that to realise appreciable development in NESI today, there is an urgent need to put technocrats in charge of regulation. Copying industrialised economies in their models of power system regulation is not bad in itself, but doing so without knowing why they do things is foolhardy! They already have stable electricity for decades so they can afford Lawyers and Economists to toy with their power industry plus they have consultants who were formerly technocrats in the industry in the many decades leading up to the privatisation of the electricity supply industry. Their situation is different from Nigeria that i believe is going to witness the rebuilding of her network. Apart from this, there are thousands of experienced practitioners in their power industry who work with the distribution and transmission network operators who will challenge and contribute to the regulatory objectives set by the economic regulators in these countries. Again, there is a shortage of relevant skills in NESI to provide this check and balance.
NERC & Policy Somersaults
NERC realised too little too late. After waking up from its slumber, NERC suddenly realised consumers have been milked dry for over 5 years, removed this element of the tariff (losses) and that disrupted the serenity of the system which made Discos to declare a force majeure with the potential to truncate the privatisation process. This kind of policy somersault send wrong signals and drive away investors. NERC & the government need to provide a clear message of assurance to Discos that there is no plan to truncate the on-going power sector reform. This must be supported by a form of guarantee that will be enough to make Discos to begin investing in the network. At the minute, they are not!
Distribution Companies (Discos) presented fresh baseline values for losses
The new administration took immediate action to set matters right by asking the Discos to submit their own fresh calculations of baseline loss levels and power flow studies were carried out. The pertinent questions are: Who validates the accuracy? Same regulator? Same consultants? There is an urgent need to make available the methodology used by the Discos in arriving at their values and their cost profiles. Also, NERC needs to request each Disco to publish its strategy for loss reduction while it continues to monitor (year-on-year) actual reduction in estimated losses. It is highly likely that if the fresh baseline values have been wrongly determined, then we will keep going round in circles and there is a potential for under/over estimation of charges to consumers forcing a return to status quo ante. This has to be avoided. The likelihood is high because to determine losses, each distributor would have to have accurate data about consumers and their metered consumption, transformers, lines, cables, substations, network demand, network imbalance (NPS causes network losses), power factor, system operation and control. The subject is fairly complex, and certainly beyond the understanding of the general engineer apart from Power System Engineers who know their onions.
There is an urgent need to establish the basis for assumptions on electricity costs that is consistent with the overall power sector reform road map by ensuring that Discos develop a robust and accurate means of measuring and reporting distribution network losses. Also, discrepancies in reported losses by Discos will cause a distorted view of the power sector reform in Nigeria in the wider electricity supply industry. This has potential impact on the government- nationally and internationally.
NERC – Better late than never
NERC whose primary function is the protection of the consumers has left the matter till the end of its statutory 5-year tenure in office. This looks as if intentionally calculated to cause chaos in the system and therefore perpetuate the elongation of their term or services. Only time will tell! More than that, the increased tariffs came at a time when the regulator has been involved in the scandal of over bloated and outlandish severance payments to its commissioners which is currently under investigation by the National Assembly. With most consumers having no meters to ensure that they pay for what they have used, the possibility of a looming sack of workers in the Banking sector, and the fact that the benefits of privatisation since November 2013 is yet to be felt in terms of availability of supply, this increase in tariff came, saw, and conquered Nigerians!
To be continued………
Idowu Oyebanjo is a Power System Professional from the UK