Vanguard (Lagos)

10 December 2012

Nigeria: New Electricity Tariff Draining Industries' Profit

INDUSTRIES across the country have started feeling the negative impact of the new electricity tariff which they say have been eroding their profit margin as operating cost have risen by 440 percent since the new tariff was introduced in June this year by Nigeria Electricity Regulatory Commission (NERC).

A survey of 138 companies from the six geopolitical zones (Abuja, Bauchi, Calabar, Kaduna, Lagos and Owerri) conducted by NOI Polls Limited for the Nigerian Association of Small and Medium Enterprises (NASME), showed that the new tariff has been having negative effect on their businesses.

The survey covered companies operating in the Micro, Small and Medium Enterprises (MSMEs) within various sectors such as manufacturing, construction, computer sciences and technology, engineering services, hospitality, among others. Sectors surveyed showed that the new electricity tariff is hitting them hard as their operating cost have increased by 440 percent, since the inception of multi-year tariff II (MYTO II)

For instance, Alind Nigeria Limited is a private limited company based in Bauchi. The company employs between 10-49 employees and its annual turnover for the last financial year stood at N10 million. The company manufactures cables and semi-conductors. According to the Managing Director, before June 2012, the company was classified as 03 (industrial) for tariff classification and paid a fixed charge of N43, 471 and an average monthly electricity bill of N110, 000.

However, after the introduction of the new electricity tariff in June, 2012, their classification moved to D4, and they now pay a fixed charge of N106, 000 and an average electricity bill of N212, 231, representing 143 percent and 93 percent increases in the fixed charge and average electricity bill respectively.

Prepaid meters

When asked to describe the power supply situation since June 2012, the MD lamented that there has been "No Improvement" and that the new tariff has had a "negative impact" on their business resulting in increased operating cost. As a result, "I have had to lay off several employees to keep the company afloat." He also added, "We only pay for the hope of having power, and not the power itself."

Similarly, Orfema Pharmaceutical Industries Nigeria limited, a private limited company based in Lagos, which manufactures pharmaceutical products and employs between 10 - 49 employees with turnover for the last financial year between N10 million to N100 million. Due to the nature of the products it manufactures, the CEO noted that they have rotating, cutting and lifting equipment.

The company is supplied power from a dedicated transformer fed and operates on a Maximum Demand (MD) Meter. According to the CEO, before June 2012, the company's tariff classification was given as D2 (industrial) and they paid an average monthly electricity bill of about N30, 000.

However, since June 2012, its tariff classification has moved to D4 and the average monthly electricity bill rose to N160, 000, representing an increase of 433 percent.

In the words of the CEO, "PHCN has been unduly unfair to us. We do not even have the light and they bring outrageous bills; it's so sad." He further stated that the new tariff has had a "negative effect" on his business because he has had to reduce his staff strength since the operating cost was too high and that they have had to close down production for one week at a point. He suggested a review of the MYTO II policy; because it is wrong for his company to be grouped in the same category (D4) as multinationals like GlaxoSmithKline and Cadbury, "when we are just an SME," he added.

Further, Helicon Space Concepts Nigeria Limited, a Private Limited Company based in Owerri, the capital of Imo state, revealed that before June 2012, the company paid an average of N5, 000 monthly on electricity bills; however, their average monthly bill has now gone up to N12, 000 since June 2012, marking a 140 percent increase in what they used to pay.

Abuja based Chair Bi Donald Nigeria Limited is a Private Limited Company involved in the manufacturing of furniture and household interior decoration items. The company employs less than 10 poeple and it made less than NI0 million in turnover in the last financial year. Given the nature of their job, they have cutting, welding and spraying machines that require the use of power.

According to the MD, the company used to pay N5, 000 monthly on electricity bills before June 2012. However, after June he was surprised to notice that his electricity bill has risen to N9, 000, representing 80 percent increase. He lamented that as a small business, this increase in electricity bill cuts into his profit margin at the end of the month.

AAM Plastics Nigeria Limited located in Kaduna, also a Private Limited Company employing between 50 - 199 people. The company manufactures polythene and plastic products and is supplied electricity from a dedicated transformer, with a Maximum Demand (MO) meter which is read monthly by the local PHCN staff.

The technical manager stated they experience power cuts for between 20-30 percent of the time and spend between N250, 000 to N500, 000 to power their diesel generator. The survey revealed that before June 2012, the company paid a fixed charge of N5, 000 and an average monthly electricity bill of about N850, 000. However, since June 2012, their fixed charge has risen sharply by 2680 percent to N139, 000 and their average electricity bill rose by 95 percent to N1.66 million.

Also, Flo-Gee Enterprises, a Private Limited Company located in Calabar, the capital of Cross River State employs between 10 - 49 poeple and has an annual turnover below NI0 million in the last financial year. This company is involved in producing confectioneries such as cakes, bread and biscuits. Its major equipment is a large electric baking oven, which the company purchased less than five years ago.

The company is supplied electricity from a supply drop from an 11KV line, with a three phase meter; yet they suffer power cuts more than 40 percent of the time, and have to augment their power source with a diesel powered generator on which they spend between N50, 000 to NI00, 000 monthly. The survey found that before June 2012, the company paid an average of N3, 500 monthly on electricity bills.

However, after June, their average electricity bill went up to N8, 000, representing a 129 percent increase in monthly tariff. To make things worse, the manager stated that there has been no improvement in electricity supply since June 2012 and that the new tariff has had a negative impact on their business because they have spent more on alternative power supply this year than they have ever spent in the almost five years of operating the business.

Eke Ubiji, Executive Secretary of NASME, disclosed that the Association decided to carry out the survey following several complaints from its members about the cost implications of the new MYTOII policy introduced by NERC in June 2012, which they claimed constitutes a burden on their businesses.

He said that against this background, NASME invited an independent consultant, NOI polls limited, to conduct an assessment of the impact of MYTO II from November 6th to 12th, 2012. A total of 138 enterprise owners were interviewed and 127 interviews were completed. Interviews were spread across the six geo political zone in Nigeria.

"MSMEs have a very negative perception about the MYTO II tariff since its introduction. This arises from the fact that they are experiencing declining profit margins which they attributed to a rise in their total operating costs." Erratic power supply is a major issue faced by MSMEs due to the fact that there are no visible power improvements. This has led to an increased use of alternative power supply which has again led to increased operating cost.

NASME is willing to partner with NERC to mutually define a tariff regime that will encourage stakeholder interest in the Nigeria electricity sector as well as ease pressure on MSMEs. Operators, he said have also proposed that NERC should provide clarity on MYTO II and that NERC in partnership with NASME should endeavour to create enlightenment programmes about the MYTO II price regime, its implication for businesses and its overall objective.

*We recommend to NERC that before such policy is implemented, it should carry out a Regulatory Impact Assessment (RIA) on all categories of electricity consumers to have a feel of the impact on such policy.

*There is negative perception about the tariffs and this has to be addressed to ensure a successful price regime. *NERC should instruct the electricity distribution companies to inform/educate customer on their customer classification for the purpose of billing them for electricity.

Template of bill should be unified across all DISCOs including fixed charge, tariff classification, name and address of customer. This should help tackle the issue of transparency.

*Elimination of fixed charge and replacement with unit charge. This will help SMEs who produce seasonally and encourage energy conservation, where an SME only pay for what it consumes.

Issue of stability of power supply though not NERC's core business should also be addressed in order to forestall further resistance to the MYTO II price regime as the perception about power is very negative given the increasing cost to business on the use of alternative power supply.

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