9 February 2016

Nigeria: NERC - Issues With the Joint Tariff Design Policy

Wale Irokosu posits that the new tariff fixing policy for electricity distribution companies, amounts to an abdication of its statutory duty by NERC.

This article will posit that the new tariff fixing policy for power distribution companies in Nigeria, known as the Joint Tariff Design Process (JTDP), amounts to an abdication of statutory duty by the Nigerian Electricity Regulatory Commission (NERC). Also, it will opine that the aforesaid policy will amount to unnecessary unionisation of consumers and create unnecessary bureaucracy in the power sector.

On 8th April, 2015, the Chairman of NERC announced a new policy direction for the Nigerian Electricity Supply Industry (NESI). The JTDP stipulates that electricity tariff paid by consumers of electricity will be determined jointly by the Distribution Companies (DISCOs) and the consumers/end users. Thus, NERC will only play the role of an independent adjudicator in reviewing the tariff agreed upon between the DISCOs and consumers within the DISCO's concession area.

By the said policy, the DISCOs are to come up with their costs of distributing electricity power and will then propose a tariff based on the said costs. Their proposed tariff and cost plan will be presented to a session/panel of the DISCOs, consumers and representatives of NERC for deliberation and approval. After consultation with the consumers, the DISCOs will then forward the cost plan and proposed tariff to NERC for approval.

It is pertinent to state that the central duty of an electricity regulator is to balance the interest of consumers with that of the providers of electricity. Essentially, the regulator is to ensure a fair balance between making electricity available to consumers at affordable rates and making the business of electricity profitable. The latter duty entails allowing suppliers of electricity recoup their investment and make reasonable returns. Also, the regulator is expected to ensure safety of power utilities, and ensure adequate competition in the sector.

Furthermore, it should provide a regulatory regime that ensures universal access to electricity including for low-income households, protection of the environment, and investment in innovation. All three of these services are forms of social services, which markets on their own, are unlikely to supply in adequate levels.

In Nigeria, the power to regulate electricity tariff in Nigeria is vested in NERC by virtue of Section 76 of the Electric Power Sector Reform Act (EPSRA) 2005.

Section 76(1) of EPSRA 2005, stipulates that NERC has power to regulate distribution tariff in respect of which licenses are required under the EPSRA 2005. According to Section 76 (2) of the EPSRA 2005:

"Prices for the activities referred to in subsection 1 of this section shall be regulated according to one or more methodologies adopted by the Commission (NERC) for regulating electricity prices and such tariff methodologies shall:

(a) Allow a licensee that operates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business; (b) Provide incentives for the continued improvement of the technical and economic efficiency with which the services are provided; (c) Provide efficiency for the continued improvement of quality of services; (d) Give to consumers economically efficient signals regarding the costs that their consumption imposes on the licensee's businesses; (e) Avoid undue discrimination between consumers and consumer categories; and, (f) Phase out or substantially reduce cross subsidies."

Section 76(6) of the EPSRA 2005, also provides that prior to establishing a tariff methodology, NERC should give notice in the Official Gazette and in one or more newspapers with wide circulation, of the proposed establishment of the tariff methodology, indicating the period within which objections or representations may be made to NERC in connection with the proposed methodology.

Further, by Section 76(7), in preparing a tariff methodology, NERC shall consider any representations made by the license applicants, other licensees, consumers, eligible customers, consumer associations, association of eligible customers and such other persons as it considers necessary or desirable. NERC shall also obtain evidence, information or advice from persons who in NERC's opinion, possess expert knowledge which is relevant in the preparation of the methodology.

The above provisions of the EPSRA, 2005 show that: i. NERC has the sole responsibility to prepare and approve tariff methodologies; ii. It is the duty of NERC to give notice to the general public that it is preparing a tariff methodology, thereby asking for representations within a specific time; iii. NERC is only mandated to consider representations from licensees as well as consumers. iv. Licensees such as DISCO's are not statutorily authorised to prepare tariff methodologies like the JTDP would have it. v. It is not envisaged that a licensee comes up with tariff methodologies and structure, and then invites consumers to advocate for themselves on the sustainability of the tariff methodology and/or structure.

It therefore becomes clear that by the JTDP, NERC will be abdicating its statutory responsibility to regulate power tariff.

[A major flaw of the JTDP is that the highly informed, sophisticated and profit oriented DISCOs are left to bargain tariff with (in most cases) a group of less informed consumers, who cannot understand the nuances of the complex power industry] . [It is opined that well-informed consumers may either not have the time or access to the cost structure of the licensee in order to query the methodology proposed by the latter.] More so, cost identification is usually a problem for regulators. Essentially, regulators often find it difficult to obtain full information on operators' costs and are therefore prone to making mistakes that either allow excessive returns or not allow sufficient return to encourage fresh investment. It is improbable that consumers or consumer advocacy groups would do a better job than the regulator. It is obvious that NERC is better placed to scrutinize the tariff due to its industry expertise, resources and access to the necessary information

[Secondly, the NERC, in line with the JTDP, now seeks to constitute consumer advocacy groups that will discuss with the DISCOs before a tariff is determined. The poser is: what will be the criteria for identifying and constituting the advocacy group as well as the process of determining their demographic spread?] Most importantly, it is opined that this will amount to creating consumer unions in the power sector and meetings with the DISCOs are bound to be confrontational, emotional and political. Unions in Nigeria have been known to carry out mob activities, which are never in the interest of the country.

Furthermore, due to political visibility of power infrastructures, the industry has proved to be a particularly challenging area to introduce market forces, as the government often intervenes if market forces deliver a politically inconvenient outcome. This makes the sector, particularly the distribution segment, unattractive to investors, who are wary of their ability to earn an acceptable return on investment.

The key challenge for regulators in developing countries has been the ability to muster the authority needed to protect the distribution companies against the monopsonistic tendencies of politically organized consumers. It is said that the largest inefficiency and greatest difficulties lie in the distribution segment between the power system and politically influential retail customers. JTDP further compounds the challenges of licensees/operators with the resort to consumers and consumer-groups in determining tariffs.

Nigeria being a nation of about 180 million people, and with her power-generating capacity fluctuating between the 3500MW to 4500MW mark, her power industry is not near functional at this stage and the quest for stable power may be elusive in the short term . In the interim, there will be poor power supply hence, a reason to take to the streets. This unionisation may affect investments in the Power Sector.

In sum, the abdication by NERC of its duty to fix electricity tariff in Nigeria will be counterproductive to the development of the Nigerian Electricity Supply Industry. The Electricity Industry is in dire need of investments to increase power generation, improve the obsolete transmission and distribution infrastructure. This may be improbable with militant and organized consumer groups united against paying the going rate for electricity. The NERC is expected to be the bridge or stabilizing factor between the operators and the consumers. Thus, we recommend the following:

i.NERC should assume its role as the body statutorily empowered to develop tariff methodologies for the industry; ii. NERC should reverse the JTDP policy and in the alternative, come up with a policy that will enable NERC design the tariff structure after having consulted jointly with the DISCOs and sampled the opinions of the consumers. This will better meet the spirit of the EPSRA 2005;

iii. NERC should also take up the task of informing the consumers of how power tariffs are arrived at. That way, consumers will be enlightened without the need for confrontations that may arise from meeting with the DISCOs. Irokosu is managing partner at Probitas Partners LLP, 70, Queens Street, Yaba-Lagos.

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