NERC; its Tariffs and Stakeholders: A Seamless Bond

NERC; its Tariffs and Stakeholders: A Seamless Bond

At a time the Nigerian Electricity sector needed reform and transformation, the Federal Government under President Olusegun Obasanjo, birthed the Nigerian Electricity Regulatory Commission (NERC). The Commission is an independent regulatory agency which was inducted on 31st October 2005 as provided in the Electric Power Sector Reform Act 2005.

One of the primary functions of the Commission as contained in Section 32 (d) of the Electric Power Sector Reform (EPSR) Act, 2005 is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and obtain reasonable profit for efficient operations.
No doubt, the electricity sector has not achieved the projected level of improvement due to various reasons that are attributable to the operators’ deficiencies and beyond. These challenges are not peculiar to only Nigeria, but also did occur within 3 to 5 years in similar forms in all other countries that undertook similar power sector reform
Without mincing words, NERC has truly lived up to this task. It has taken upon itself the responsibility to ensure it promotes an investor-friendly industry. The market structure has been efficient to meet the needs of Nigeria for safe, adequate, reliable and affordable electricity.

The tariffs have been flexible in such a way that has incredibly shed the weight off customers. Noticeable is the establishment of a key methodology for regulating electricity prices called the Multi-Year Tariff Order (MYTO).

The MYTO methodology (pricing methodology) mandates the Commission to carry out a minor review of the Tariff bi-annually and adjust these exogenous factors that are beyond the control of the investors and the regulators. The official exchange rate in the country has risen from N198.97 to over N305.05 to a dollar. Kindly note that the unofficial (black market) exchange rate is about N500 to a USD. This alone is bound to trigger an increase in electricity tariff given the fact that all equipment, spare parts, meters used for the generation, transmission and distribution of electricity in Nigeria are imported. Electricity is therefore a product like any other product that is affected by changes in micro economic indices.

This methodology has been a key determining factor of electricity tariff in the Nigerian Electricity Supply Industry (NESI). The Tariff Order called the Multi-Year Tariff Order (MYTO) sets out tariffs for the generation, transmission and distribution of electricity in Nigeria.

The Multi-Year Tariff Order (MYTO) is a tariff model for incentive-based regulation that seeks to reward performance above certain benchmarks, reduces technical and non-technical/commercial losses and leads to cost recovery and improved performance standards from all industry operators in the Nigerian Electricity Supply Industry.

It is used to set wholesale and retail prices for electricity in the industry by employing a unified way to determine total industry revenue requirement that is tied to measurable performance improvements and standards.

According to a Statement by the Commission, The purpose of the MYTO is to set cost-reflective tariffs which will allow the power sector to be properly funded and functional. It provides a 15-year tariff path for the NESI with limited minor reviews each year in the light of changes in a limited number of parameters (such as inflation, interest rates, exchange rates and generation capacity) and major reviews every 5 years, when all of the inputs are reviewed with stakeholders.
Cost recovery/financial viability of the tariff system has been appraised. With its introduction, regulated entities should recover their costs, including a reasonable rate of return on capital.

The tariff has equally provided certainty and stability of the pricing framework which encourages an efficient level of investment, while incentives for improving performance has been made visible. It provides incentives to reduce costs, improve quality of service and encourage efficient use of the network. Its cost effectiveness cannot be over-flogged.
Going by the explanation of the Commission, MYTO methodology uses building blocks approach in setting Transmission and Distribution tariffs which provides the benefits of both price cap and incentive based regulation. It is simply a way of bringing together all of the industry’s costs in a consistent accounting framework.
The Commission issues licenses to entities that wish to engage in the business of Electricity generation, excluding captive generation; Electricity transmission; Electricity system operation; Electricity distribution or; Trading in electricity. Every form of Electricity distribution goes through NERC.

In addition, it issues Permits for Captive generation, i.e. electricity generated for consumption by the generating entity and not sold to a third party.

The Nigerian Electricity Regulatory Commission is saddled with the responsibility of protecting the interest of both consumers and well as investors when it comes to the issue of electricity pricing as well as electricity supply in Nigeria. The allegation that the Commission is siding with the operators is simply untrue.
In recent times, as part of its peace making moves, NERC urged stakeholders in the Nigerian Electricity Supply Industry (NESI), to adopt alternative dispute resolution for the resolution of differences in the electricity industry in line with the provisions of the market rules.
NERC has been putting the Electricity Distribution Companies, DISCOs, in proper check, such that electricity tariffs are not hiked beyond the capacity of consumers.
The implementation of upward review of the electricity tariff slated to take off on July 1, 2020, was addressed by NERC.As a regulatory agency, NERC is saddled with such responsibility, as to ensure customers interests are put at heart in the implementation of any upward review by DISCOs.
The rights of electricity customers have been jealously guarded by NERC. These rights are set out in the NERC’s Customer Service Standards of Performance for Distribution Companies, Customer Complaints Handling Services and Procedures, Connection and Disconnection Procedures for Electricity Services, and Meter Reading, Cash Collections & Credit Management for Electricity Supply.
It says Electricity customer rights include; Right to electricity supply in a safe and reliable manner; Right to a properly installed and functional meter; Right to be properly informed and educated on the electricity service; Right to transparent electricity billing.
Others include Right to be issued with electricity bills strictly based on NERC’s estimated billing methodology where the customer is unmetered and the Right to be notified in writing ahead of disconnection of electricity service by the DisCo serving the customer in line with NERC’s guidelines.

The Commission has addressed power sector challenges beyond Tarriff matters. The Commission as the sector regulator on power pursuant to the Electric Power Sector Reform EPSR Act 2005 has reiterated its commitment to providing fair regulation to all stakeholders, including electricity consumers and operators as contained in Section 32&36 of the EPSR ACT 2005.
Specifically, the Commission has provided a cost reflective tariff for the operators based on prudent costs and created an enabling environment, while at the same time protecting the interest of electricity customers to ensure they get value for money.
In fact, the Commission once said in its release, that it has never at any time stated that only an increase in electricity tariff would guarantee steady power supply in the Country. NERC has had some bottlenecks due to litigation processes instituted by some DisCos, however its position remain that in view of the economic recession in Nigeria and poor remittance level by electricity distribution companies (DISCO’s) increase in tariff is not imminent at this time, when economic recession is biting hard on the country.
“The Commission is working with the Ministry of Power, Works and Housing and other stakeholders to implement innovative ways to address the liquidity gap and other issues militating against improved electricity supply through both regulatory and policy interventions not excluding the appropriate intervention of the Federal Government as was executed in other jurisdictions that have implemented similar power reform programme”, the Commission said.
It is also a known fact that over 80% of the electricity generated in Nigeria is from gas fired power plants. The gas price is indexed to the US$ as the generators pay the gas suppliers in Dollars ($). The Commission has proposed to the government the option of pricing gas in local currency to mitigate the foreign exchange risk which is the major cause for the gap in tariff.

The Commission in recognition of the importance of protecting the interest of electricity customers has rapidly set up 19 Customer Complaints Forum Offices nationwide with over 10 more in the pipeline to be opened this year. The monitoring and enforcement actions have been intensified by the Commission to ensure that the electricity industry operators, especially the DISCO’s comply with the rulings of the NERC Forum Offices and other regulations. A lot of the defaulting DISCOs have been sanctioned by the Commission. Most of these defaulters have either fully paid the fines or applied for reconsideration. These regulatory oversights of the Commission have tremendously increased the rate of voluntary compliance by the electricity industry operators, especially on issues bordering on customer complaints.

As Nigerians are fully aware, the macroeconomic indices such as the rate of inflation and exchange rate have steadily gone up over the last one year. This increase has affected the prices of all other commodities in the country. The purchasing power of Naira has crashed to all time low within the last couple of months.
The rate of inflation has risen to 18.55% as at 1st February 2017 as against the 8.3% used in the tariff computation. Similarly, the available electricity generation has dropped from the projected 7,199MW in 2017 to under 4,000MW.
The Commission once said, “The drop in power generation is due to vandalism of key facilities as rightly pointed out by the Honourable Minister of Power and this has created volumetric risk in the Nigerian Electricity Supply Industry (NESI)”.
The Commission has assured Stakeholders that it is not oblivious of the economic hardship faced by Nigerians.
It wrote in a Press release, “We pay the same electricity tariff like every other Nigerian but we also have a duty of ensuring that the operators recover their prudently incurred cost thus the need for the tariff review at an appropriate time and manner with the aim of ensuring that the electricity market remains operational”.
The Commission has however reassured investors that problems in the power sector are transitory and there is a comprehensive and robust proposal developed by a joint committee piloted by the Hon. Minister of power with the participation of NERC and other stakeholders to effectively resolve these teething problems in the NESI.

Olamide Adeniji is a member of TheScript Editorial Board.