Much Ado about Electricity Tariff Increase

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The Nigerian Electricity Regulatory Commission recently announced an increase in electricity tariffs. While instituting an effective cost-reflective tariff is very critical to the improvement of the electricity sector, it must go hand in hand with commensurate improvement in quality of electricity supply. Over the years, and even more so now, the country’s electricity industry has grown into a massive uncompetitive sellers’ market, characterised by price takers, asymmetric information and heavy barriers to entry and exit. Increasing tariffs, while quality of service remains low, means that NERC is loudly rewarding the distribution companies for their inefficiencies. Nosa James-Igbinadolor reports

The Nigerian Electricity Regulatory Commission (NERC) has said the electricity tariffs being paid by consumers will increase in April this year. NERC disclosed this in its December 2019 Minor Review of Multi-Year Tariff Order 2015 and Minimum Remittance Order for the Year 2020. It said the order was issued to reflect the impact of changes in the minor review variables in the determination of cost-reflective tariffs and relevant tariff and market shortfalls for 2019 and 2020. The commission said the order also determined the minimum remittances payable by the distribution companies (Discos) in meeting their market obligations based on the allowed tariffs.

Nigerian power distribution companies immediately signaled their intention to enforce the new electricity tariffs from April 1, 2020. The Discos explained that the new tariffs ordered by the Nigerian Electricity Regulatory Commission would cater for revenue shortfalls in the sector. In a tariff review clarification notice from the Association of Nigerian Electricity Distributors (ANED), the Discos said the tariffs shall remain as they had been since 2015, but would change from April 2020. “The tariffs shall remain the same as they presently are (i.e. 2015 levels) until April 1, 2020 when there will be a slight increment to cater for tariff shortfalls, which shall be gradually passed on to the consumer until this is fully completed by the end of 2021. In view of the foregoing, we state emphatically that there shall be no change or increase in the existing electricity tariff until April 1, 2020 when the new adjusted tariffs shall begin to gradually reflect the dynamism of our macro-economy.”

The Discos explained that the NERC was empowered by the Electric Power Sector Reform Act to carry out minor reviews of the Multi-Year Tariff Order 2015 twice a year. “NERC has just reviewed the MYTO 2015 and has published an order on tariffs and minimum remittance for January to June 2020. The tariffs anticipate changes in the currency exchange rates between the United States and Nigeria, changes in the rate of inflation and gas prices,” ANED stated.

Thus, tariffs will join the VAT rate and other tax rates as commodities that have seen sizeable increases over the last one month.

The World Bank in its Programme-for-results information document for the Power Sector Recovery Based Loan to the Federal Government had noted that, “The inconsistent application of the tariff policy (the Multi-Year Tariff Order or MYTO) resulted in the deterioration of the financial situation of sector companies, especially Discos. In particular, lack of tariff adjustment to account for depreciation of the Naira in 2016 severely impacted the power sector, as approximately 65 percent of the sector costs are denominated in hard currency. Declining revenues further constrained access to commercial financing by Discos, whose balance sheets were already weak.

Without access to financing, Discos have not progressed with investments in metering and rehabilitation of distribution networks, resulting in poor service delivery. Declining revenues have also constrained FGN’s ability to enforce key contracts (including Discos’ Vesting Contracts) with resulting non-payment across the supply chain, including to gas suppliers of the thermal power plants. Payment arrears to the gas suppliers and the occasional sabotage of petroleum infrastructure have led to erratic gas supply, further impacting service delivery. Poor service delivery, in turn, has made tariff adjustments difficult.”

Despite the obvious economic case for electricity tariff increase, the reality is that the lack of progress in the sector that necessitated the proposed increase has nothing to do with the end users, but rather with the government and the Discos themselves. As the World Bank further noted in its PID report, “The operational and financial situation of the sector is further aggravated by weak governance and inadequate enforcement of contracts. The sector’s lack of financial viability hinders the full activation and enforcement of sector contracts and regulations, i.e. the financial consequences of sector companies being unwilling or unable to meet their contractual obligations are not enforced. The power market thus functions on a “best effort” basis with a resulting lack of accountability and poor service delivery.”

It is no wonder that the proposed hike has been met with serious opposition across the board, and rightly so. The ineffectiveness of NERC means that consumers of electricity will persistently have to pay more for ending poor quality of service provided by the Discos. In addition, the inefficient privatisation process that saw the transfer of the unbundled electricity assets to technically and financially incompetent investors meant that even with expected tariff increase, the provision of substantial and sustainable electricity and electricity infrastructure would unlikely be achieved any time in the near or far future, thus perpetuating the sordid state of service provision in the sector.

Access to energy is and has always been low in Nigeria. With approximately 80 million people lacking access to grid electricity, Nigeria has the largest access deficit in sub-Saharan Africa and the second largest in the world, after India. The transition from a publicly-owned to largely privately-owned power sector has not brought the expected outcomes and the sector is under severe stress. High losses, low collections and lack of cost recovery tariffs have resulted in an annual financial deficit to the sector of approximately US$1 billion. For the years 2015 and 2016 combined, the tariff shortfall alone amounted to US$1.4 billion. Sector Aggregate Technical Commercial and Collection (ATC&C) losses are extremely high, averaging 54 per cent in 2017, versus 27 per cent projected in the tariff regulation/order. The poor financial viability of the eleven Discos has resulted in their low remittances to NBET (estimated to be 26 per cent for the first nine months of 2018) with a resulting lack of timely and full payments to GENCOs that, in turn, accumulate arrears to gas suppliers.

While instituting an effective cost-reflective tariff is very critical to the improvement of the electricity sector, it must go hand in hand with commensurate improvement in quality of electricity supply. A situation where metering coverage is extremely low and where power supply duration per day is on average just two hours if at all, makes little or no economic sense and disincentivises customers to pay their bills. Over the years, and even more so now, the electricity industry in Nigeria has grown into a massive uncompetitive sellers’ market, characterised by price takers, asymmetric information and heavy barriers to entry and exit. Increasing tariffs while quality of service remains low means that NERC is loudly rewarding the Discos for their inefficiencies. There cannot and must not be a positive correlation between poor service delivery and increased pricing that benefits the price taker.

It is in this sense that many Nigerians believe that the Discos are in league with the NERC to rip off consumers. There is a need for the Federal Competition and Consumer Protection Commission (FCCPC) to look into the electricity sector and fulfil its statutory responsibility of modifying the behaviour of service providers, in this case, the Discos. It has become obvious that NERC does not have the capacity to do this, as it has shown itself to be a biased player in the industry. NERC must at all times take into consideration the balance between the impact on consumers and the Discos sustainability when making revenue decisions.

The economic situation in the country is itself a key encumbrance to the effectiveness of the proposed price increase. Minority Leader of the House of Representatives, Hon. Ndudi Elumelu, in his response to the proposed move by NERC to increase electricity tariff opined that “Nigerians are currently passing through grave economic stress and anything that would aggravate the situation such as an increase in electricity tariff is completely unacceptable.

Electricity, he noted, “is pivotal to the economic and social lives of Nigerians and NERC should rather seek ways of making power affordable and available to Nigerians, in line with its establishment laws, instead of an increase in tariff.”

No doubt, the substantial tariff increases that have been awarded by NERC to the Discos, will have a major impact on industries’ cost structure, jeopardising the viability of marginal and loss-making firms and, inevitably, accelerating job losses at energy-intensive companies in particular. The tariff increases could also lead to the closure of small businesses in the country already struggling with the many varied barriers to profitability. Due to the subsequent drop in economic demand, retailers won’t be able to pass on the increase to consumers. Expectedly, another effect is that businesses will need to make adjustments to their employment strategies. This might mean job losses, as well as an increase in the price of goods and services. In addition, the proposed upward review of electricity tariffs could further put upward pressure on prices in the near term and push the inflation rate up by as much as 0.9 per cent. The inflation rate increased to 11.61 per cent in October 2019 from 11.24 per cent of the previous month, reaching the highest since May of 2018.