This article is by no means supporting the current inefficiencies in the system. However we must encourage the entire electricity value chain to run on commercial principles that are required for a more efficient sector in the next few years. We must not return to the old order.

Just when the electricity market in Nigeria was hoping to jump out its liquidity crunch, the Federal High Court in the country’s commercial capital has dealt a huge blow to the cash flow of the power sector.

In December 2014, the country’s electricity regulator, Nigerian Electricity Regulation Commission (NERC) announced its decision to increase electricity tariff in the country. This decision came after NERC had approved the Distribution Companies’ (Discos) proposals for higher tariff.  Tariff got higher due to increased costs and high incidence of aggregate technical, commercial, and collection losses (ATC&C losses) being experienced by Discos. The hike was to take effect in June/July 2015.

The tariff increase was to have a suspended effect for R2 Category of electricity consumers, i.e. for residential customers. For this category, the tariff hike was to become effective after 31January 2016.

This increase was opposed by many electricity users around the country. Some time ago I wrote on why I thought the tariff increase was good, bad, and ugly. See the article here.

Feeling aggrieved by the hike, a legal practitioner and (self-styled) electricity-rights activist, commenced a suit against the Nigerian Electricity Regulatory Commission (NERC) before the Federal High Court in Lagos seeking to reverse the proposed tariff increase. The main grounds upon which the reversal was being sought were that it is unjust and unlawful for NERC to increase electricity tariffs mainly on the grounds that there’s been no significant improvement in electricity supply in the country. Of course, NERC fiercely challenged the suit.

The legal practitioner sought and obtained a temporary order preventing the NERC from effecting the tariff increase. The Discos, however, did go ahead with the hike.

The Federal High Court in a landmark and bold decision granted the reliefs of the legal practitioner and ordered a reversal of the tariff increase. The basis for the court’s decision was what it termed ‘the failure of NERC to follow the provisions of the Electric Power Sector Reform Act’ (ESPRA). The court held thus:

“The upward increment in tariff was hasty and procedurally ultra vires… The 1st defendant (NERC) violated its powers as contained in EPSRA. The law is clear and unambiguous. The issue of increment in electricity tariff must comply with the provisions of section 76 of EPSRA. The 1st defendant has not shown that it acted in due obedience to prescribed procedures.

“There is no evidence that the 1st defendant complied with section 76, (6) [sic], (7) and (9) of the EPSRA. The 1st defendant did not give notice of the increase in official gazette and publish it in a newspaper with wide circulation or give room for the public to make presentations and objections before the increase will be effected.

“Under the law, tariff increment is subjected [sic] to a number of factors. Under the Act, customers are to pay for only what they consumed. Of all the requirements, the only one that appeared to have been complied by [sic] the 1st defendant is that it announced in the newspapers that it was going to increase the tariff.

“The recent increase in tariff is procedurally ultra vires. It is irregular. It is irrational and it is illegal.”[i]

My View on the Decision

I am an electricity consumer like many Nigerians. But from a sectoral perspective, I do not agree with the judgment of the Federal High Court. I think that a holistic view of the facts and the law do not support the judgment. The judgment has the potential of returning the Nigerian Electricity Supply Industry (‘NESI’) to its Egyptian days of Power Holding Company of Nigeria (PHCN) and National Electric Power Authority (NEPA) – epitomized by a lack of commercial structure to support the sector. My reasons are as follows:

  1. Tariff Regulation in a Privatized Market – Tariff regulation in a privatized electricity market depends on the market structure and the market stage. Nigeria’s electricity market is structured as a private-sector driven market with the government as a partial player and regulator. Private entities are fully responsible for power generation and distribution. While, in between, the government plays key roles in bulk power trading and transmission. The government also acts as a regulator for the sector. As a sector that is private-sector driven, it is important that electricity tariffs are regulated by independent processes and regulations. Applicable tariffs must be made in accordance with local law.

In 2015, the Federal Ministry of Power and NERC declared that the NESI had now fulfilled the conditions precedent for it to go into the Transition Electricity Market (TEM) phase. The key feature of the TEM is the activation of the grid code, metering code and the market rules as against the interim rules and an agreement-driven market. In this stage, it is expected that market participants (most especially the discos and gencos) will keep up their obligations as required by various agreements and the industry codes. Importantly the discos, serve as important source of liquidity for the NESI under TEM. As such it is important to secure this source of liquidity through effective and cost-reflective electricity tariffs paid by consumers. Hence, the NERC issued the revised MYTO 2.1 to take effect after June 30, 2015. From this perspective alone, I do not agree with the decision of the Federal High Court. The courts exist to protect the people as well as the state.

 

  1. Procedure for Tariff Adjust – the Electric Power Sector Reform Act of 2005 provided a broad guideline for tariff adjust in Nigeria. Section 76 of the ESPRA sets the tone for a regulated tariff structured for all activities along the electricity value chain upon which a tariff may be issued under the ESPRA. Section 32(1)(d) provides one of such broad guidelines. The section provides that, as a key object of NERC, it is to “ensure that the prices charged by licensees are fair to consumers and are sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation.

Section 76(2)(a) provides that:

“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 for regulating electricity price 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.[1]

Both sections 32(1)(d) and 76(2)(a) provide similar considerations for fixing electricity prices. Section 76(2)(b)&(c) introduces another consideration which was not earlier captured in the two previous sections – provision of incentive for improvement of services. Thus the following must be considered during tariff fixing/adjustment:

  1. Fairness to consumers;
  2. Cost recovery (cost-reflective) by the licensees;
  3. Reasonable return on investment by the licensees;
  4. Provision of incentive for further investments.

The other stipulations in Section 76(2)(d),(e)&(f) are, in my view, subsumed understand the first consideration – that is fair to electricity consumers. Of these four considerations, one is for the benefit of the consumer while the others are in favour of the licensees.

It is important to remember that before the privatization of the electricity utilities in Nigeria, the Power Holding Company of Nigeria and its predecessor, the Nigerian Electric Power Authority were fully vertically integrated. They were government owned, so essentially they didn’t run as commercial entities but as inefficient behemoths, which came to be perceived as ‘welfarist’ public entities. Thus, it is not far-fetched to state that one of the mischiefs the ESPRA came to cure was to provide a framework for these behemoth electricity utilities to transition from state-owned inefficient corporations to commercially viable entities whose costs can be fully borne by their stream. This is by no means intended to downplay the important of consumer protection in a free market. However, my view is titled towards the bias that there must first be a ‘market’ before the expectation of consumer protection arises.

As part of societal limitations, consumers will, in every likelihood, see any price increase as unfair, regardless of whether such increment is inevitable. A similar example to this is the fact that any increase in fuel pump price in Nigeria is always seen as unfair and requires the stiffest possible resistance. Same as with an increase in electricity price. Such that while regulators and operations would see justifiable reasons for price hikes, consumers perceive such with the greatest disdain.

Generally, fair regulation is one that allows only efficient and prudent costs to be passed through to the customers. In my opinion what is fair to consumers will depend on the facts and circumstances. Taking into cognizance these facts and circumstances, the tariff methodologies adopted by NERC have been based on certain criteria/assumptions in the sector and the economy at large. Some of such considerations include the rate of inflation, the exchange rate, the price of fuel (either at the regulated prices or at the international open market, depending the fuel source), and losses as a result of energy transfer.  Where any or all of these variables are on the rise, it will be natural for electricity prices to rise. It will not be ‘unfair’ to consumers to fix a higher tariff, or in the case of NERC, it will not be unfair to provide a pathway to increased tariffs.

Section 76(6)(7)(8)&(9) provide for the procedure in increasing or adjusting electricity tariffs. NERC is expected to give notice to the general public, through the Official Gazette and a national newspaper of its intention to approve a new tariff methodology (that may result in tariff increase or decrease). Following the publication, the NERC is to consider representations from consumers, groups, and operations on the proposed methodology. It will then use the information, advice, or evidence provided by experts in preparing the methodology. After considering the representations from the public, it fixes a date upon which the tariff may go into effect. If the tariff methodology needs to be changed, the NERC is still required to through the same process.

Considering the above and in the light of publicly available information[ii] with respect to steps taken before the tariff, I am of the view that NERC did not violate the procedure under Sections 32 and 76 of the ESPRA. It did not act ultra vires. In 2015 for example, the NERC released the Guidelines for Public Consultations by Distribution Companies (‘Guidelines’), which sets out the procedures which the Discos must follow to have their tariffs approved.[iii] The procedures are in line with the provisions of section 76 of ESPRA. The Discos were required by the Guidelines to consult with all class of customers – “residential, industrial and commercial customers, associations of customers, civil society groups that advocate for consumer interests. Professional groups like Manufactures Association of Nigeria, Nigerian Bar Association (NBA), etc.,” are all required to be consulted in the tariff review process. In line with the Guidelines, “all Discos are expected to publish on their respective websites and at least two (2) national newspapers their intention to carry out a review of their tariff. The notice should also be aired on at least 2 radio stations that are popular in their franchise area for a minimum of 2 times for 5 days.”

Conclusion

From the wordings of section 76(2) of the ESPRA, it should be noticed that NERC does not fix the final retail tariffs for electricity supplied in Nigeria. It rather establishes the methodology with which participants arrive at and fix or review tariffs for their services. As the industry’s regulator it approves the tariffs ‘fixed’ by the participants. NERC’s core duty is tariff regulation, not tariff fixing.[iv]

The tariff increase approved by NERC, though its implementation was arguably improperly timed, was necessarily for the survival of the NESI for the benefit of all.

The following may sound unconventional today, in the light of the decision of the Federal High Court, however it is a bitter truth. The sector (especially the Discos) will find it difficult to abide or go by the judgment of the Court. The current economic realities do bear this assertion out. Otherwise, we may have to forget about privatisation of the power sector, have the government refund back what was paid for the Discos and Gencos, drastically alter the transactional basis for the privatisation, repeal the ESPRA and go back to the days of PHCN (perhaps NEPA). If the government does not refund the monies paid for the assets then it risks crippling the local banks who financed the acquisition of these assets and a sovereign credit downgrade.  The PHCN would then need a bail out from government to re-gig its operations or the government leaves the assets with the discos and then subsidy electricity tariffs (in essence pay electricity bills for you and I). By far, this is a tougher price to pay for tax payers than the current tariff increase.

This article is by no means supporting the current inefficiencies in the system. However we must encourage the entire electricity value chain to run on commercial principles that are required for a more efficient sector in the next few years. We must not return to the old order.

By

David Yibakuo Amakiri

[1] The use of the word “business” here seems to be deliberate.

[i] See the following: (1) http://www.premiumtimesng.com/news/top-news/206864-court-cancelled-buhari-govts-45-electricity-tariff-hike.html (2) http://www.vanguardngr.com/2016/07/breaking-nerc-insists-electricity-tariff-hike-appeals-court-ruling/

[ii] Please see http://www.nercng.org/index.php/media-and-publicity/public-notices/283-guideline-on-public-consultation-by-electricity-distribution-companies

On the Discos efforts see the following (1) http://ibedc.ourdemoserver.com/services/news-media/press-releases/tariff-review/  (2) http://bedcpower.com/wp-content/uploads/2015/08/CONSULTATION_PAPER_FOR_TARIFF_REVIEW_August_0415.pdf (3) Page 7, The Nation of 19 July 2015.

[iii] Please see http://www.nercng.org/index.php/media-and-publicity/public-notices/283-guideline-on-public-consultation-by-electricity-distribution-companies

[iv] For a contrary argument see Wale Irokosu, ‘Nigeria: NERC – Issues With the Joint Tariff Design Policy’ available at http://allafrica.com/stories/201602101160.html

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