Power Sector Privatisation: NERC, Discos And Fixed Charge

(By Onoakpoma Ohimor)

Increase in electricity tariff on privatisation of the sector is expected, however, the level of increase being pushed by NERC is becoming a source of worry. Industry watchers and consumers alike expected increase in tariff should be preceded or at least matched by improved electricity supply and performance by the industry as a whole. Based on publicly available information the current tariff of N12 per unit payable by most residential consumers is comparable to what obtains in other countries. 

AS the privatisation of the power sector reaches a crescendo and point of irreversibility, the present administration deserves credit for seeing the process through thus far and saving the nation from monumental embarrassment foisted by the monopoly formerly known as National Electric Power Authority (NEPA). The inefficiency and mismanagement that NEPA represented were legendary; from power generation to distribution; from staff matters to customer services and from billings to collections there was no particular cause for cheers with the behemoth. The disappointment and pain with NEPA are made more poignant when juxtaposed with the scenario in other African countries where the electric power sector is vested in a vertically integrated monopoly like NEPA but with enviable performance; of note is Eskom of South Africa.

  As the nation and indeed consumers eagerly look forward to the replication of the telecoms sector’s transformation in the power sector, it will be apt to underscore the vital role of the industry regulator. One of the major reasons why the telecoms sector has largely satisfied the needs and yearnings of the populace is not unconnected with the presence of an active regulator – Nigerian Communications Commission (NCC). While there is room for regulatory improvement, the telecoms sector has to a great extent delivered on its promise; with telecoms operators in unrelenting competition for consumers’ attention; call rates in continuous downward push and the customer being rightly celebrated as king.

   While the power sector may diverge from the telecoms sector in respect of structure such that direct competition for customers’ patronage may not be possible presently, it will eventually be. As the industry evolves and develops; electricity consumers will have the option of choice among several electricity suppliers – a scenario that exist in developed economies.

   In the interim, however, the role of the regulator in ensuring that the end users who collectively bear the entire costs and returns for the entire value chain are not short-changed cannot be overemphasised. To achieve this, the regulator will have to be active and effective in the areas of enforcing standards and regulating tariffs.

   Of recent concern to observers of the power sector is the systematic increase in electricity tariffs. Within the last two years, tariffs for most residential consumers have moved upwards from about N6 to over N12 per unit of electricity (1KWh). Worst still is the fact that further annual increases to over N14 per unit are expected by 2016 according to the Multi-Year Tariff Order (MYTO) II. The MYTO is an official document detailing electricity tariffs approved by the Nigerian Electricity Regulatory Commission (NERC) for all categories of consumers. The current order covers a five-year period from 2012 to 2016.

   In addition to the tariff hike is the introduction of fixed charge initially at N75 per month as at 2011 then to N500 in 2012 and at present N750 in 2013. Under the current MYTO, the fixed monthly charge would eventually increase to over N1, 500 monthly by 2016 for a majority of residential consumers.

   Increase in electricity tariff on privatisation of the sector is expected, however, the level of increase being pushed by NERC is becoming a source of worry. Industry watchers and consumers alike expected increase in tariff should be preceded or at least matched by improved electricity supply and performance by the industry as a whole. Based on publicly available information the current tariff of N12 per unit payable by most residential consumers is comparable to what obtains in other countries.

   There is no social justification for electricity consumers who have suffered untold losses under the now defunct NEPA and its successor – Power Holding Company of Nigeria (PHCN)— to commence the payment of the hiked rate when the new investors are yet to make any investment in the upgrade of facilities and improvement of supply. It can only be opined that the regulator is providing a fertile ground for a short payback period for the investors to recoup their investments.

   Unlike the telecom sector where licensees after paying their licence fees made initial investments in infrastructure before passing the cost to consumers, the approved tariff hike has more than guaranteed returns to the new investors even before parting with a dime. NERC’s high command has often posited that the prevailing tariff is meant to attract investments and ultimately ensure stable supply of electricity.

   Of greater concern is the introduction and successive hikes in the fixed charge for consumers. This can only breed inefficiency in the sector and consequently make the anticipated gains of privatisation elusive. With a fixed charge at present N750 per month and expected to rise to over N1500 in 2016 for residential consumers, an average distribution company will earn hundreds of millions of Naira monthly even without supplying a unit of electricity. A cursory look at the MYTO document by NERC did not provide any justifiable basis for the introduction and astronomical increase of the fixed charge in the five year period (2012 -2016) it covers. Furthermore, the projected hike in fixed charge to over N1,500 per month for the majority of residential consumers will most certainly mean the fixed charge element will be higher than the consumption element for the average consumer. This is at variance with what obtains in other climes.

    The posers for NERC as per the fixed charge are – Is fixed charge going to be a permanent feature of electricity tariffs in Nigeria? What is the justification for the scenario in which fixed charge element equals or is greater than the consumption element? The only deduction that can be made is that consumers are being made to pay for the projected capital expenditures even before they are made.

  It should be apparent to all, that the best way to improve supply and ensure utmost efficiency is by tying distribution companies’ revenues to supply of electricity and indeed satisfaction of the consumer. Distribution companies should not earn revenue if electricity is not supplied. It would be better to introduce and enforce a higher per unit tariff based on consumption than to have a high fixed charge.

   Tying of distribution companies’ revenue to actual supply of electricity will engender efficiency in two ways. First is efficiency on the part of distribution companies as they will ensure as much as possible electricity from the generating companies is delivered to consumers, by cutting avoidable technical and commercial losses. Also it will encourage efficient consumption on the part of consumers. A relatively high fixed charge as provided in current MYTO will do the exact opposite.

   The exorbitantly high fixed charge presently in place is an aberration and a harbinger of inefficiency and undue burden on consumers. If NERC is alive to its responsibility and wishes to see the privatisation programme deliver on its promise, fixed charge should be discouraged and discontinued forthwith in the interest of all.

• Ohimor is a finance and SME consultant. oohimor@gmail.com

“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”

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