Published On: Fri, Nov 1st, 2019

NERC’s new tariff regime and its spillover effects

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GUEST Column by Engr. Y. I.Tambari

The economic strength of any nation is largely measured by the amount of its stable electricity generation, distribution, and yes, consumption and ultimately production. A few weeks ago, the Nigerian Electricity Regulatory Commission, N.E.R.C., apparently without recourse to the Distribution Companies who are to bear the brunt of any increases in tariff, announced electricity tariff increase across the country. In the same notice, NERC announced its intention to withdraw operating licenses of 8 Discos that it claimed didn’t comply with an Article in the Act that established them.
The Article in question says that the Discos shall maintain an adequate and unencumbered letter of credit covering three months based on the minimum payment obligation to NBET and the MO. The Discos are also expected to comply with the minimum remittance thresholds specified in the order whose commencement date is July 1st 2019.
According to NERC, the objective of the order was to place the Discos on a path of meeting their contractual performance obligations to the power market with the recognition of tariff shortfalls arising from revenue under-recovery and the exclusion of 2017 and 2018 as years of mutual non-performance in the performance agreement.
But while the NERC is correct in its assertions, as one writer pointed out sometime ago, “there is no gain saying the fact that uninterrupted supply of electricity is as essential as life itself. Today, life without electricity is almost unimaginable because electricity is the driving force of all economic and social development. No country has managed to develop much beyond subsistence economy, without ensuring at least a minimum access to electricity services for a broad section of its population”. And this is something that industrialized nations of today, adhered to so strictly in their formative years.
Most certainly the NERC would find its order difficult to implement in full by any Disco, if not impossible. At the moment all the Discos in the country are facing difficulties because the power market itself if distressed and certainly license withdrawals would only hasten the entire power sector to its grave. And by the way, in the interregnum, who would operate the Discos whose licenses are withdrawn before new ones are appointed, and who would refund the defunct Discos their investments?
For the sake of space, and avoiding technical terms and terminologies, I shall in this article, concern and limit myself more to the effects of this new order, and invariably, the tariff increase on electricity consumers in the Northern states, and the DISCOS based in the Northern part of the country, and to a large extent, the Kaduna Distribution Company where I am currently based.
To refresh the memory of the reader, the defunct National Electric Power Authority, NEPA, was unbundled via the promulgation of the Electric Power Sector Reform Act of 2005, and in its place, power generating and transmission as well as distribution companies were established. The distribution companies formed the privatization of the power sector, and are to be regulated by the Nigeria Electricity Regulatory Commission N.E.R.C. The Commission is charged with, among others, the regulation of electricity tariffs across the country.
Though I am not the spokesperson of any of the DISCOS, (I firmly believe they have quite competent hands for their defense), being a stakeholder in the energy market as an industrialist, I feel the overriding need to contribute my quota in simple terms for the larger public to understand what is at stake as regards that recent increase in electricity tariff across the country, and the subtle threat of cancellation of licenses issued to some DISCOS that allegedly didn’t meet up with the very stringent conditions contained in the NERC Act. It is my considered opinion as a regular contributor to international energy magazines, that nothing can be more insensitive than this action by NERC coming at a time that governments in the Federation are striving to enhance the development of small and medium scale industries. The immediate effect of this hike if allowed to stand, would be the tendency of reversing the Federal Government’s effort of diversifying our economy.
As at today, most, if not all, the states covered by the Kaduna DISCO are facing one security challenge or the other viz kidnapping and banditry in Zamfara and parts of Sokoto, Kebbi, and Kaduna States. This is further compounded by the occasional religious and tribal unrests in the southern parts of Kaduna state.
The unseen, and therefore unquantified effects of these should have, on its own drawn public and government sympathy to the Kaduna DISCO, because of the huge dent in revenue shortfall it registers daily through these unhealthy developments. Here I wish to point out that electricity is supplied to military, police and other security agencies as well as some key state and federal government offices in all these states, but because of the involvement of all the security agencies in fighting these internal conflicts, payment for power supplied is never made by the security agencies, and at a time like this, it would be insensitive for the Kaduna Disco to disconnect these agencies power supply for reasons of nonpayment of bills. This alone, costs the Kaduna DISCO nothing less than one billion Naira monthly across all states of its operation, and I believe the same goes for other DISCOS in the North. (Indeed, not long ago, a similar situation as this, forced the Yola Disco to call a Force Majoure due to insecurity in its area of operation).
Another area of loss of revenue to the Northern DISCOS is that of supply of power to urban and rural areas across states on joining the National Power Grid (where hitherto Rural Electricity Boards were operating). Because to these villages and even local government headquarters, the new digital electricity meters are alien, virtually all the DISCOS suffer huge losses monthly for power supplied without corresponding payment.
In the North, even today, our housing system in the rural areas and some parts of our urban centers are largely the ancient mud buildings in mostly unplanned communities. By the nature of its services, the government wants electricity power to reach every home in Nigeria, so the DISCOS strive to reach all the houses in these communities, their remoteness and roadlessness notwithstanding. By so doing, DISCOS expose themselves to huge power theft and vandalization of installed power supply infrastructure.
In this regard, therefore, before any tariff increase, one would have thought that NERC would, by now have come up with means of checkmating these incidences that have, on many occasions led to losses of lives and properties. In other nations and climes, power theft and vandalizations of electrical infrastructure is frowned at, and viewed on a scale next only to treason, and is treated ferociously and with more seriousness than oil bunkering and oil pipeline vandalism. But here in Nigeria, the supervisory commission and indeed the governments at federal and state levels, being the dominant players in the electricity market, never give due consideration to this irksome and dangerous development.
To make matters worse, and in support of the argument that the tariff increase should not be allowed to stand is the fact that there is disparity in the electricity tariff payable in the Northern states and the tariffs payable in the Southern states, with that of the north remarkably higher. One cannot understand the economic, political or social wisdom of this discriminatory tariff against the northern states, especially when all economic indicators and human development indices prove that poverty level is higher in the north than the south.
I would, at this juncture, like to advise the Minister of Power, under whose purview is the NERC, to consider the following suggestions, among others, as a matter of urgency:
(a) Forward a specific bill to the National Assembly criminalizing any acts of vandalization of power supply infrastructure and energy theft with zero tolerance against perpetrators. Similar action has succeeded in the oil and gas sector when security agencies (and especially the Civil Defense Corps) were charged with the special responsibility of monitoring and apprehending perpetrators and charging them to court without recourse to the oil companies;
(b) Immediate establishment of Electricity Tariff Equalization Fund to ensure uniform electricity tariff across the country as is the case with petrol and petroleum products. This would ensure equity and fairness in the sector and make electricity accessible to all and sundry;
(c) The Federal government should direct all state governments to subsidize electricity costs of the rural communities as a means of reducing rural-urban migration and at the same time assisting Discos in recovering payments for electric power supplied and consumed by the rural populace; and
(d) The Federal Government should embark on investment in cheaper energy sources such as solar, nuclear and or hydro as against our current over dependence on fossil fuels with the resultant effect of making the cost of electricity power among the highest in the world.
At this juncture, I would want to thank President Buhari for signing an agreement with his Russian counterpart at the recently held Russia-Africa Economic Summit for the establishment of a nuclear power plant in the country. As is the case the world over, when established, this would drastically bring down the cost of electricity across the country.
In view of the foregoing, I would like to observe that the New Market Rule will most certainly hurt all Discos (North and South in spite of tariff disparity which favours the Southern Discos). The new market rule which expects Distribution Companies to pay their Market Operator (MO) bill in full will definitely hamper their abilities to function effectively.
Considering the poor electricity bills payment culture of Nigerians, many Distribution Companies presently always struggle to pay even half of their MO and NBET invoices. Added to this, is the pressure to also pay taxes, insurance costs, salaries and wages, and other overheads which force them to devise paying the invoices and other statutory obligations in part.
Compelling the Discos to pay Market Operator bills in full will certainly make it near impossible for them to meet up with their other obligations, prompt payment of salaries and wages inclusive, and is, therefore, not in the best interest of the industry as this can give rise to industrial dispute with labour unions as was the case recently with the Kaduna Disco. In my view, in order to ensure continued viability of the power sector, NERC must, as a matter of urgency, reconsider its stance and allow for flexibility in market invoices settlement since most Discos presently achieve only 30% to 40% collection efficiency.
It is in these regards, therefore, I call on the Hon. Minister of Power and NERC to urgently reconsider and approve a reversal of this recent enforcement of an Article in the Act establishing it, and at the same time drop all threats of license withdrawal from the 8 Discos. THIS IS NOT ONLY NECESSARY BUT VITAL IF THE MOMENTUM SO FAR GATHERED IN OUR NATION’S DRIVE TO INDUSTRIALISATION IS NOT TO BE JEOPADISED.

Engr Yusuf Tambari wrote from Wuse 2, Abuja.

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