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Why NERC reviewed electricity tariffs — Amadi

By BusinessNews Staff on June 2, 2014

In this interview with OKECHUKWU NNODIM, the Chairman/Chief Executive Officer, Nigerian Electricity Regulatory Commission, Dr. Sam Amadi, speaks on the recent controversial review of electricity tariffs

Why did you have to review electricity tariffs again?

It is already in the Multi Year Tariff Order that in every six months there will be a minor review. The minor review deals with changes that would have happened in the preceding six months with respect to inflation rate, foreign exchange rate, cost of gas, and generation capacity. So what we do is that on March 31, we draw the line based on data available at that time from official custodies like the Central Bank of Nigeria and the National Bureau of Statistics.

The MYTO model prescribes that if there is a plus or minus five per cent increase or decrease in the aggregate of these data; then it triggers a review. But if the change is less than plus or minus five per cent, then it does not trigger a review. So in the review that we just finished, the rate was more or less than five per cent aggregate. We have done a petition to the CEOs and we have also approved the change in the review of the prevailing price. So that is how the model is. It made for biannual minor reviews.

The tariff is a five-year rate already set by June 1, in which a new tariff sets in and it is what we call automatic adjustment. June 1 is also another time for a minor review. In this particular June 1, the minor review showed significant difference, so the price that was published in 2012 will now be amended to reflect that change. In 2013, the minor review didn’t show any significant difference. Therefore the price published in June 2012 became the price for 2013 automatically. This means that there are two things that can happen every year; the minor review may make no impact when it is not significant or it can be significant and arrest the automatic adjustment. Now what has happened is that the automatic adjustment has been arrested for 2014 and a new price that the minor review has triggered will now replace the published increase for 2014.

Your reviews always lead to increase and never a decrease in tariffs; why is this so?

Reviews can be upward or downward depending on how those indicators move. But this new review actually recorded a downward movement. Downward from not necessarily what you have but from what was published to take effect. For example, many of the customers should be paying from June 1, a fixed charge of about N1,500. Now the adjustment has resulted in a decrease, in such that the fixed charge will not change. If this review was not done, the fixed charge should have been about N1, 500 in some places.

But now, the reduction is that instead of having an increment in fixed charge; the consumers now have a decrease from N1,500 that would have been published from June 1 to N750 for most places. The fact is that based on consumers concern, NERC has done the minor review in a manner that the consumers will pay less than they would have paid if there was no review.

So what you are going to see is that most of the consumers will not have any increase in their energy charge, apart from R2 customers that may have something like N1 in some cases. So instead of having the much bigger increase in the energy charge that was published for the MYTO for 2014, you will now have the same fixed charge, which means reduction from N1,500 to N750, and a slight increase of about N1 or so for R2 customers.

Will any area in the country witness a drop in energy charge?

In Ikeja actually, R2 customers’ energy charge reduced. The reason is that in Ikeja, they are much more in a cluster so the cost will be cheaper. And when you do the average with the energy they receive, their retail price came down. The process is not arbitrary; we benchmark index to the real cost, each distribution company will need to incur to distribute the energy that they have to sell.

If the indicators change then there will be an adjustment. But the principle here is that there will be no over-recovery and no under-recovery. Otherwise, if we were a regulator that the operators have hijacked, we would have allowed them to take those profits and you won’t know. But because we make sure that they don’t over-recover their investments, we also make sure that they don’t under-recover.

It is a system of rule-based approach to build the confidence of investors as well as the confidence of the consumers. Therefore, any savings from the system goes back to the consumer. If inflation drops and gives us savings, the customer benefits; if the Nigerian currency is doing well vis-à-vis the dollar, the consumer benefits also.

We won’t allow the operator to take any of those efficiency gains to themselves. We have to make sure that the gains are returned to the consumer, except those gains that arise when they (power firms) manage their processes better. For example, if they use less labour to get more value; they are entitled to take the efficiency gain.

Are you insisting that despite the rise in energy charge in some places, consumers will still pay less for power?

Sure! The fact is that based on consumers’ concern, NERC has done the minor review in a manner that the consumers will pay less than they would have paid if there was no review. So the consumers are paying less of the fixed charge and are even paying less of the energy charge, because they would have paid more, but now they are going to pay less than they would have paid without the review. So the review has actually reduced what the consumer would have paid. And it shows that if the macro-economic fundamentals are good as they are, it will get better. And if we have more power coming to the grid, and we are able to reduce the loses through regulation; we can see that instead of price spiraling up, we will get a reduction in tariff over time because we will get the savings that will go back to consumers. So the tariff is not set to benefit the operators necessarily, but set to reflect the actual reality of the market in a way that will enable the operator to deliver on their commitments.

Did you adopt any mechanism before now to make consumers know that this review actually reflects an overall decrease in electricity tariffs?

If the consumers look at the published order, they would have seen automatically what they will pay and that payment would have happened. And if we didn’t do the review, the people would have been paying N1,500 monthly as fixed charge.

Of course, we do know that consumers are not happy with even paying any fixed charge at all. That means there will be probably much more crisis for the sector. But happily for us, we have done it in a manner that helps the consumers and of course the operators. Because if we don’t follow the rules and the operators feel that they are being shortchanged; there will be problem for they are actually in this to make money too.

So the critical thing is that NERC has since 2012 continued to apply the rules about tariff increase. The major thing that the World Bank and other financiers are concerned about is your ability to follow the rules.

What gives them confidence is that the rules are set in a way that when you say it is time for the review of tariff, they know the process you will follow and they know that the data is in public domain. And these data are got from established proper custodies, CBN, NBS and the system operator who is in charge of electricity generation. Therefore, once they know that these figures are not concocted and has no contest, then there is stability.

This is important for consumers too. Ultimately, what the consumers are looking for is availability of power and therefore it serves their interest to have stability that allows for more investments.

Today the World Bank, African Development Bank and others are ready to invest to improve the capitals of some distribution companies. Much of the problem we have with power quality is the weakness with distribution network, apart from the fact that we are having problem with gas supply.

[Punch]

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