‘New electricity tariff regime will promote investment profile in power industry’
Dr. Anthony Ikenna Babatunde Akah is the Acting Chief Executive Officer of the Nigerian Electricity Regulatory Commission (NERC). Prior to his appointment, he was the General Manager (Director), Consumer Affairs at the commission. Akah, who is an alumnus of the National Institute for Policy and Strategic Studies Kuru, is also a chartered accountant/Certified National Accountant of Nigeria, Certified International Regulation Specialist and Public-Private Partnership Specialist from the joint programme of the Loughborough University, UK. He has also attended courses at Water, Engineering and Development Centre (WEDC), and the Institute For Public-Private Partnership (IP3), Virginia, USA; Harvard University (JFK School of Government); and USA’s Strategic Management of Regulatory and Enforcement Agencies Course, 2008, among others.
In this interview with EMEKA ANUFORO of our Abuja Bureau, he speaks on the new Nigerian Electricity Supply Industry (NESI), which is expected to berth on February 1 and other power industry issues.
Many Nigerians were not impressed by the recent announcement of a new tariff regime by the regulator. Some have argued that NERC shouldn’t have fallen for the antics of Discos, Gencos and the Transmission Company of Nigeria and should have waited for improved power supply before considering any hike in tariff. What is your take on this?
The state of the Nigerian Electricity Supply Industry (NESI) is still far from what was envisaged in the reform policy for the sector. We still have a very poor infrastructure set up, from distribution, transmission to generation to the extent that the much power being generated are sometimes rejected by the distribution companies. In some instances, due to the transmission constraints, excess powers are also rejected and not transmitted to the end consumers. It is of a very serious negative effect. It affects the planned accelerated economic development of the country. We have high rate of electrocution. The networks are very poor. We have very high rate of power snapping. We have instances of transformers not adequate or highly overloaded. We have this unacceptable situation where consumers and communities are compelled to buy transformers and electric poles and pay for them.
We have a very high level of estimated billings, what we call crazy billings, to the extent that Nigerians who feel aggrieved that they did not consume the power they are billed for are still compelled to pay.
We also have the vexing issue of fixed charges. In a sector that is near to 100 per cent efficiency and reliability, fixed charge is justifiable. However, in a sector where we are yet to match the demand for power, it translates to a situation where in some instances, the distribution companies are unable to supply power either due to poor generation or transmission, yet the consumers are charged fixed charges.
Based on the analyses of the complaints that we get from consumers, we realised that the major complaints border on fixed charges. They border more on estimated billings. We feel that as regulator, we had to tackle that one in the next tariff order. As regulator, we are supposed to come up with regulatory mechanism that would correct the acceptable defects that affect either the consumers or the operators. We have situations within the sector where Nigerians who paid for meters under the initiative for willing customers are not metered within the 60 days required period. We feel that this is not acceptable.
We have a situation where the generating companies produce power, yet they get only about 40 to 45 per cent of the invoice for the amount of power that they generated. This is inimical to the growth of the sector. This also has negative trickle down effect to their obligations to the gas aggregators and other suppliers in the value chain. We also have a situation where the Transmission Company of Nigeria (TCN) could not expand its network because of the fact that our tariff is below realistic market tariff.
On the distribution level, the Discos could not perform on the performance agreements that they have with the Federal Government. The performance agreement is built on reduction of ATC and C (average technical commercial and collection losses). This is predicated on giving them a cost reflective tariff. We have realised the other time that the scenario was unlike in telecommunications sector, where the market environment was very liberal when the reform of the sector was done.
The investment climate was for the investors to come in. In fact, the prices could be said to have been unregulated or liberally allowed. I could recall paying N25, 000 to buy a SIM card after two days of queuing painstakingly. But when the competition triggered in, NITEL couldn’t survive the competition. Many of the private operators kept expanding and competing amongst themselves. Today, the SIM cards are free. Sometimes they are sold as low as N10 or nothing.
We believe we have done it the wrong way. We copied our reform model from New Delhi. But they did the right thing. Immediately they started their reform, they went straight to understand that electricity is a product and had to be rightly priced. They had some characteristics with us. Aggregate losses were around 50 per cent. Ours was around 42 per cent. They also had issues of inadequate generation, high rate of electrocution. They had deficiencies that we also found in our own model. But the international community and observers believe that the New Delhi model was able to accelerate efficiency and the quality of power generation and customer satisfaction level was high.
So, Nigeria adopted the New Delhi model, but during the implementation, we did the right things. Nigeria did not start with a realistic market tariff for the sector. We had a lot of expectations from contracts that were signed. But they were predicated purely on wrong indices that did not trigger the desired results. The problem then was there was virtually no investment in the sector. The power sector is a critical infrastructure that all over the world, there is massive investment every year to proactively provide for excess power to meet the needs of the future.
But for whatever reasons, when it was under the government, for 19 to 20 years, there was no investment. This degenerated to huge debts and parlous infrastructure, to the extent that Nigeria could be said to have the worst and oldest turbines in the world.
Under government control, collections were difficult but officials earned their salaries. We had a situation where there was no precedence in terms of allowing for business decisions. We had a situation where we had over 55, 000 workers working for then NEPA/ PHCN of which over 60 per cent were non-technical staff, compared to South Africa that was having less than 30 or 40 per cent of the workforce Nigeria was using but was generating over 45, 000 megawatts. It was imperative at that time that the government of Nigeria should reform the sector, so that we can bring in efficiency and improved technology and run it purely like a business model. That triggered the reform that we had. However, with the private sector operators’ entrance, we were not able to provide a realistic tariff. Of course, they too have their issues, because, perhaps they may have thought it was like the telecommunication industry. They were not able to realistically assess the challenges and the state of the power sector that they were bidding for.
As a regulator, there were expectations on your part to come out with a regulatory tool to take care of those challenges. What are these challenges, in summary?
Consumers did not want the fixed challenges. It was prone to abuse. Estimated billing was also prone to exploitation. Consumers didn’t want it. The infrastructure was so weak to the extent that consumers were the ones buying transformers and poles. It was exploitative because it ended up being part of the asset base of the Discos.
The distribution, transmission and generating companies wanted a cost reflective tariff that would give them a healthy financial statement to enable them get loans. At this point in time, financials were in bad shape and they were over leveraged, with huge decisions still to be made. If they don’t have a cost reflective tariff, no bank would provide the needed funding. It has therefore become imperative now for Nigeria to do things the right way. We believe that we have gotten the right regulatory mechanism to make the sector move at the speed it should run. We were convinced at our own end that given the mechanism that we have set into the tariff model, in terms of costumer protection, incentives and penalties, that we are very convinced that Nigeria is now on the right track to reform the sector and ensure that we leverage on the much needed efficiency and service that Nigeria desires.
Do you think the operators would not come back in the nearest future to ask for another tariff hike?
Every price item that was allowed in the tariff is based on prudence. You must convince the regulator that additional incurred cost is necessary for improved efficiency. For example, if we find that a Disco or Genco or the transmission company added a private jet to cost profile, we won’t take it. It will be removed. What is fundamental is that there must be adjustments every six months on macroeconomic variables that are clear. This is a business and is import dependent. Our currency is heavily depreciating. It is all but fair that we should be able to periodically review things like inflation, cost of gas, capacity and factor in cost of foreign exchange depreciation. We have window for a review. Those reviews may also result to tariff reduction. They may also result to slight increase in tariff. What is fundamental is that every review request that a distribution company makes will have to be defended and the regulator will look at it to see that they are prudent and absolutely necessary and that they also live up to the expectations that were built up on the originating tariff that they were complaining about. It is not going to be on fait accompli.
Consumers are worried about the ability of NERC to bark and bite. The commission has had so many orders and regulations that were issued and either reversed or never enforced. What is the guarantee that NERC would now wake up to its mandate as a regulator?
Yes, as regulator, I can say we are there ideally to provide regulatory certainty. In doing that, we then guarantee and minimise regulatory risks. The issue you raised may be attributed to the learning curve. But it can also be attributed to the dynamics of the changes and situations at the point in time, when those decisions were taken. What is critical now is that going forward, we have gotten the tariff right and everybody has accepted that the tariff is right. It must be noted that this tariff originated from the Discos, Gencos and the transmission company. They went back to their respective constituencies, their customers to get their buy-in before they came back to us. It is a bottom-up approach tariff. It is not a NERC’s tariff. There is a misconception out there that NERC increased tariff. We only approved a reviewed tariff. The distribution companies, generation companies and the transmission company made a case for an increased tariff. It is their tariff. We have built it up on a very strong customer protection mechanism and quality of service mechanism. We have all agreed that the performance agreement signed up with government will automatically take effect from February 1.
It is important however to note that fundamentally, all transactions in the Nigerian Electricity Supply Industry will from February 1 be on contract basis. So, there is a legal contract that will be binding on all stakeholders. If you don’t perform, your LC can be called up. If you don’t perform, there are strong penalties. The system will now activate itself. From February 1, we will now be in for real business. Once that is done, every distribution company would know the consequences of not meeting up to performance agreement, consequences of not accepting power allocated to them. From February 1, they can no longer reject power. Any electricity that is produced from generating companies must get to the end consumers. If the transmission company has been constrained and because of that transmission could not wheel out the power, the transmission company will be penalised for that. If the distribution companies have constrained infrastructure, they will get penalised for that too.
We have made it in such a way that every Nigerian consumer would know their rights, so they can trigger off complaints, using all available legal processes. We are very confident going forward that NERC will strictly monitor and enforce all its regulations and conditions that are stipulated in the Multi Year Tariff Order (MYTO). It is not going to be business as usual.
Many of your stakeholders have kicked against the new tariff. A case in point is Manufacturers Association of Nigeria. We also have the National Assembly and the umbrella body of electricity consumers. What efforts are you making to carry these groups along in the interest of all?
As part of the basic tariff making process or regulation, we made a lot of consultations. And these involved all stakeholders. We didn’t just sit down at NERC and concocted the tariff. All our regulations passed through processes that were dully advertised and members of the public were invited to come and make contributions. But regardless of having done that, we also have institutions that may have issues that they think need to be cleared. As a regulator, we feel that we are there to clear those concerns. We have very high regards for the National Assembly and we will always respect them as an institution of government. We also have high regards for the Manufacturers Association of Nigeria (MAN) and other concerned bodies.
As we meet these bodies and educate them on the issues raised, they will find out that this tariff model will take care of identified gray areas. One of the issues that MAN has been complaining about has been the high fixed charges. With this tariff model, we don’t have that. And unless we have a truly market based tariff model that will trigger off the growth in the industry, up to the point that tariffs will start going down, there will be competition and more power in the country, Nigerians will continue to experience the problems that we are having. There is no need to continue to postpone the date that we need to start full recovery that the market needs to recover.
Because of the unfreezing of the R2 customers increase last year and the zeroing down of the collection losses, the gap in the market went to N187 billion. This was coupled with other accumulated debts that under-pricing of electricity brought up. The sooner we started recovering them, because they were inputted into the 2015 MYTO tariff, the better for the average Nigerian consumer, the better for the sector
So far, every group that we have talked to understands the rationale behind what we are doing and we are confident that as we continue to engage them, we will clear these issues and reach a meeting point. For the first time in the history of this country, we want the right tariff that will match the right model that we are doing, that will trigger the desired objective, which will be optimal power for Nigeria at safe, reliable and affordable rate.
As currently constituted, customers don’t have proper complaint channels. Discos have customer service units as directed by NERC. But these units are hardly active and NERC seems to look on helplessly. With this new era, what guarantees do consumers have for a listening ear to their complaints?
These are issues that the commission from day one did a lot of regulations on. We have insisted on value for money for customers. Part of the service delivery agreement with government says that Discos must do customer enumeration, have forum offices and set up a three tier redress mechanism where we expect the distribution companies to have customer complaints in all their business units, and also have functional and automated customers’ complaints information management system. NERC has gone far to set up its own. We are only putting some final infrastructure to roll it out. From our office, we will be able to mirror the complaints that are going to the Discos and that will be a good mechanism for us to make them do what they said they would do.
Discos feel that because of the low tariff, they didn’t have enough money to provide those support services. But going forward, with the agreement that we signed, which is legally binding on both parties, from February 1, all such agreements must be effected, otherwise, appropriate sanction will be applied. The regulator is very mindful of the safety issues in the sector. We have done extensive work on regulations. We have gotten a lot of support from the US government to do a lot of health and safety manuals, the grid code, the metering code, the issues about the networks, electric poles and the rest of them. We now intend to ensure that distribution companies are going to meet those standards.