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Reflection on electricity tariff review 20 May 2024

On 1 May 2024, the Nigerian Electricity Regulatory Commission (NERC) announced an increase of more than 260% in electricity tariff for electricity consumers in Nigeria. The commission declared that the increase only applies to customers on the class described as ‘Band A’. The increase moved the approved tariff for this consumer class from N66 to N225 per kwh. In industry parlance, the increase is a classic case of rate shock. Rate shocks are a result of increasing costs of production, which are often passed to consumers when the regulator cannot force the distribution companies to control costs. The consumers become the weeping boys who carry the inefficiency. An increase of more than 200% in one instance is a rate-shock. It will lead to underconsumption by many consumers.

We know that with the devaluation of naira at more than 300% and food inflation at 37.92%, many Nigerian households face the imminent threat of starvation. It is estimated that more than 10 million more people will be thrown into acute poverty in 2024, further worsening the inequality and poverty situation in the country. The FAO estimates that about 32 million Nigerians will be acutely hungry in 2024. With less consumption of electricity, we will witness more poverty and hunger and low economic growth. Tariff increase could reinforce these negatives in a vicious circle.

The regulator conditions the approval of more than200% increase in tariff for customers on Band A on the unproven assumption that the ailing distribution companies can supply to them daily minimum of 20 hours of stable electricity. Many commercial entities and small and medium enterprises are on Band A. This sort of regulation is a form of failure of regulatory fairness and efficiency and illustrates the problem with regulatory efficiency in the industry. In the context of the poor supply of electricity to all customers, how could the regulator speculate that distribution companies in Nigeria could supply 15% of the customers a minimum of 20 hours electricity daily without any notable addition of megawatts or transformation of the frail electricity networks? How would this magic occur when generation companies cannot produce more than 4,000mws of electricity because of constraints of gas supply? As is becoming evident by the complaints of Nigerians across the geopolitical zones and the response of NERC that has penalised Abuja Electricity Distribution Company (AEDC) for violation of the tariff order, the discos do not have the capacity to supply a minimum of 20 hours of electricity daily to those they have classified as Band A.

The regulator justifies the increase on the acute illiquidity in the sector, which could cost the federal government as much as N2.9 trillion as subsidy if there is no unlocking of the tariff. There is no doubt that the financials of the sector are poor and would need urgent and strategic response. We need to have cost-efficient tariffs as soon as we can. But increasing tariff in the manner NERC did without due process and transferring unjustifiable costs to some customers disproportionately violate regulatory due process. First, there was no required consultation of the affected customer group as required in law and practice of electricity regulation.

The procedure for review of tariff is guided by the provisions of the Electricity Act and the regulations issued by NERC. One such regulation is the Tariff Regulation, which devolves the procedure for tariff review to each disco and requires it to conduct public consultation with its customers where it will seek acceptance of the proposed tariff change. This requirement for sincere and thorough consultation is part of regulatory due process. This is standard global regulatory procedure. It follows from the canonical principles of tariff review enunciated by the authoritative Professor Bonbright whose views are still globally accepted. Bonbright’s principles of tariff making are simplicity, stability, consultation, acceptability, non-discriminatory, and operability. Tariff designs must be simple, understandable, non-controversial, arise from consultation, acceptable to customers, and stable overtime. The key concept here is acceptability. The regulator cannot approve a tariff unless it is convinced that the utility has met with its consumers whose tariffs would be changed and the change is acceptable.

On what basis did the regulator build its evidence that the proposed tariff is fair and just? Did the discos disclose to Band A customers their plans to increase power supply to their homes and business and provide them verifiable evidence of capacity to do so before the regulator approved over 200% increase in tariff? It is not believable to move suddenly to 20 hours of electricity without a significant increase in daily generation and supply and upgrade of transmission and distribution network.

By allocating 20 hours to some customers and less to others, current tariff review violates constitutional protection against discrimination. The structure of any market should be such that no one is excluded from consumption of goods and services if they are able and willing to pay a fair price. This is more so with regards to public good like electricity. Section 116 of the Electricity Act further underlines the importance of non-exclusion and non-discrimination with regards to access to electricity services in Nigeria. According to Section 14 of Chapter 2 of the Constitution, every person is entitled to equal protection of the law and equality of access to social services. As the Supreme Court held in the case of Fawehinmi v. Abacha, when such fundamental objective and directive principle of state has been enacted into a statute like the Electricity Act of 2023, it becomes judicially enforceable.

Sam Amadi, PhD, a former Chairman of the Nigerian Electricity Regulatory Commission, is the Director of Abuja School of Social and Political Thoughts.