by Adeola Balogun

What we have here is a chain reaction. If the power situation in the country is to improve, we need more investments into the transmission and distribution sectors. For there to be investors, there has to be regulations that are designed to boost investor confidence.

Yes, you heard right! Starting June 1 2014, Nigeria electricity consumers will be subjected to a new tariff regime. The new tariff is a result of a recent review by the National Electricity Regulatory Commission (NERC). You may be wondering why there was a need for a review. The power situation in the country has not been at its best in recent times. In fact, there was a dip to 3,424MW on 31st March, 2014 from a gross capacity estimated at 4,306MW.

Now here’s the thing: It is because of fluctuations like these that there is a NERC provision to do minor reviews every six months and major reviews every five years. The Multi Year Tariff Order (MYTO) provides that where the review shows that the aggregate of these variables have changed by plus or minus 5% of MYTO figures, the changes are significant and would result in a review of the tariff. The minor reviews will take into cognizance not just power generation but a number of other factors which include inflation rate, exchange rate, gas prices and capacity to evacuate generation capacity.

In truth, taking these factors into consideration, produces a more holistic and scientific approach to electricity pricing. It ensures that investors will continue to recover their investments as they provide adequate and reliable electricity in Nigeria. At the same time, it guarantees increase in efficiency will leads to increased access to affordable electricity. In other words, the more efficient electricity generation and distribution is, the more affordable it will be to consumers.

So, we are paying more for the inefficiency of the system.

How then can we get the system to be more efficient? Or you may prefer to ask: how do we determine the efficiency of the system? We go back to looking at the components that come together to determine the pricing of electricity.

It is interesting to note that in the period under review, there was actually a drop in some components of our pricing system. For instance, exchange rate which was earlier pegged at N178 to a Dollar decreased by about N20. Also, inflation rate has stabilised at 7.8% as opposed to the projected 13%. These two factors on their own should have led to a drop in electricity tariffs but for two other components that have shrouded the gains from a decrease in wholesale tariffs.

Power generation dropped by about 50%. Based on the information available to it, NERC had projected a peak of 9,061MW for the period. We are yet to get the transmission and distribution components right. So whatever gains are being made at the wholesale tariff front is lost.

We can compare this to three brothers who were each given N10,000 to do business but who at the end of the period have to pool their resources together to determine how much profit each takes home. The first brother doubled his capital and returned with N20,000 while the other two lost their capital. Obviously, they will all have nothing to share for the period under review. You will also agree this is not sustainable on the long term. At some point, the first brother will revolt.

Similarly, as things stand, the inefficiency in transmission and distribution has been designed to be transferred to the consumer. In fact, section 5.76(2)(a) of the EPSR Act of 2005 mandates that the Commission sets a tariff methodology that allows “a licensee that generates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business”.

What we have here is a chain reaction. If the power situation in the country is to improve, we need more investments into the transmission and distribution sectors. For there to be investors, there has to be regulations that are designed to boost investor confidence. A huge part of the confidence boosting mechanism is that the investor recovers “the full costs of its business activities, including a reasonable return on the capital invested in the business”. For this to happen, tariffs may need to increase from time to time until we achieve a saturation that will force the prices down.

Meanwhile, the NERC has not forgotten it is also a regulatory body that should protect consumers. So, it has put in place a system that gives licensees an incentive for being more efficient and a penalty for a lack of efficiency. This penalty comes in the way of Fixed Charges. If fixed charges were tied to a higher percentage of fixed costs, what would result is that no matter how inefficient the system is consumers will pay proportionally higher costs. Presently, these charges are tied to just about 20% of fixed costs. In the period under review, fixed charges dropped across board from a maximum of N1,500 to a minimum of N624 in certain residential areas.

In addition, the NERC has regulated those areas that do not receive power accumulatively or continuously for 15 days in a month should not pay the fixed charges. Here in lies where energy consumers need to be more pro-active and hold the Distributing Companies accountable. Consumers need to be interested in what they are paying for and why. Perhaps, templates on which formal complaints for the deduction of this would need to be provided.

Yet, many persons are still under the ‘estimated bill’ regime because they have no meters. The distribution of prepaid meters is painstakingly slow. In fact, it appears that the DISCOS are foot dragging on meter distribution because it works to their advantage. If you are one of those who already has a prepaid meter and you want to see if you can benefit from a deduction of at least N750 from your monthly bill in the Lagos area, here is an APP that can help.

The good news is we are attracting investors into the sector. We certainly have the population to attract the $900 billion needed to stabilize the sector. A large number of the 311 investors who indicated interest in the power sector turned up for the International Energy Investors Forum held in February this year. International investors such as General Electric, APR Energy, Brambles, Symbion Power, Dangote, World bank and others seem set to invest in the sector. We, therefore, join the NERC in hoping that soon Nigeria will achieve its potentials in power generation with a corresponding increase in distribution and decrease in tariff costs. We hope.

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Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.