People & Money

NERC’s 100% Tariff Hike: Six Ridiculous Arguments Against

Nigerians have to understand the investment needs of the sector and be able to judge if the tariffs they are being charged are an efficient and fair means of funding this investment. NERC should have the courage to explain to Nigerians how the electricity market – and tariffs – work.”

On January 5, 2021, the Nigerian Electricity Regulatory Commission (NERC) announced a review of electricity tariffs (statutorily, NERC is required to review electricity tariffs once a year in line with “inflation, interest rates, exchange rates, and generation capacity” to ensure that producers cover their costs and make a fair profit).

Knowing how Nigerians by nature reflexively condemn any increase in the price of a service, NERC got itself twisted in an effort to hide the fact that a class of consumers will be paying 100 percent more for electricity.

It first explained correctly that only a few consumers are affected. It then bizarrely claimed that the consumers whose tariffs will become 100 percent higher would only be enjoying a “tariff adjustment” rather than paying more for electricity.

For more than two decades (the mid-1980s to mid-2000s), Nigeria’s power sector was starved of investment as the economy expanded and the population exploded. The unfortunate legacy of decades of underinvestment is that Nigeria with a population of almost 200 million generates about 4,000 megawatts of electricity while Tokyo with 9.2 million people has an effective generation capacity of 4,649 megawatts

For Nigeria to generate adequate electricity to boost productivity, investment, and create jobs, it needs roughly $10 billion investment every year in the electricity sector. The government has privatised the sector partly in recognition that it cannot afford this investment.

The arguments against the tariff hike do not show that Nigerians understand the relationship between tariffs, investment in the sector, and economic growth.

Here are a few of those arguments.

Also Read: NERC Colluding with Power Firms on Estimated Billing, Says Rights NGO

1. The government is insensitive for increasing electricity prices in the midst of a pandemic and recession. Government has no and should never have a role in deciding electricity tariffs. The sector is governed by an independent regulator – NERC. The purpose of having an independent regulatory body is precisely to prevent “compassionate” politicians from fixing electricity tariffs that would be too low to cover costs and fund investments in the sector. No one can go to Shoprite and pay less for items bought because the country is in a recession or pandemic. Power producers also have costs and cannot provide services at a loss.

2. Even in the UK, the poor don’t spend so much on electricity. The poor could also not afford generators in Nigeria in the 1970s or 1980s. As an economy becomes more productive with greater access to innovation, products and services become more affordable for everyone. Many Nigerians grew up hearing stories about how you could get sent out of someone’s house in London if you left the lights on in a room while visiting. Meanwhile, power was so cheap for a long time in Nigeria that people left their ACs on while they went on holiday. Mrs. Cherie Blair, the wife of the former Labour British Prime Minister, recalled when she was growing up they had baths only once a week because heating was so expensive. The universal access to electricity in places like the United Kingdom is because of investments over several decades funded by citizens paying a significant proportion of their incomes in tariffs.

3. It’s an external imposition by the IMF and the World Bank. This is not a problem at all. The idea that a service that requires billions in capital investments can be sustainably provided (i.e. constantly and in good quality to an ever-increasing number of citizens) without beneficiaries paying for the cost of investment, maintenance, etc. is also a foreign idea i.e. from the former Soviet Union (a political and economic entity that collapsed under the weight of the dangerous ideas it exported to other parts of the world).

4. We can’t pay for what we are not enjoying. This is akin to telling Daimler Benz that it cannot fix the price of its 2022 E-Class sedan because it is unavailable for you to ride now. The power sector requires billions of dollars in upfront investment. Both the power company and the banks funding the investments have to know the price at which they are selling to take the risk of investing. The consumer is not obliged to consume the power they produce at whatever price nor is the consumer asked to pay for power that has not been supplied or consumed. Argument 4 really reflects an almost genetic reluctance to pay for services (except perhaps party chops) that a lot of Nigerians suffer from.

5. They have to give us prepaid meters before any tariff increases. Traders use rigged weighing equipment to cheat in markets while selling everything from beans to melons. Do customers focus on having appropriate weighing equipment or try to get the traders to alter their prices? Fighting for prepaid meters will bring transparency and fairness to the market but fighting for low or frozen tariffs that do not cover costs will stifle investment and prolong Nigeria’s journey to an adequate power supply.

6. #EndNERC: The Nigeria Electricity Regulatory Commission (NERC) is said to be in the pockets of the Distribution Companies (DISCOs), and it does their bidding. This is complete fiction. Rather than allow them to finance their activities from cost-reflective tariffs determined by NERC (in accordance with the Multi-Year Tariff Order (MYTO), a transparent method of setting and reviewing tariffs), the government decided to pay distribution and generation companies subsidies when rising inflation and foreign currency prices pushed their costs over existing tariffs rather than allow a tariff review as provided for by the law.

Also Read: Suspension of New Tariffs Exposes Nigeria’s Power Sector to Ridicule, Sam Amadi, former NERC Boss

Firms automatically raise their prices when inflation and higher foreign exchange rates raise their costs. The power sector is one of those industries defined as having a “natural monopoly” i.e. consumers enjoy the lowest price when the industry has only one supplier or operator.

NERC exists precisely to ensure that DISCOs – monopoly suppliers to vast areas of the country because it would be more expensive to have more than one company erecting poles and wires to cover the same areas – do not raise costs arbitrarily. Government intervention is turning the sector into a natural money loser – a sector where investors are prevented by law from adjusting prices to cover their costs and in which the regulator with the legal responsibility to review prices is prevented by the government from adjusting prices. This is the perfect way to keep Nigeria in darkness.

Nigerians have to understand the investment needs of the sector and be able to judge if the tariffs they are being charged are an efficient and fair means of funding these investments. And NERC should have the courage to explain to Nigerians how the electricity market – and tariffs – work.

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