People & Money

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

The FGN strengthens the impression of “political decision-making" by suspending electricity tariff review

Dr. Amadi said that the World Bank was concerned that rather than independent regulatory decisions, what it saw was “political decision-making.” The action of the FGN in suspending the power sector tariff review, which it should have had no power in allowing or delaying in the first place, may have strengthened the impression of “political decision-making.”

Dr. Sam Amadi, former Chairman of the Nigerian Electricity Regulatory Commission (NERC), made known on Wednesday, September 30 that the decision of the Federal Government to postpone the review of electricity tariffs by two weeks will lead to “further loss of credibility” and “exposes the sector to ridicule and distrust of the investment community”.

The Nigerian Labour Congress and the Trade Union Congress (TUC) had threatened to embark on a nationwide strike after the Muhammadu Buhari government announced in September its decision to allow operators in the power sector to charge tariffs that cover the cost of generating and distributing electricity and a withdrawal of subsidies for petroleum. The Federal Government conceded to postpone the review of electricity tariffs, from “about N30.23 to about N62.33 per kWh” for some classes of consumers after negotiations with the labour unions.

Amadi explained that the decision to suspend the review of the tariffs is a “loss-loss” for the power sector because of the way it was done. According to him, the “business rules” of the Nigerian Electricity Regulatory Commission (NERC) clearly specify a process for reviewing regulatory orders.

Read Also: DisCos to Pay For Electricity Rejected, Says NERC

 

IN CONTEXT

Until 2013 when the Nigerian power sector was partially privatised (the FGN still owns 49% of the power sector companies which were carved out of the monolithic state-owned National Electric Power Authority (NEPA), the cost of generating and supplying power to firms and households and how much consumers paid to cover this cost was not important. The Nigerian government-owned NEPA 100% and was not interested in making a profit. But this means it also grossly underinvested in supplying electricity.

With the sector privatized, the power companies now operate in a commercial value chain in which inputs have clear costs which have to be paid for-the power generating companies (Gencos) have to pay for gas and the distribution companies (Discos) have to pay for the power the (Gencos) supply to them and the transmission company has to be paid for “wheeling” electricity from the Gencos to the discos. Consumers have to pay for the goods and services the Gencos, Discos and the Transmission Company invest in to be able to generate and supply power.

The Nigerian Electricity Regulatory Commission (NERC) was created by the Electric Power Sector Reform Act of 2005. NERC’s role is to ensure that the power sector firms (through the Discos) charge tariffs that are fair to consumers but that also allow them to fulfill their obligations to each other i.e. pay each other for inputs in the value chain and pay interest on the huge loans they have to invest if Nigerians are to enjoy adequate supply of power. The 2005 EPSR act guarantees NERC’s independence i.e. its power to set tariffs and take other decisions free of government control. This independence is a critical requirement in all energy markets; investors will not stake their funds where they perceive that governments could interfere with decisions on tariffs that may be politically popular but hamper the sector’s ability to pay for investments in the value chain.

 

An electricity industry run on the basis of commercial relations envisaged by the Electric Power Sector Reform Act of 2005 has not been allowed to function.  Successive governments have delayed the take-off or interfered in the functioning of the market out of various political motivations. The Buhari Government, which was elected in 2015, had preferred to pay subsidies to the power companies rather than allow NERC to effect commercial tariffs that cover the cost of generating and supplying power. It has taken the new coronavirus pandemic, a fall in the price of oil and very high level of indebtedness for the Buhari Government to allow NERC to introduce commercial tariffs.

Read Also: “This is Ridiculous”: Nigerians React to $100 Debit Card Spending Limit

Under this process, the labour unions or a group of consumers have the right to petition NERC on the basis of the business rule within 60 days of the order i.e. the decision to review tariffs. This according to Amadi, would have preserved the independence of the regulator, NERC.  The hijacking of the responsibility of an independent regulator and jettisoning of the tariff setting and review process in Nigeria’s electricity market inherent in the FGN’s decision in the words of Dr. Amadi “has ridiculed the regulator and therefore create more risks and discredit for the market”.

Dr. Amadi objects to the manner the tariff was hurriedly reviewed in the first place. He is of the opinion that it was “inadequately communicated”, lamenting there “was absolute lack of leadership in the manner the sector engaged consumers and the public on the tariff review”. The decision should have been preceded by “good risk analysis and impact assessment.”

Dr. Amadi had explained to Arbiterz in an interview in August, “There should never be any questions about whether Nigeria’s electricity sector should be run on the basis of commercial tariffs or not. What we can debate is if tariffs could be increased when the economy is weighed down by the pandemic. A decision could be reached to defer the increase but making it clear the money will be recovered within a reasonable time frame either from consumers or through Government subsidy”.

In essence, there isn’t a single path to running the power industry on the basis of commercial tariffs. Dr. Amadi further explained that NERC and operators in the industry could together craft the structure of tariffs so far “there is clear commitment to commercial tariffs”. On Nigeria’s negotiations with the World Bank for a loan during which the issue of power tariffs proved to be one of the thorny issues, the former NERC chief said that there is no requirement that says the tariffs “should be X at this or that time”, the World Bank only wants to see “a clear methodology for deciding tariffs and an electricity market that is regulated in a stable manner”.

Dr. Amadi said that the World Bank was concerned that rather than independent regulatory decisions, what it saw was “political decision-making.”

 

 

David Fagbule

David Fagbule is an oil and gas and climate change analyst. He has an MSc in Management and International Business from Nottingham Business School, Nottingham Trent University, and a BSc in Business and Managerial Economics from Lancaster University.

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