Nigerian Electricity Consumers as Interim Guinea Pigs Power Transformers Chineme Okafor writes that without capacity growth in generation, transmission and distribution, consumers may continue to feel the impact of the cost of inefficiencies transferred to them by the electricity market There is evidence to show that the relatively slow progress of Nigeria’s electricity market since its privatisation 11 months ago is greatly linked to its extreme financial illiquidity. This development, is without doubt, interfering in the delivery of quality electricity service to eligible consumers, who by the market econometrics, have to bear every cost incurred by the market, yet without proportionate service from the market. In terms of the many challenges before the emerging market, it may be safe to say that within the government’s reform programme, the operations of the new investors may have taken off with little knowledge of the financial requirements of the market, hence, the current challenge of chronic illiquidity, which resulted in the recent intervention of the Central Bank of Nigeria (CBN) with N213 billion loan. Early anecdotal market reports indicated that participants, especially preferred bidders, who financed their transactions in the generation and distribution assets of defunct Power Holding Company of Nigeria (PHCN) with bank loans and guarantees had in the wake of the takeover of the assets, contended with tremendous challenges in running their assets with very low financial base. The Nigerian private sector led by the banks had ensured that over$2.5 billion was raised for the successful conclusion of the electricity privatisation process, with the government earning approximately $3.3 billion from the sale of the PHCN assets. But under pressure from competition, assets in the electricity sector which the new private investors were expected to manage more efficiently, thereby bringing real, long-term benefits to consumers, were found to be unable to deliver the expected electricity goods. This singular development soon became a source for huge revenue losses by operators, in addition to the technical losses that was recorded from operations in the market. Notwithstanding these irregularities, electricity consumers in the country still pay for electricity service that is characterised by irregular rates from estimated billing system, scarcity of calibrated meters for transparent rates calculation and payment, poor service delivery from low generation profile and distribution capacities. These limitations however were all associated with the sector when it was managed by the government. Through periodic rates reviews and computations under the Multi Year Tariff Order (MYTO) framework of the Nigerian Electricity Regulatory Commission (NERC), the market economics are designed to ensure that consumers are adequately billed to cover for all component expenditure incurred in the production and supply of electricity by operators. However, there is an expectation of proportionate service delivery to the same consumers, whose payment for such service should keep the market buoyant. Whatever reasonable costs that are incurred in the production and supply of electricity, NERC through the MYTO framework passes them through to the consumers in form of fixed and energy costs. That is why it is exclusively the responsibility of distribution companies, for instance, to procure hardware assets such as transformers, electricity poles, wires and other materials for eligible consumers within their network areas. It is equally within this same line of responsibility that the distribution companies are expected to undertake needed repairs of extant mechanical faults at their distribution assets in furtherance of quality service delivery. Under the present market, no consumer is obliged to procure electricity assets for use by a distribution company. NERC has in its regulations clarified that consumers’ investments in the market should be compensated in good proportions. However, field reports from the market indicate that in addition to paying statutory electricity bills, consumers across the country have continued to shoulder such responsibilities of some service providers along with badly rendered services. Like the prevalent practice with the defunct PHCN, both new and old customers in the current privatised market still procure poles, wire and mini transformers. All these are still done without any form of rebate from the service provider, thus ignoring the regulation from NERC. The average monthly fixed charge paid by consumers in the market is about N702, but instances of non-installation of meters paid for by most consumers for use in their homes are still high. In addition to non-installation of meters, opaque estimated billing techniques are still part of the market’s tradition. For instance, THISDAY’ s recent investigations revealed that customers in new residential suburbs that are springing up within the Apo resettlement district in Abuja and homes in parts of the Government Residential Area (GRA) of Enugu, for instance, are currently being made to contend with these anomalies. Some of them told THISDAY that they not only procured the poles, wires and transformers that currently supply electricity to them, but also paid the technicians from the Abuja and Enugu distribution companies to install them on to the service grid. They also alleged that the requests for meters by customers in Enugu and Abuja have remained unattended to. Consumers: Kings or Cash Cows? In addition to the current heavy burden on consumers, NERC recently indicated that its upcoming electricity rates review, which is scheduled for December, will take into consideration its recent adjustments in price of natural gas supply to power plants from $1.50 to $2.50 per million cubic feet per day (mcf/d). The regulator noted that the current market tariff remains inadequate to cover the costs incurred in the production and distribution of electricity, adding that it will be reviewed to include the extant costs of the market going into the transitional electricity market. According to NERC, the natural interaction of price in a market with high demand that is in contrast with low supply is simply playing out in the electricity market, hence, the need to continue to grow the market’s capacity in terms of adequate electricity production and optimal service delivery. Similarly, NERC stated recently that the N213 billion loan that is being arranged by the CBN to cover market shortages will be repaid by electricity consumers over 10 years. It however added that operators whose expenditures are not prudent enough as to match up with its relevant obligations in the market will not benefit from the fund. NERC said that the transfer of the burden of the loan to consumers would be spread over 10 years, since the loan was meant to offset the market’s shortfalls from poor revenue collection. NERC also said that its recollection will be in piecemeal over the period, to ensure that the consumers are left with minimal financial burden that would have come with higher tariff. “Without this fund, consumers ought to pay for any shortfall in pricing, so essentially, the shortfall is a function of the price not being cost reflective and what we would have done is to put it back into the MYTO formula and probably work out the tariff increase that will cover it over five years but the CBN fund gives opportunity for Discos and Gencos to have this money on time and for it to be paid over 10 years. They are giving us a 10 years period instead of five and this further reduces the rate tariff; it further reduces the amount that consumers will be paying. It is just like getting loan and paying back in 10 years,” Chairman of NERC, Dr. Sam Amadi had explained, while justifying the loan. “They are giving us 10 years facility that covers the shortfall and what it does is that it gives Discos and Gencos money at hand now that they will be collecting in piecemeal over the years and gives them opportunity to use the money for quick investments that will produce quick returns in terms of service improvements and of course it reduces incidence of repayment on consumers. Don’t forget that every cost in the industry is ultimately repaid by the consumers and so it has reduced the incident of burden of repayment by stretching it over a long period of time, perhaps with some moratorium on repayment and that could result in freezing tariff increase as the case may be,” Amadi further explained. The commission however stated that it expects a proportionate service delivery to consumers from operators in the market going forward. Need for Enlightenment Notwithstanding reported promises of expected growth in the electricity market, consumers in the country are skeptical of these promises. Their fears really stem from the laid-back attitude of some of the distribution companies, which they constantly interface with in the market. For instance, some consumers in Abakaliki, Ebonyi State who are serviced by the Enugu distribution company, disclosed to the paper that the company was yet to respond to their requests for meter from them. They explained that the poor electricity supply to the State by the distribution company has also not helped matters, adding that they are made to pay their monthly bills irrespective of the poor service. In view of this situation, it is important to note that a constant transparent interaction with consumers on the direction of the emerging market is imperative. The regulator should seek to promptly remind electricity consumers, who now consider themselves as a cash cow for the sector that the electricity market reform, which seeks to liberalise and introduce competition in the operations of the market, is though a long process and not just an event. It should also be noted that regardless of the approach to the liberalisation of the electricity market, the process requires strong government involvement. In fact, the level of on-going political commitment invested significantly will always influence the outcome. In the absence of clear signs of commitment, regulatory uncertainty may well become self-fulfilling and undermine a positive outcome. There is no doubt that from time to time, all electricity systems will most likely experience a crisis. Such crisis has become important tests of the robustness of liberalised electricity markets and, perhaps even more importantly, of the robustness of the political framework backing the liberalisation process. NERC in this regard has stated that the temperament of Nigeria’s electricity market to withstand crisis has been tremendous. At very trying moments in market development, signals of strong political commitment, which are often expressed by not intervening, can also lead to the necessary market responses, hence the need for the government to endeavour to stick to a market-based solution to the current challenges. Stakeholders in this regard, should keep in mind that effective markets are mostly fuelled by competition. The government must decisively seek to establish a framework that allows for the development of effective competition as liberalisation creates benefits by introducing incentives for higher efficiency and more innovation with competition as the driver. In addition, consumers must not be made to constantly consider themselves as cash cows with no benefits to derive from the recent privatisation. The regulator must in consideration of the pains of the consumers, insist on proactive and quality service delivery from operators in the industry. It should promptly administer requisite penalties on breach of extant market regulations like the breach on its regulation on estimated billing system by most of the distribution companies.
Posted on: Tue, 14 Oct 2014 04:50:17 +0000
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