Electricity Tariff Hike: Is it Lawful?

That Nigerians are presently going through tough times, is an understatement. With the spiralling rate of inflation, most were unprepared for the recent  upward review in electricity tariffs. Was due process followed, before the tariff increase was effected? What was the need for this huge tariff increase, even though it is said to be limited to a particular category of users, that is, the ‘Band A’ Customers that purportedly receive up 20 hours electricity supply daily? Has it been proven that any band of  consumers get up to 20 hours of electricity supply daily? Is the tariff increase discriminatory against Band A Customers, in that they have to cross-subsidise the other Band Users by paying so much more, so that the DisCos can ramp up their revenue? Or will electricity supply to Band A Customers be reduced after the increase in their tariff, while that of Band B is increased, in order to be able to upgrade them and increase the number of Band A Customers, again to increase revenue? Will the tariff increase result in even less power supply to the other Band Users whose tariff remains unchanged? Is Band A even possible, under these more than frequent national grid collapses? Is the increase in tariff even legal? Femi Falana, SAN, George Etomi and Dr Sam Amadi discuss the issues surrounding what Nigerians now perceive to be ‘suffering and smiling’, and, in doing so, answer some of these posers   

Illegality of the New Electricity Tariff

Femi Falana, SAN

Procedure Not Followed

B

y virtue of Section 116(2)(e) of the Electricity Act of 2023, the National Electricity Regulatory Commission (NERC) is empowered to allow a licensee that operates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business. But, prior to approving a tariff methodology, the Commission shall give notice in the Federal Government Gazette, and in one or more newspapers, with wide circulation, of the proposed establishment of a  tariff methodology,  indicating the period within which objections or representations in connection with the same may be made to the Commission.

 Upon receipt of the application for a new electricity tariff, the Commission shall conduct a public hearing on the applications prior to making a ruling.

But, in utter violation of the Electricity Act, the Commission announced that it had approved an increase of electricity tariff to N225 ($0.15) per kilowatt-hour from N68. The 230% hike for urban consumers, also known as Band A consumers in the country, took  effect from April 1, 2024.

 Before the announcement, no prior information of the proposed tariff was published, consumers and other stakeholders were not given the opportunity to make a representation to the Commission while no public hearing was conducted by the Commission. To that extent, the new electricity tariff cannot be justified under the Electricity Act. Furthermore, in order to give the impression that the DisCos are operating “efficiently”, the payment of the new tariff is premised on electricity supply of not less than 20 hours per day for the Band A consumers. But, the DisCos have admitted publicly that they are unable to comply with the directive due to a variety of reasons. Is this ground not sufficient to vitiate the new tariff?

Contradictions

However, in justifying the insensitive hike, the Minister of Power, Mr Adelabu, said that Government was subsidising 67% of the cost of generating, transmitting and distributing power in Nigeria, amounting to over N3 trillion, which he put at 10% of Government total revenue. Mr Adelabu has apparently forgotten that he had  claimed on January 15, 2024 that, “.. If tariffs are left at this current rate, it is projected that the Government will spend about N1.7 trillion to subsidise electricity. The FG cannot afford that”.

 On its own part, the International Monetary Fund (IMF) had warned on March 6, 2024, that the continuation of fuel and electricity subsidy will cost Nigeria N2.33 trillion or 3% of its Gross Domestic Product (GDP) in 2024. The warning was given by the team led by Mr Axel Schimmelpfennig, IMF Mission Chief for Nigeria that visited Lagos and Abuja, February 12–23, 2024, to hold discussions for the 2024 Article IV Consultations with Nigeria. Since about N1 trillion is allegedly spent on fuel subsidy per month, it means that electricity subsidy will cost N1.3 trillion.

Apart from the fact that these figures do not add up, the immediate past Minister of Finance, Budget and National Planning, Zainab Ahmed disclosed on March 12, 2022, that the Federal Government had quietly removed electricity subsidy. Speaking at a virtual meeting of African Finance Ministers and the IMF, Ahmed also said the amendment of the budget was ongoing to accommodate the incremental removal of fuel subsidy. The theme of the meeting was, ‘The Political Economy of Fiscal Reforms’.

On that occasion, Mrs Ahmed said, “We are cleaning up our subsidies. We had a setback; we were to remove fuel subsidy by July this year, but, there was a lot of pushback from the polity. We have elections coming and because of the hardship that companies and citizens went through during the Covid-19 pandemic, we just felt that the time was not right, so we pulled back on that. But, we have been able to quietly implement subsidy removal in the electricity sector, and, as we speak, we don’t have subsidies in the electricity sector. We did that incrementally over time, by carefully adjusting the prices at some levels while holding the lower levels down”.

At no time were Nigerians informed that electricity subsidy, had been restored. Was the N700 billion which Mr Adelabu said was spent on electricity subsidy in 2023, appropriated by the National Assembly? Whatever may be the case, it is indisputable that the IMF and the Federal Government are juggling figures of electricity subsidy to blackmail and deceive the Nigerian people. Whereas the IMF claims that “fuel and electricity subsidy will cost Nigeria N2.33 trillion” in 2024, the Minister of Power has given a subsidy figure of N3 trillion. Curiously, the Federal Ministry of Finance has failed to reconcile the conflicting figures being peddled around by the IMF and Ministry of Power.

Another reason adduced for the hike in electricity tariff, is that  Band A customers should enjoy a minimum of 20 hours of power supply per day, and all Discos have been authorised to implement the policy immediately. But, the electricity distribution companies (DisCos) have started publishing their inability to meet the required 20 hours per day power supply for Band A customers, as directed by the NERC.  Having not met the conditions stipulated by NERC, the DisCos have forfeited the right to sell electricity at the rate of N225 per kilowatt. The DisCos should refund the funds collected since April 3, 2024, while the NERC should withdraw the approved electricity tariffs without any further delay.

Femi Falana, SAN, Human Rights Lawyer;  Recipient of the Bernard Simmons Award of the International Bar Association

The Electricity Tariff Hike: Facts and Myths

George Etomi

On 3 April,, 2024, the Nigerian Electricity Regulatory Commission (NERC) issued Supplementary Tariff Orders for Distribution Companies (DisCos) which announced an increase in electricity tariffs. However, this tariff increase from N66/kWh to N225/kWh is solely applicable to consumers in the Band A category. The new tariff rates take effect immediately, and will apply to these customers from the April billing cycle. This signifies the phased transition, from the Government backed subsidy regime to a competitive market. The tariff rates for other customer classes remain frozen, subject to further policy direction from the Federal Government (FG).

The implications of the tariff increase on the Government, the market and the consumers, are complex. A balancing act needs to be maintained between the Government’s drive for cost savings and phased subsidy removal, the market’s need for liquidity and stable supply, and increased costs for consumers.

To be clear, some frequently asked questions which may stem from this development are outlined below:

Why the Tariff Increase?

The tariffs paid by customers are heavily subsidised by the FG, meaning that Nigerians do not pay the actual cost of electricity supply which involves power generation, transmission, and distribution. However, the tariffs have now been revised to reflect the changes in the gas price, inflation, foreign exchange rate, and available generation capacity. Recall that the Nigerian Midstream and Downstream Petroleum Regulatory Authority had announced an increase in the gas to power price from $2.18 per MMBTU to $2.42 per MMBTU on 2 April. Coupled with the high inflation rate and frequent changes in the dollar rate, the tariff increase was imperative. So, the FG is implementing a transition plan to reduce tariff subsidies for all customers, and focus on only the vulnerable. Hence, the commencement with the Band A customers, which represents 15% of the customers. The other customer bands, will continue to benefit from Government subsidies under the order.

Which Customers are in the Band A Category?

In 2020, NERC introduced the Service-Based Tariff (SBT) which classified customers into service bands, to ensure that tariffs paid by customers reflect the services delivered by the DisCos based on the hours of power supply per day. Other considerations are the quality of power supply, service interruptions, customer service, and adequate metering.

Under the SBT, consumers are classified in Bands A to E as follows:

• Band A: Minimum of 20 hours

• Band B: Minimum of 16 hours

• Band C: Minimum of 12 hours

• Band D: Minimum of 8 hours

• Band E: Minimum of 4 hours

So, not everyone is affected by the tariff increase, and customers can confirm if they are affected by checking their respective DisCos’ websites as well as NERC’s websites. DisCos are also to communicate these developments to their customers via bulk SMS.

Can Customers Unilaterally Migrate to Higher or Lower Bands?

No, customers are to formally write to DisCos, requesting migration. The DisCos may, on the other hand, determine that a customer cluster is due for migration, and present an application to NERC for approval. It should be noted that only feeders with smart meters, are eligible for upward migration. Upon approval by NERC, customers will be notified by the DisCo via SMS and other channels.

What Remedy do Band A Customers have, where the actual hours of supply is less than 20 hours?

The DisCos have outlined service delivery commitments, in their respective supplementary orders which is available on the NERC website. Where power supply is less than 20 hours for 2 consecutive days, the DisCo is to issue a public notice by 10 am the following day explaining the reason for the failure, and providing a timeline for service restoration to 20 hours. Where this occurs for 7 consecutive days, that customer area will be downgraded from Band A to the band that aligns with the actual hours of supply recorded. Where the DisCo fails to deliver on the committed service levels for 1 month, the affected customers will be compensated with free energy units. Customers have the right to submit their complaints to the DisCos and NERC, via all communication channels.

How Often will the Tariffs be Adjusted?

On a monthly basis. The approved tariffs will be adjusted monthly, to reflect changes in the pass-through indices of inflation rates, Dollar-to-Naira exchange rates, and gas-to-power prices. So, customers should expect more frequent reviews, as against the previous 6-month minor reviews.

Is the Tariff too High?

Actually, power supply from the grid is cheaper than alternative sources. The new tariff rate, is lower than the average cost of power consumption from diesel. If reliability and sustainability is guaranteed, grid power is a better option for electricity customers. 

What happens to Band A Customers who are not metered?

Metering is a must for Band A customers. They need to be able to track the amount of power supply being given to them. This will be necessary in case of redress and to avoid disputes. For postpaid customers, power supply may be tracked manually. However, customers should note that electricity theft is criminalised, and meter bypass and refusal to pay bills is penalised in the Electricity Act 2023. The NERC Order mandates that Band A feeders should be metered. The Federal Competition and Consumer Protection Commission has recommended that, DisCos should be mandated to meter all Band A customers within 60 days. The feasibility of this within the timeframe is, however, questionable given the metering challenges in the sector.

Is the Tariff Increase a fair move for Band A Customers?

Well, the feedback has been mixed, but, it is predominantly on the side of doubt by the populace. That is understandable, because it is a “chicken and egg situation”. Tariff reviews assume that if customers pay cost-reflective tariffs, they will get improved power supply, but, customers are concerned about the uncertainty of power supply for the minimum 20 hour-period because of previous supply history. Whilst we welcome a gradual transition to cost-reflective tariffs, transferring the burden of increased tariffs to a particular set of customers requires more detailed planning and an even better implementation. The liquidity risk, which was usually borne by the FG, is now being transferred to the highest-paying customers who can presumably afford it. This announcement was not preceded by wide consultations and dialogues with industry stakeholders. This new cost ought to be spread to ensure equity across all customer bands, apart from the vulnerable and life-line customers. However, this can be considered a pilot phase, and tariff increases across other bands can be expected over the coming months, especially as services improve.

Some of the unintended consequences of this increase is that the DisCos’ minimum remittance obligations (MROs) will increase, and it may be harder for them to meet their OPEX after the waterfall deductions. There is also the possibility of DisCos concentrating all their efforts and investments on Band A customers, to the detriment of other customers in the other bands to meet their new MROs. Also, the service level agreements between DisCos and TCN needs to be reviewed, to address any potential imbalance issues that may affect the DisCos’ ability to adhere to their respective service commitments to Band A customers. In addition, a number of Band A customers are industrial customers who will consequently, pass the cost to the very populace that the Government seeks to protect.

Conclusion

In conclusion, it is important to understand that privatisation exercises such as the one which Nigeria has embarked on is a long journey and requires patience on the part of all, including the citizenry. The costs involved in ensuring steady power supply are humongous, and can only be assessed from potential investors through steady, reliable and consistent policies from the federal Government. For sustainability, the mode and consistency of implementation is what will inspire confidence in the market to ensure security of supply.

Even where setbacks are encountered, the consistent desire to attract investment should be undeniable. This is what motivates investments, and DisCos should invest in technology to drastically reduce energy theft. We must look to the potential benefits in the Electricity Act which will hopefully see more State participation in this sector, such that its disaggregation should create more off-grid solutions such as embedded generation and solar energy. A consistent drive for these solutions, will allow for better penetration of power supply to the populace.

George Etomi FNIALS, NPOM, Founding Partner, George Etomi & Partners

How Appropriate is the Recent Tariff Review?

Dr Sam Amadi

A few weeks ago, the Nigerian Electricity Regulatory Commission (NERC) announced that it has approved a new tariff rate for some customers grouped under Band A. These customers who were paying N68 for a kilowatt (kwh) hour of electricity, will, as from April 1, 2024, pay N225 per kwh. This is about a 230% increase, in one fell swoop. In electricity industry parlance, any single increase of more than 20%, constitutes a rate shock. This is an extraordinary increase, at a time that cost of energy and cost of necessities have gone up. For example, current food inflation is 35.41%. If you tie this to over 400% increase in petrol price arising from the immediate withdrawal of petrol subsidy, it means that Nigerians are facing a very difficult period.

Expectedly, Nigerian customers revolted against the increase. The logic of the increase is that, it will apply to only 15% of the customer base of the eleven distribution companies. Also, it will come with increase of power supply to these customers who are banded together under Band A. NERC has given assurance that, these customers will receive a minimum of 20 hours of regular electricity everyday. The rest of the customers who are banded under Bands B-E will have few hours of electricity, in some cases, less than 6 hours for those on the lowest band.

The approval took effect immediately, on April 1. The reports of activities of distribution companies days after, illustrate the problem with the tariff increase. Distribution companies began to smuggle customers into the lucrative Band A, such that those who were previously under Bands B and C were automatically deducted N225kwh. On the microblog site X, formerly know as twitter, the management of distribution companies apologised to customers who complained that they were billed Band A tariff when they do not receive anything close to 20 hours of electricity daily. According to Daily Trust Newspaper, the complaints were so overwhelming that, within a week, there were more than 30 such admitted wrong categorisations and over-billings. The regulator, NERC, had to intervene the next 24 hours to cite Abuja Electricity Distribution Company (AEDC) of numerous violations, and slammed it with a whooping N200m fine.

These actions foreshadow the problems that the new tariff will unleash in the sector, as the impacts of the tariff increase hit home. As we await reactions from distribution companies’ regulator and customers, we need to evaluate the process undertaken by the regulator to approve the tariff hike, and the regulatory issues surrounding the new tariff.

Just and Fair Tariff

The prime issue in electricity regulation is the obligation of the regulator, to allow an efficient operator the right to recover the costs it incurred to supply electricity and a reasonable profit. This obligation is standard global practice that is now codified. Section 33 of the Electricity Act that replaces the Electric Power Sector Reform (EPSR) Act 2005 articulates the function of NERC to include “to ensure that the prices charged by licensee are fair to consumers, and are sufficient to allow licensees to finance their activities and to allow for reasonable profit for efficient operation”, and to “ensure that regulation is fair and balanced for customers, licensee, investors and other stakeholders”. The twin obligation of ensuring just and fair tariff to licensees and regulate in a fair and balanced manner for the benefit of consumers, is at the heart of utility regulation.

The general power to regulate tariffs in the Nigerian electricity supply industry, is derived from Section 116 of the Electricity Act 2023. It declares that generation, transmission, and distribution are subject to tariff regulation. It further states in regulating tariff, the Commission can adopt one or more methodologies that, among other things, “allow a licensee who operates efficiently to recover the full costs of its business activities, including a reasonable return on the capital invested in the business”. The Commission must, through tariff regulation, “provide incentive for continued improvement of the quality of services” and “avoid undue discrimination between consumers and consumer categories”.

The critical thing about the power to regulate tariffs in the electricity industry, is that it is based on a methodology established by the Commission in line with the Electric Power Sector Reform (EPSR) Act (now repealed by Electricity Act 2023). NERC cannot issue tariffs contrary to what is in the methodology.The methodology is a regulation, and is gazetted. Therefore, it is legally enforceable against the Commission. If tariffs are changed in a manner not contemplated in the regulation, it raises issues about legality. Under judicial review, the court can deny it due deference because it fails the test set by the US Supreme Court in the classical Chevron case, that a regulatory decision deserves judicial deference as long as it is legal, logical, and reasonable. A decision of a regulator that violates its principal enactment or its subsidiary legislation, is an illegal exercise of power and subject to judicial nullification. The obligation in Section 33 is translated into ‘incentive regulation’ which characterises the work of utility regulators. Why incentive regulation? Incentive regulation emphasises that the objective of regulation, is to incentivise the operators to deliver services at the most efficient level possible. The idea is that the ultimate public interest is that, utilities can deliver the best quality services at the least cost. Therefore, the focus of regulation is to push or nudge the operators to that level of efficiency, that will result in the best service at the least cost. Incentive regulation has implications, for the design of tariff structure. Oftentimes, the regulator will use the cost of service model, which results in cost-plus or rate of return or price cap. Each of these pricing models has its advantages and disadvantages. In rate of return or cost-plus model, the regulator estimates the cost of producing the service and additional profit, and fixes the price at that level. This means that to be profitable, the firm should not exceed the allowable costs. But, the negative side is that it does not incentivise the firm to invest in innovation that will be more efficient, since such may not improve much its revenue. This has led to some other incentive regulatory models, that allow the firm to share from the gains of its innovation.

The bottom-line of regulation is that the service should be produced efficiently, and the customer should be protected from exploitation in terms of poor quality of service and high pricing. In a natural market that is perfect, there would be no regulation since the forces or demand and supply will ensure that the price that the customer pays is the most efficient price, because of the pressure of competition. But, in a natural monopoly like the electricity market in Nigeria, where there is no competition and entry and exit into the market is constrained, the market price will not be efficient. Therefore, it should be regulated.

The nature of the market, is the major difference between telecommunication and electricity markets. In the telecommunication market there is relative free entry and exit, and customers can easily switch service providers if the price rises or quality of service falls. But, in the electricity industry there is no easy entry and exit, and there is no choice of service provider. This is the reason, for regulating price and quality of electricity services. Legislation and judicial opinions recognise that the two markets are different, hence, the law establishing them reflect the economics of their services.

The fundamental law and economics of price regulation, focus on three basic things. These were well articulated in 1961 by Professor James Bonbright in his classic, The Principles of Public Utility Rates. He listed these as (1) establishing the revenue requirement of the industry, (2) apportioning cost of service to different customers, and (3) ensuring optimal efficiency. The law requires a regulator to determine the revenue required to generate, transmit and distribute a particular amount of electricity in a year. The revenue requirement will depend on the efficiency of the sector, and the quantity of power expected to be supplied to customers. The key point is that since many costs will be capital costs that do not vary much with change in quantity, it is more efficient to supply higher quantity of electricity than less.

The second important work of regulation, is to apportion the costs to different customers to recover the revenue requirement. In doing so, the regulator ensures that the burden that falls on a customer class is fair, in that it is proportionate to the cost that the utility incurs in serving that customer class. This principle discourages cross-subsidy. There should be little cross-subsidy, such that one customer group pays a disproportionate portion of the cost of service. This will violate the principle of non-discrimination. This is a controversial point, to the extent that there is always some degree of cross-subsidisation because of policy. But, where it is gross, then the principle of far regulation and its fundamental tenet of ‘just and fair’ tariff have been violated.

Due Process Regulation

In ensuring just and fair tariff, the regulator ensures that the utilities consult with their customers, and secure their consent to tariff changes. This is a fundamental principle of fair regulation. Professor Bonbright listed the fundamental principles of rate setting as simplicity, practicability, consultation, consent, and stability. A tariff must arise from consultation, and receive the consent of consumers. It must be simple, non-controversial and stable.

Consultation as a fundamental aspect of fair regulation, is embedded in the administrative law and procedures that regulate the management of public agencies. The laws establishing the regulator, in this case, the Nigerian Electricity regulatory Commission (NERC) requires it to consult with stakeholders, especially customers before making regulations, including tariff regulations. In establishing the methodology for tariff, the NERC Business Rules requires that it consults with stakeholders, especially before signing a tariff order. The failure to do so will invalidate a tariff order.

Consultation is not just putting out an advertorial and asking for submission. That is not consultation, in the regulatory sense. The NERC regulation for tariff enacted in 2014 requires that before NERC approves a tariff request from its licensees, it must review evidence of real and sustained consultation with the affected customer class. NERC staff will attend such consultation and provide internal report, to use to second guess the report of consultation filed by the distribution companies.

Application of Regulatory Due Process to the Current Tariff

The approval of the current tariff offends the law and principle of regulation, as established under the Electricity Act and regulations issues by NERC. First, there is no evidence of consultation with customers on Band A, before approving hike in their tariff. At such consultation, the DisCo will show evidence of historical performance that justifies confidence that it can deliver 20 hours of electricity to the customers. This proof is empirical. If the DisCo has not supplied a minimum of 18 hours of electricity to the customer group in the preceding six months, how would it be reasonable to believe it can offer 20 hours without any significant increase in generation capacity and network reliability? This is preposterous. It is at such consultation, that the regulator would have realised that the request would amount to exploitation of those customers. Interestingly, the many complaints in less than a week of the approval about failure of service by the DisCos since the increase of tariff, shows that there is no capacity to supply minimum of 20 hours to any customer group. Therefore, the basis of the price increase does not exist.

Another serious defect of the tariff order, is the discrimination against customers banded under other bands. Chapter 2 of the Constitution prohibits discrimination, in access to social services. This is because such discrimination is unjust, and violates equal opportunity under the law. By granting discretional 20 hours of guaranteed electricity to one customer group and less than 6 hours to another category of customers, the regulator has violated Chapter 2 of the Constitution whose provisions have been enacted in a statute – the Electricity Act 2023. As the Supreme Court noted in Fawehinmi v Abacha, although the rights under Chapter 2 of the Constitution may not be readily enforceable, once they re-enacted in a statute, they become enforceable by the court by virtue of the enactment. Therefore, the discrimination in access to electricity not based on price but on discretional allocation, violates Section 16 of the Constitution and Section 116 of the Electricity Act.

It is clear that NERC did not apply the required regulatory rigor in the approval of the current tariff. The chief failures are that there was no real consultation with the consumer class that would be affected by price increase and no consideration for the right of other consumer groups to have equal access to electricity on equal terms like Band A customers. This is not withstanding other socioeconomic considerations that suggest that this is not the right time for such a large tariff increase. It is obvious that the regulator fell under the fiscal pressure of saving the sector from assumed financial collapse and passed unjustified costs to a category of customers perceived to be able and willing to pay. That is not good regulation.

Dr Sam Amadi, Immediate Past Chairman of Nigerian Electricity Regulatory Commission (NERC)