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Sorry, But Here's Why You Must Pay More For This Darkness By Chienedu Ekeke

June 3, 2014

Mr Amadi's plea for understanding is understandable. It bothers him that the consumer who lives in darkness most of the day will be asked to pay more for electricity. But this irony--not having electricity and being asked to pay more--is the reason the consumer is paying more, not less, as he would expect.

Seated across a stately conference table, Dr Sam Amadi addressed an assemblage of reporters on a new electricity tariff regime which his team had just reviewed. 'The new review', he read from a prepared text amidst competing flashes of light from photojournalists' cameras, 'will take effect on June 1, 2014.' Calm, measured, and with a body language that pleaded understanding, the Chief Executive Officer of Nigeria's electricity regulator reeled out the variables that underlined his National Electricity Regulatory Commission (NERC)'s price change.

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The variables are in the nation's macroeconomic outlook as at March 31st, 2014, the cut-off date for the period under review. These were inflation rate, exchange rate, gas price and quantity of power generated for sale.

It was a mixed bag of a sort. On the core economic front, the numbers turned out positive: inflation, projected at 13% by the commission, peaked at just 7.8%. Exchange rate, projected at N178 per dollar, peaked at N157.30. These two collectively meant that there was supposed to be a reduction in the wholesale tariff. And there was; except that it was eaten up by a huge drop in the projected power generation within the period. The expectation was that 9,061 megawatts of electricity would be generated. But the actual wattage generated was 4,306 mega watts, a 52% negative variance, huge by every standard. This drop is tied to non-availability of gas, a key component of Nigeria's electricity generation and distribution. This, however, resides totally outside the scope of NERC's control. The direct consequence of this low generation for the Nigerian electricity consumer is that the fixed costs - and this is huge - have to be spread over a much smaller quantity of electricity generated.

This, in a sense, could be understood by understanding what the economists call 'economy of scale'. If much goods are produced, the cost of production gets spread over a larger amount of products. This drives down price per unit of product paid by consumers. But if the same assets produce much lower quantities, the cost per unit goes high, and this cost gets shifted to the consumers.

To further drive this complex message down, Mr Eyo Ekpo, a lawyer with vast experience in both private legal practice and Nigeria's public sector administration, drew a parallel with an office building - NERC's Adamawa House high-rise office building in an upscale Abuja Central Business Area - and how its tenants will ultimately bear the cost of recouping investment for its developer. An amount should be recouped from each floor, and whether the floor is occupied by one tenant or fifty, the investment in that floor does not alter. It then follows that with more tenants comes reduced rent. Mr Ekpo is NERC's Commissioner overseeing Market Competition and Rates. The wholeness of his knowledge in the electricity sector, an industry he joined in reforming since 2001, was not in doubt. It was clear that the topic in discourse was his beat.

Given our realities, the new tariff could have been worse. Mr Amadi reminded the media. "It is also noted that the cost of this increase would have been much higher but for the good macroeconomic management that produced a real reduction in wholesale (generation) sector tariffs." Evidently, if inflation and exchange rate remained at their projected values, the reduced volume of wattage generated would have shot up the new tariff far above the new figures to be released by NERC.

Why should the consumer concern himself with a business man's fixed cost or even cost of capital?

It is difficult not to see it as an investor's market, really. Or, put differently, the Nigerian electricity market was designed to protect investors' huge outlays, assure them of returns and ensure results for the electricity consumer. The impression one gets interpreting the bases for the new price regime is that the consumer must be ready to keep the private power producer in business, so that the bulbs can light up.

The statutory document from which NERC derives its powers to regulate prices is called Multi-Year Tariff Order (MYTO). NERC established this order, some years before current CEO Amadi took over the management of the commission, with a legal reliance on a 2005 act of parliament, called the Electric Power Sector Reform (EPSR) Act, which established the commission. In the methodology set out for fixing and regulation of electricity tariff pricing, premium was given to the desire to attract investment into the sector. Mr Amadi drew reporters' attention to this when he cited a section of the EPSR act. In section 5.76(2)(a) of the act, NERC is mandated to set 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".

This must have set the tone for a proposal the commission made two years later. In a 2007 pricing MYTO methodology drawn up by Ransome Owan, NERC's former CEO, Section 3.5 suggested that "the main objectives in setting bulk electricity prices in vesting contracts are to cover the cost of existing plant and allow for their efficient maintenance and ongoing investment programmes while ensuring that an appropriate incentive exists for new entry generation..."

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I asked the chairman the duration of this investment cost recovery for energy providers. He said MYTO provided for 15 years. On the sidelines, I asked Mr Ekpo if after 15 years the fixed cost variable would be discounted off consumers' tariff, he said investments in the sector would remain continuous.

Mr Amadi's plea for understanding is understandable. It bothers him - it really should - that the consumer who lives in darkness most of the day will be asked to pay more for electricity. But this irony - not having electricity and being asked to pay more - is the reason the consumer is paying more, not less, as he would expect. It is in the consumer's best interest for electricity to be generated in large wattage and distributed: he will have more power and he'll have it cheaper.

It sounds like the consumer is at the losing end, but Mr Amadi said his commission is out to protect consumers. He said NERC gets accused by both parties - electricity sellers and buyers - of not protecting them enough. He assured consumers of fairness in price fixing, and said the pricing methodology designed a way to ensure the energy producers and sellers do not recover investments fully without making enough wattage available for the consumer. For this reason, only 21-23% of investment fixed cost will accompany the fixed charge of electricity tariff. The remaining 77-79% of the fixed cost is tied to the energy charge. The energy charge is tied to electricity output. In simple terms: there's an incentive for producing electricity, and conversely a penalty - by way of losing a significant part of fixed costs - for failing to produce.

NERC is confident Nigeria will get past this stage. The commission believes that this is a transition which will be managed to full competitive market. But for this to happen, adequate investments in the sector, by private individuals, need to be encouraged. MYTO seems to have been designed with this in mind, to boost investors' confidence in the regulatory system.

This is already happening. Mr Amadi told his guests that in spite of gas scarcity which hinders power generation, investors are still showing interest in the sector. For instance, National Integrated Power Projects (NIPP) plants are all subscribed. Government's commitment to put strong regulations in place, Mr Amadi said, is responsible for this full-subscription.

Nigeria's electricity sector, haunted by a checkered history in opacity and corruption, did not witness any reasonable investment until 2010, according to Amadi. He reminded reporters that "all the issues of today are legacies of an industry riddled with corruption." Mr Amadi's claim has a backing from a Presidential Task-force on Power which once said investment in the power sector witnessed significant drop consistently over a 20-year period beginning from 1980.
To bridge this wide investment gap, a roadmap on Power Sector Reform by  the Jonathan administration recommended a consistent yearly $10 billion investment in electricity for ten years. That way, Nigeria would be able to generate up to 40,000 mega watts by 2020. Today, six years shy of 2020, peak generation to date is 4,500MW. And if the 2010 roadmap was followed, $40 billion should have been invested by now with a corresponding 16,000 megawatts generated. Any faltered determination to follow the roadmap through will widen the gap for a country with a population of 160 million and an annual 6% growth on population.

As the new tariff took effect June 1st, electricity workers had already issued threats of a showdown with government. Mr Amadi's plea for understanding may be the only option left for the consumer, with a distant hope that the consumer's willingness to cooperate with MYTO pricing methodology will attract many profit-seeking investors who will, over time, naturally randomly compete among themselves. If that happens, tariffs might go down, and the consumer ultimately benefits.

"We are here today because of the past, discussing the future because of the present", Mr Amadi said. His NERC has a message for an audience mostly unwilling to listen. If that happens, it will not be because Amadi and his commissioners have done anything wrong. It'll be because the history of electricity in Nigeria has come to haunt those who today manages its regulation.

Follow the writer on Twitter as @Nedunaija

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