Lawyers and the Protection of Electricity Consumers in Nigeria, By Sam Amadi
In the last couple of weeks, the media has been abuzz with the Senate’s recent effort to protect the consumers of electricity in Nigeria against what it considers exploitation by the distribution companies. The media has made the legislative call on the electricity regulator to intervene a cause cerebrum. The Nigerian Bar Association (NBA) appears to be acting true to type in taking over this business of consumer protection from the Senate as further evidence of the patriotism of Nigerian lawyers. This is appropriate, for as the first Nigerian lawyer, Sapara Williams, put it, “the lawyer lives for the direction of his country.”
Let’s reflect on how the context of service delivery impacts on the responses lawyers ought to give to concerns about consumer protection. Context matters in this case as in many other issues. We can’t talk meaningfully about how to protect consumers without clearly outlining the features of the context of service delivery. Lawyers function in three main capacities as regards consumer protection. The fourth capacity is akin to the first that it does not merit separate consideration.
The first capacity is lawyers as regulators. As regulators, they either function as decision-makers or as analysts engaged in casework in a regulatory organisation. The second capacity is as lawyers acting as advocate and litigators on behalf of aggrieved consumers. The third capacity is as lawyers who sit as judges or administrative tribunals to provide redress to aggrieved consumers. There are common ethical responsibilities that apply to all the categories. But also depending on their capacity, lawyers functioning in different capacities have different obligations in the protection of customers.
But why do we need to bother about protecting consumers? Shouldn’t we be content that each consumer knows what is best for him or her, and has the power to protect his or her interests? In a perfect market, there would be no need to protect consumers as the forces of demand and supply would fix the right price and ensure that the right quality of service is delivered.
But there is a little issue here. Consumers are not that rational. Their decisions may not set off the movement towards equilibrium price and the right quality as perfect market theory expects. There is also power asymmetry. Producers of substandard products or firms that fix inefficient prices may veto the decisions of millions of disparate and unorganised consumers simply because they are more powerful. Just as we have power asymmetry there is also information asymmetry. They are related, but different in a sense.
For a perfect market to work, consumers and producers must have access to real time information about the workings of the market. If consumers lack important information they would not be able to respond rationally to the actions of producers. Of course, lack of information leads to lack of power to change the game.
Another imperfection is that consumers are disparate and may have little incentive to cooperate. This leads to ‘collective action problem’. The production or consumption of a good may create unintended consequences that could be negative. Such ‘externality’ means that the price of the product is not efficient, because it has not internalised this extra cost. These imperfections constitute ‘market failure’.
All these imperfections justify interventions on behalf of consumers. In fact, it is partly because of these imperfections that we design regulatory regimes in some service sectors.
In Nigeria, we have established regulatory regimes for electricity and telecommunication. If the theories of perfect market and perfect rationality are as stated, there would be no justification to establish the Nigerian Electricity Regulatory Commission (NERC) and the National Communications Commission (NCC) to regulate supply of electrical and telecommunication services. Their mandates are in the main to protect consumers of these services.
From the point of view of economic theory, consumer protection is justified because markets malfunction radically. And when they malfunction they hurt consumers gravely. A political justification for consumer protection flows from the economic justification. Because market malfunctions, usually to the advantage of producers, there is need for preferential treatment for consumers in order to recreate a balance of power. The state establishes institutions to protect consumers because producers tend to exploit consumers because of the imperfections in the markets. The whole point is to remove the asymmetry of power and restore equal and fair bargain.
Legislatures establish regulatory agencies and empower them to intervene in the market to restore balance of power between producers and consumers. And once the law establishes the regulatory regimes, the role of the court in the protection of consumers is triggered. As long as the political authority has made the decision to cure the imperfections of the market through the establishment of a regulatory regime backed up by law, judges and lawyers have become the prime Donnas of that regulated market. So, the legal theory of consumer protection is that because of the inequality in the market, the legislator has mandated the regulator to intervene in deserving cases to protect the consumers.
In the Nigerian electricity market, the National Assembly established the NERC to regulate the entire electricity sector. Section 70 of the Electric Power Sector Reform Act 2005 mandates NERC to develop, together with licensees, customer service standards and ‘information to be provided for consumers and the manners of its dissemination”.
Section 32 also mandates NERC to ensure that “adequate supply of electricity is available to consumers, to ensure that the prices charged by licensees are fair to consumers and are sufficient to allow the licensees to finance their activities and to allow for reasonable earning for efficient operations, to ensure safety, security, reliability and quality of service in the production and delivery of electricity to consumers, to ensure that regulation is fair and balanced for licensees, consumers and other stakeholders…”
How lawyers respond to concerns about protection of electricity consumers in Nigeria depends on what part of the policy, regulatory and litigation landscape of the regulated electricity market they operate.
Lawyer as regulator
Lawyers working as regulators are the first protector of the consumers. The EPSR Act is unmistakable that NERC has clear responsibility to make rules and regulations that protect the consumers. These rules and regulations cover mainly three aspects of service delivery.
First, it deals with the quantity and quality of electricity supplied to consumers. The regulator should ensure that consumers have access to adequate and reliable electricity as much as possible. This is technical regulation.
The regulator also has responsibility to ensure that the prices that consumers pay for electricity services are ‘fair and reasonable’. This is economic regulation. The regulator also has responsibility to ensure that electricity is supplied in a safe and secured condition. This is social regulation.
In managing these responsibilities lawyers-as-regulators ought to understand the real nature of the imperfections of the market they are to regulate. Let us start with technical regulation.
In the Nigerian electricity market, NERC sets standards of technical operation. The Grid Code, the Distribution Code and the Metering Code set technical standards for efficient and effective management of the transmission and distribution grids.
In order to achieve the quality of service required, NERC sets benchmarks and Key Performance Indicators, KPIs that each service provider must meet. The competence to set measurable and enforcement KPIs is a clear indication of the capability of NERC to achieve agency mandate on quality of service.
The responsibility of lawyer-as-regulator with regards to technical regulation is to design clear and lucid benchmarks and KPIs with effective monitoring and enforcement mechanisms. The regulatory tools and frameworks should be such that incentivises efficiency and discourages race to the bottom in terms of technical efficiency.
The lawyer-as-regulator must understand the behaviour of regulated entities and as much propose codes and standards that motivate towards high quality service. This is basically a competence-based responsibility. It is in this wise, that such lawyers must also have good enough knowledge of engineering or economics. They must be schooled or experienced in other disciplines so as to gain useful perspective on the interrelationships in electricity market so as to enact rules and regulations and design tools and frameworks that promote quality of service to consumers.
The second component of regulation – economic regulation – imposes other responsibilities on the lawyer-as-regulator. The strongest protection for consumers is protecting them from excessive pricing. The fundamental premise of classic economic theory is that in a perfectively competitive market, the prevailing price is the right price.
Regulation is an attempt to simulate the ideal conditions of a competitive market. The prices of electricity services should be so regulated such that consumers pay only reasonable prices appropriate for the services they receive.
The Act guarantees every operator fair returns. Fair returns cover costs of operations plus appropriate return on investment. But the catch is that the only costs that a regulator can rightly pass through to consumers are costs that are prudently and efficiently incurred.
It is because of the principle of prudency and efficiency that NERC disallowed distribution companies, DISCOs, from passing collection losses to consumers. This resulted in the lowering of tariff. I have been personally abused for taking this bold decision and many critics have accused me of introducing regulatory instability. But the bold decision we took as a Commission to refuse passing collection losses to consumers as higher tariff is in line with the responsibility imposed by the Act on NERC not to allow inefficient costs to be passed to consumers.
What NERC decided was that thenceforth, any DISCO that wants to pass its collection losses to the consumers must prove that those losses are beyond its reasonable efficiency. This is a clear intervention to protect consumers.
The responsibility of the lawyer-as-regulator is to ensure that the utility does not pass inefficient and impudent costs to consumers in form of higher tariff. Tied to the issue of tariff is the question of access to electricity services. The lawyer-as-regulator has a responsibility to incentivise operators to increase connection to rural areas. In Nigeria, connection to the national grid is about 50 percent. This means that many Nigerians don’t have access to electricity. In addition, many communities that are connected to the grid have no meaningful enjoyment of electricity. Through incentive-based regulation, the regulation should ensure that these communities get enough electricity.
Now this analysis hides a potential conflict. Consumers want cheap electricity. But, they also want sustainable electricity supply. Electricity is a product that has to be produced, before it is supplied to homes and businesses.
In a real world of scarce resources, the price of electricity has to be right in order to stimulate continuous investment that will increase availability and reliability.
A very low tariff that is not cost reflective does not protect consumers enough. This is ironic. But it is true. Investment decisions on power project will be based largely on the assurance that the proposed investment will be recovered through tariff. If the tariff does not guarantee the recovery of cost there will be no investment. Without appropriate investment we cannot guarantee customer access to adequate and reliable electricity.
Lawyer as advocate
The consumer advocate should focus attention in ensuring that the tariff approved by the regulator does not have windfall profit for the operator at the detriment of consumers. In the Nigerian electricity market, the incentive regulation approach enables NERC to achieve fair outcomes for consumers in pricing.
It is based on a methodology that gives us a line of sight into the costs of electricity business. Once the regulator benchmarks quality of services, it now approves the expenditure that the operators need to make to achieve that level of service quality. This then translates into a revenue requirement (RR) which will be recovered through tariff design. The efficient tariff design is one that allows the operators to recover its approved revenue requirement without undermining access to electricity supply. This means that the tariff will guarantee cost recovery and affordability. The work of the lawyer-as-regulator is to ensure that the tariff design it approves for every operators places fair and affordable tariff on each customer class.
It is important that the consumer advocate understands the mechanism of tariff setting to be effective in protecting consumers. If we don’t set up a cost-reflective tariff we will not guarantee increase in capacity and reliability. This is the first violation of the consumer charter.
The first need of the consumer is availability of the product at the right price. If a product as essential as electricity is not available then there is a gross violation of a fundamental condition of customer protection. For it to be available there must be a commercial incentive to produce it. That is what cost-reflective tariff does.
But getting to cost-reflective pricing (right pricing) is both a science and an art. As a science it is based on a methodology that was set through due process as provided in the Act. But as an art, it is based on intuition, experience and pragmatic analysis of socio-political and economic situations and trends.
This means that the regulator has to make a call on what tariff level is appropriate to stimulate investment and at the same time is affordable. Affordability throws up a difficult challenge for the regulator. Affordability is not determined outside the economic and social contexts of everyday life.
The regulator may guarantee minimum consumption for those who cannot afford the right price. This means two things. The richer consumers may pay slightly more than they ought to pay to compensate for the underpayment by the less privileged consumers. This is a cross-subsidy.
Cross-subsidy distorts the market because it means that some people are paying more and others are paying less than cost reflective tariffs. But, in the art of tariff making, reasonable amount of cross subsidy is tolerable.
The second approach is for the government, either through taxation or national budget, to provide for a subsidy regime to assist adequate consumption by those who may not pay cost-reflective tariffs. In the Multi Year Tariff Order (MYTO), NERC provides for cross subsidy for most residential and small commercial consumers. We are also developing a Power Consumer Assistance Fund (PCAF) to provide financial support to guarantee full enjoyment of electricity for some poor consumers identified through means testing.
The lawyer-as-regulator also has responsibility to protect consumers through enforcing standards on health, safety and the environment. I will not say much on this. It is important as one of the ways of regulating the negative externalities of the electricity market.
We have many cases of electrocution arising from improper management or handling of energised platforms and equipment by operators and the public. As a regulator, we have the Health and Safety Code and Handbook to benchmark acceptable standards of care and due diligence in the industry, as well as guidelines on how to operationalise the code. We hold periodic health and safety meetings with operators to assess and enhance performance. And we monitor and punish infractions of the codes and standards. This is the standard manner lawyer-as-regulator protect consumers’ health and safety.
Lawyer as consumer rights advocate
If you ask me I will admit that the weakest link in the protection of consumers in the Nigerian electricity market is advocacy. We are doing badly here. I have had to step out of jurisdiction to become the chief advocate of electricity consumers. As CEO of NERC, we don’t have good participation of consumer advocacy groups in our public hearings on tariff and other regulatory issues. This lack of serious engagement led me to do what no one has done in Nigeria: to set up a consumer advocacy network to scrutinise NERC’s protection of consumers.
What led to this revolutionary action is the realisation that consumers are disparate, unorganised and, oftentimes, powerless against the behemoth of operators. Because of this disadvantage, the interests of consumers lie only on the vigilance of the regulator. This is not enough. We need to have an organised consumer platform able to sponsor expert analysis of the electricity market and design interventions that better promote consumer interest.
Much more important is the place of lawyers who utilise administrative tribunals and courts to protect consumers. These lawyers challenge the decisions of the regulator. From what I have seen so far many Nigerian lawyers don’t understand the intricacies of regulation in the electricity market. This acute lack of knowledge will militate against effective protection of consumers.
There are core principles of regulation that shape the regulatory landscape. The absence of the equivalent of the U.S. Administrative Procedure Act (APA) in our administrative law does not help the consumer advocate. It means that there is no organised body of procedural law that lays clear standards for regulatory agencies in their notice-and-comment processes.
So, the would-be lawyer-advocate should start with proper understanding of regulatory landscape of electricity market in Nigeria and a commitment to see where the regulator has deviated from procedural and substantive due process.
Judge as consumer activist
The judge is the last bastion in the chain of consumer protection. The responsibility of the judge is to hear petitions of aggrieved consumers and the public against the regulator and/or the operator. There is a well established body of rules and norms on how the judge should approach this responsibility. I will do no better to try and improve on it. But, I will gladly add that judicial review of regulatory decision is somewhat a different kettle of fish.
I have argued before that in reviewing the decision of regulatory agencies, the court does not usurp the responsibility which the law bestows on the regulator. The same Constitution that bestows on the court the judicial power of the republic also bestows the legislative and executives powers on different entities.
Therefore the Constitution mandates due deference to the executive branch of government. Besides, the regulator exercises quasi-legislative and quasi-judicial functions as well. Its decisions are often arrived at after the review of evidence on records and pursuant to principles and criteria clearly established by law.
Therefore, the acceptable degree of review of regulatory decisions as stated in the common law case of Council of Civil Service Unions v. Minister for Civil Service (1985) 1 AC 378 and the US Supreme Court case of Chevron, Inc. v. Natural Resources Defence Counsel 467 UD 837 (1984) is that the court should defer to the decisions of the regulatory (including its interpretive decisions) as long as they are legal, rational and reasonable.
Now this position does not restrain the judge from effectively protecting consumer rights. Rather, it protects the judge from costly errors arising from handling technical decision which he is neither trained nor exposed to handle effectively. But deferring to regulator is not allowing the regulator get away with murder. It simply means that the judge has to have the skills to review the process of decision making by the regulator to ensure that it was not motivated by extraneous and unwarranted considerations. Beyond that the judge has to agree with the regulator.
The conclusion of the matter is that we have enough wriggle room to protect the consumer even in the most difficult regulatory regime. The Nigerian electricity market has enough enablement for lawyers who want to protect consumers. Lawyers should now rise to the game and acquire the skills and temperaments that will make them effective protectors of consumer rights.
Sam Amadi is Chairman/Chief Executive of the Nigerian Electricity Regulatory Commission (NERC).
This presentation was made recently at the Annual Conference of the Nigerian Bar Association in Abuja.