Mr. Gates, an orange dealer supplies certain exotic oranges from Ondo State to hotels, restaurants and retail fruit outlets in Abuja. He transports the oranges from Ondo to Abuja in an old truck that spends days in transit.
Due to the stacking and long period of the transit, some 10 percent of the oranges get damaged before reaching the warehouse. At the warehouse, during distribution, another five percent of the oranges received are lost due to pilfering, and unauthorised gifts by warehouse and distribution personnel.
What is eventually sold is only 85 percent of the procured number of oranges. Hence, the oranges whose procurement costs stands at N10 per unit, for instance, will finally get to his customers at N11.7 per unit.
Six months into the business, some of his customers not paying him promptly after delivery led to difficulties in his paying the farmers of the oranges on time.
This reluctance to pay or delay in payments, according to his estimate, is caused by half of his customers. He therefore proposes to double his supply price to N23.4 per orange, so that even if only half of the oranges sold are promptly paid for, he will still collect enough money to pay the farmer with ease. Any time those delayed revenues come in, it would be a welcome windfall.
In extrapolating the above scenario, the 10 percent loss could be similar to the transmission and distribution loss or technical loss in the Nigerian Electricity Supply Industry (NESI).
It could be improved upon if the orange dealer uses better and faster freight vehicles and packages the oranges in wooden racks. But, this would require some investment, and may take a little while.
Hence, it is fair to pass the cost of such losses in the meantime to the consumers. He may install security cameras at his warehouse and take other auditing steps to reduce the pilfering and similar losses (same as commercial losses in the NESI). Again, this may require investment and time. So, passing it through to the consumers – while making efforts to reduce them – can be logically explained. However, if the dealer claims that 50 percent of his sales experience delayed payment, or are not collected as invoiced, at and when due (i.e. collection loss), because he failed to put in place necessary sales agreements, precautionary market mechanisms to avoid bad debt or revenue shortfall, will it be fair to raise the unit price paid by the faithful customers?
This is the ethical dilemma in the collection loss debate in the NESI.
However, unlike the orange market above, the NESI has a regulator whose responsibility it is to moderate the shylock behaviour of a natural monopoly, while giving the investors an opportunity to earn just, fair and reasonable return on their investments, as a matter of public interest.
The Distribution Companies (DISCOs) were sold to the new owners to reduce their losses. But today, after two years, they have made no significant investment in the electricity distribution system; have not carried out customer enumeration, and some are yet to commence the implementation of their metering plan.
Large metering gaps still exist in the NESI. Only 55.5 percent of customers nationwide are currently metered, coupled with rampant arbitrary billing of unmetered customers. Thus, the utilities have failed to gain customer trust with regards to their bills, leading to payment apathy.
It is noteworthy that they were expected to carry out baseline studies to determine their actual customer numbers and loss levels, which would then be accepted after due verification.
But, believing that declaring high losses will entitle them to higher tariffs, all the DISCOs now claim efficiencies worse than the defunct Power Holding Company of Nigeria (PHCN) era and have declared incredibly high collection losses, with some as high as 50 percent.
What that means is that 50 percent of energy revenue billed to customers in such DISCOs will never be paid, hence such amount are to be recovered from other customers, thereby doubling the tariffs, if the regulator approves that such losses be passed to customers.
The pertinent regulatory questions are: what really constitutes collection loss? Is it delayed payment or bad debt? How long should the debt remain unpaid for it to qualify as a collection loss?
If eventually it is paid after charging it to other customers, how would such windfall be treated? What is responsible for such high collection losses? Who is responsible for its reduction? If reduction is achieved, who is the principal beneficiary? Is there any action the paying customers can take to reduce the losses, which doubled their tariff, because some other consumers had not paid their bills? Is there any obligation on the utility to continue to serve non-paying customers to justify charging their consumption to others?
Without metering, who can vouch that the amount billed is correct and that the difference between that amount and the actual revenue represents the correct billing revenue shortfall? Without metering, how do utilities measure the energy sold to each customer category and how does it convince the customer that his bill represents his actual consumption?
A former PHCN marketer has explained that the marketers would issue an ‘asking price’ to an unmetered customer who then negotiates and pays what s/he is convinced she ought to pay. It is the difference between the sum of all these ‘asking price’ bills and what is eventually collected that is posted as collection loss.
This also explains the low commercial loss figures in an industry where a large number of illegal connections exist and the operators are reluctant to carry out customer enumeration.
With a grossly understated customer number, one expects very high commercial losses through illegal connections. But, all the DISCOs claim incredibly low commercial losses, between 1.5 and 17 percent.
For instance, the 2006 national population census figures show over 28 million regular households. If we assume that only 30 percent of the Nigerian households are connected to the national electricity system, we will arrive at about 8.4million for residential customers only (excluding all commercial and industrial customers) in 2006.
Yet, in 2015, nine years later, the DISCOs are rejecting a total customer population of 8.7 million (all customer classes) as contained in multi-year tariffs order, MYTO 2.1, and are claiming, without enumeration, an estimated total customer population of 6.5 million.
The implication is that a very large customer population, who are consuming power illegally (commercial losses), are uncounted for in the DISCOs database. Their costs are passed to unmetered customers as estimated. When they refuse to pay for such arbitrary bill, it is posted as collection loss.
All government owned institutions, ministries, department and agencies (MDAs) must be made to pay their bills, either through adequate prepaid metering or have the verified bills deducted at source from their next year’s budgets.
Difficult customers, such as military barracks, may be bulk metered after obtaining appropriate derogation in respect of the regulatory policy against bulk metering.
For customers adjudged so indigent that their bills must be written off as bad debts, the Electricity Power Sector Reform (EPSR) Act 2005 creates the power consumers assistance fund to help them pay.
Hence, the amended MYTO 2.1 order required the DISCOs to justify that such cases exist and it will be handled appropriately in their tariffs. Several options exist through which the collection losses can be eliminated, all of which are within the responsibility of the DISCOs.
Every regulatory decision seeks to create or remove an effect in the market and in defence of public interest. Collection loss is the DISCOs’ lazy-man’s survival pills.
Rather than enumerating their customers, metering and reading their meters, engaging with them and gaining their confidence and even helping them reduce their bills through energy efficiency advice, the DISCOs are simply keeping a few in their database, issuing revenue targets to marketers who in turn issue arbitrary estimated billing that the customers continue to dispute.
Then the DISCOs go to the regulator to double their tariffs, because the sum of the figures they reel out as energy billed amount is higher than the actual revenue obtained.
Legalism versus professionalism
With regards to the treatment of the large collection losses in the NESI, two schools of thoughts have emerged, one based on legalism and the other based on professionalism.
The legalist school believes that although it is unfair to pass the collection losses to customers, since the performance agreement signed with the Bureau of Public Enterprises (BPE) anticipates a review of the Aggregate Technical, Commercial and Collection (ATC&C) value then, whatever ATC&C figure is approved must be passed fully unto customers, even if it means doubling the tariff. Doing otherwise may be taken as changing the rules of the game.
On the other side are those who believe that the regulator should do what is professionally correct at all times. They argue that the performance contract does not hamstring the regulator, nor absolve her of her regulatory responsibility to the investors, the customer and to ensuring discipline in the market.
They point out that the crafters of the agreement recognised that its content should not constrain the regulator from taking the right regulatory decision.
Consequently, all the Commission needed was to seek judicial interpretation of the relevant laws and release itself from regulatory capture, especially given that BPE that signed the contract, is currently on the Board of these companies, making it difficult for it to raise any flags.
For instance, the total number of additional consumer meters promised by the DISCOs in their performance agreement was well above 2.5million within the first two years. But, today, two years down the line, they have installed less than 0.5million meters.
A private sector investor seeking for supra-optimal compensation while offering sub-optimal service, and the consumer demanding for above the average service at below average price are acting in self-interest, but the regulator must ensure fairness to both. Hence, the Nigerian Electricity Regulatory Commission (NERC) decided in April to remove collection losses as a pass-through tariff component until its inclusion is justified.
Therefore, the MYTO 2.1(amended) states that: “any DISCO that feels that certain collection losses should be passed through to its customers should indicate this when applying to the Commission for a Tariff review, and make a case to the Commission providing evidence of what shall be passed through to customers. Such evidence shall be based on the refusal and or neglect of the customers to pay their bills rather than the failure of the DISCO to collect bills.”
Rather than coming forward to justify passing the collection losses to customers, the DISCOs have resorted to ‘cheap regulatory blackmail’ of ‘your tariffs are no longer cost reflective’, threatening with force majeure notices.
Irrespective of whatever politically expedient stance the Commission eventually adopts, a major gain from the debate on MDA debts (tens of billions of naira) are now going to be taken out before passing the rest to the customers, at least for the period of the performance agreement.
Efficiency improvement requires investment and it does not happen without regulatory nudging. As long as the inefficiencies in operations are as passed to customers by tariff, or government (subsidies), there is no incentive to reduce them.
Yusuf Abdussalam, a staff of NERC, wrote in from Abuja.