Senate President Bukola Saraki

At this critical juncture in the life of the NPS, where the sector needs all the support it can get and more, it is mightily important for the various arms of the government to realise that the ways in which they exercise their powers regarding the sector have wide-ranging impacts on how private investors – the cornerstone of the sector going forward – view it. For the sake of fellow Nigerians, I hope the Senate realises that its interventionary actions, which I presume are good willed but are unequivocally ill timed and executed, will only cause more harm than good to the NPS going forward.

On February 15, 2016, the Nigerian Senate directed the National Electricity Regulation Commission (NERC) and the eleven distribution companies (DISCOs) to suspend the implementation of NERC’s new electricity tariffs (MYTO 2015), which was due to run from February 2015 till December 2024.

I will start by providing a very brief explanation of what the MYTO means. MYTO stands for Multi Year Tariff Order and is a standardised methodology for calculating electricity prices to be paid by consumers based on the revenue requirements of the entire power sector over the course for which the MYTO is expected to run. The revenue calculations cover the capital, running costs and return on investment of the investors. The need for a shift towards cost reflective electricity tariffing was a key driver behind the adoption of the MYTO.

Since the introduction of the inaugural MYTO (MYTO I) in 2008, there have been five reviews culminating in the MYTO 2015. Even though the MYTO was designed to be dynamic, with allowances for minor and major reviews every one and five years respectively, the frequency with which the MYTO has been reviewed should be an issue for all Nigerians. This is because regular major tariff reviews lead to revenue uncertainty for investors and consequently reduces investor confidence in the market.

In justifying the need to suspend the implementation of MYTO 2015, Deputy President of the Senate, Ike Ekweremadu stated, “As a country on life-support we do not need to add to the suffering of the people, for me this tariff increase is ultra-wicked and unconscionable. We must reverse it (MYTO 2015) immediately…”

In response to the Senate’s directive, the DISCOs under the umbrella of Association of Nigerian Electricity Distributors (ANED) predictably condemned the Senate’s actions stating that it could have wide-ranging negative impacts on the whole country. “Fellow Nigerians, suspending the implementation of the new tariffs will leave us in continuous darkness, with diminished and no future prospects of growth of our economy” read the ANED statement.

While many Nigerians have applauded the Senate for protecting the masses, there is a deeper question that seems to have been ignored by most. Perhaps in the hysteria of not having to pay higher tariffs, most Nigerians have chosen not to critically analyse the impact the Senate’s actions could have on the power sector on the longer term.

Although both sides of the discourse are awash with huge claims about the merits and demerits of the implementation of MYTO 2015, it is difficult for most Nigerians, myself included (and possibly the senators as well) to make educated opinions about the issue because we simply do not have the numbers.

This in itself points to a glaring failure on the part of NERC. One of the supposed benefits of having a standardised pricing mechanism like the MYTO is to remove the arbitrariness of the tariffing process; a thing that unfortunately became one of the hallmarks of the failed PHCN/NEPA regime. Since a clear (perhaps rather complicated) mathematical framework exists for calculating the tariffs, it is very reasonable to expect NERC to publish the variables (numerical assumptions) used in the tariff calculations so that the process is very transparent.

Now to address the Senate’s directive, the legality of the Senate’s actions have been thoroughly tackled by Lawyer Bolaji Niniowo in his op-ed titled “Electricity Tariff: Interrogating The Scope Of the Senate’s Oversight Responsibility”. I support his opinion that the Senate does not have the power to order the suspension of the implementation of MYTO 2015.

As I have mentioned above, I doubt that the honourable senators have enough knowledge to make any judgement about the correctness of MYTO 2015. Also, the Senate’s timing is very contentious at the very least. NERC published MYTO 2015 in December 2015 and made it abundantly clear that it would become effective in February 2016. Therefore, it is rather “interesting” that the Senate did not address any issues until after MYTO 2015 had come into effect.

While many Nigerians have applauded the Senate for protecting the masses, there is a deeper question that seems to have been ignored by most. Perhaps in the hysteria of not having to pay higher tariffs, most Nigerians have chosen not to critically analyse the impact the Senate’s actions could have on the power sector on the longer term.

While the vicious dissuasive effect of revenue uncertainty on potential investors has been discussed above, it is perhaps not as harmful to any country’s ability to continually attract private investment as having a “serial contract infringer” reputation. This is because unlike tariffs, contract infringements can affect more aspects of an investment and so complete confidence in a contracting partner is an absolute must for private investors.

First, DISCOs will make investments in new distribution infrastructure and metering; one of their key mandates if they are confident that they will be able to accrue returns on their investment in a timely manner. Although DISCOs have continually battled with NERC over tariffs, interferences from the Senate (this is not the first time the senate is interfering with tariff-setting) will only reduce the DISCOs’ willingness to make investments in distribution and metering infrastructure with their capital. These are long-term investments for which DISCOs need a very consistent regulatory and tariffing structure to guarantee their returns.

I believe that revenue collection is a major threat to the ability of the Nigerian Power Sector (NPS) to continually attract investment along the entire value chain because people will only invest when they know they will get their money. Therefore, investment in metering is the default starting point for any serious sustainable efforts aimed at improving the financial attractiveness of the NPS.

Furthermore, we have to consider the vibes that the Senate’s actions send to potential investors, both within and outside the power sector. ANED stated that “However, implementation of this (the Senate’s) resolution is not without consequences and the following are a few of them. A market priced tariff is a fundamental requirement under the agreements signed between distribution company (DISCO) operators in the Nigerian Electricity Supply Industry (NESI) and the Bureau for Public Enterprises (BPE), raising the concern for sanctity of contract.”

While the vicious dissuasive effect of revenue uncertainty on potential investors has been discussed above, it is perhaps not as harmful to any country’s ability to continually attract private investment as having a “serial contract infringer” reputation. This is because unlike tariffs, contract infringements can affect more aspects of an investment and so complete confidence in a contracting partner is an absolute must for private investors.

With the government’s uber-conservative projections putting our peak demand at 300% of our current peak generation, generation is a sub-sector that we can ill afford to scare investors away from. The same is true for the transmission and gas transportation sub-sectors; all areas where there is gaping under-development.

Also, many Nigerians may not remember, but the DISCOs are only a final piece in a very complicated value chain. Therefore, actions directed at DISCOs inadvertently have bigger ramifications further up the value chain. An example of the potential negative trickle down impacts of fiddling with DISCO tariffs on the sector surfaced during the shift to MYTO 2.1 Amended. NERC’s decision to remove the energy loss component of the tariff in MYTO 2.1 Amended reportedly led DISCOs to start rejecting their allotted share of electricity from the Transmission Company of Nigeria (TCN) because they claimed that tariffs meant their businesses will suffer losses from selling the electricity.

Although during this current transitional market phase, Nigerian Bulk Electricity Trading Plc (NBET) was able to act as the buffer; paying GENCOs and TCN for the rejected electricity, the actions of the DISCOs which they argue is as a result of NERC’s MYTO amendment send all the wrong signals to potential investors at the higher levels of the entire value chain.

With the government’s uber-conservative projections putting our peak demand at 300% of our current peak generation, generation is a sub-sector that we can ill afford to scare investors away from. The same is true for the transmission and gas transportation sub-sectors; all areas where there is gaping under-development.

At this critical juncture in the life of the NPS, where the sector needs all the support it can get and more, it is mightily important for the various arms of the government to realise that the ways in which they exercise their powers regarding the sector have wide-ranging impacts on how private investors – the cornerstone of the sector going forward – view it. For the sake of fellow Nigerians, I hope the Senate realises that its interventionary actions, which I presume are good willed but are unequivocally ill timed and executed, will only cause more harm than good to the NPS going forward.

Yusuf O. Ali is a doctoral candidate in the Department of Engineering, University of Cambridge; you can reach him on e-mail at: yoa20@cam.ac.uk, and Twitter: @YalyAli