The implementation of the service delivery model in determining cost reflective retail electricity tariffs will be beneficial to the power sector. It will put an end to the perennial complaints of non-cost reflective tariffs by DisCos, a complaint that has plagued the power sector since the conclusion of the privatisation process.

Once again, just as the Nigerian Electricity Regulatory Commission (NERC) and electricity distribution companies (“DisCos”) are about to conclude on a long awaited review of retail electricity tariffs, seismic movements in macro-economic indices fundamental to retail electricity prices has occured and put the tariff review process in jeopardy. No thanks to the COVID–19 pandemic and the unanticipated crude oil price crash.

A similar scenario happened between 2014 and 2015 when, after the conclusion of a protracted tariff review process that led to the intervention of the Central Bank of Nigeria (CBN), the exchange rate moved from N156 to N167, then to N198/$USD1 as a result of the crash in crude oil prices in 2014. In 2016, also after the conclusion of a protracted and acrimonious tariff review process, the official exchange rate moved from N198/$USD1 to N305/$USD1, with a surge in the inflation index to a high of 18 per cent, invalidating all the key macro-economic indices in the Multi-Year Tariff Order (MYTO) 2015 that replaced the MYTO 2.1 model. The depreciation of the naira in 2016 is one of the reasons why the present retail electricity tariffs are not cost reflective.

Indeed, the Nigerian government and NERC should be held responsible for freezing retail electricity tariffs since 2016, and not implementing minor tariff reviews when due, despite significant degradation in the macro-economic indices since the 2016 major tariff review. The reluctance by NERC to review retail electricity tariffs may be borne out of an ingrained philosophy (perhaps a prevailing mindset of government) that NERC’s core mandate is to determine the ability of Nigerians to pay for electricity and also to fix electricity prices. It is the same philosophy and mindset of successive administrations in fixing the pump price of petrol. However, where there is a funded (but unsustainable) subsidy programme in the petroleum sector, there exists no such funded subsidy in the power sector. Rather, the resultant effect has been a build-up of unsustainable market debt of over N1.5 trillion. Neither the CBN nor the federal government have the capacity to fund electricity subsidies created by government’s refusal to review retail tariffs when due. Please note that this is not advocating for the creation of an electricity subsidy fund to subsidise either electricity production or consumption, even for the poor and most vulnerable.

The NERC must now let go of this encumbering philosophy and impractical mindset of deciding if Nigerians can pay for electricity and how much Nigerians should pay for electricity. Section 32 of the Electric Power Sector Reform Act (EPSRA), which deals with the objectives and functions of the NERC, does not give the NERC the mandate to determine and decide if Nigerians can pay for electricity and how much Nigerians should pay for electricity.

Rather, NERC’s overarching mandate should be on improving electricity access and service delivery to electricity customers. Remarkably, Section 32 (e) of the EPRSA very clearly mandates and empowers the NERC to “ensure the reliability and quality of service in the production and delivery of electricity to customers”. Sadly, NERC and the federal government have consistently failed to ensure electricity customers have reliable and quality electricity supply.

SAIDI and SAIFI, Not ATC & C Losses

Aggregate technical, commercial and collection (ATC&C) losses, a buzzword in the power sector, have proven to be quite nebulous and imprecise to determine, and is not a proper metric to use in determining the reliability and quality of service delivery of electricity to customers.

Rather than focus on the ATC&C losses as an index to track DisCo performance, the Bureau of Public Enterprise (BPE), the Ministry of Power, NERC, other electricity stakeholders and the general public should adopt two acronyms that encompass service delivery in the electricity sector – SAIDI and SAIFI. For service delivery to improve in the power sector, DisCo performance should be measured against these two acronyms.

In the service delivery model, DisCos would be completely responsible for proposing to customers and setting their retail electricity tariffs, in accordance with (i) the DisCos’ commitment to provide a guaranteed minimum hours of supply to the customer, and (ii) the DisCos’ ability to collect such tariffs from its customers.

SAIDI, which means System Average Interruption Duration Index, measures the average duration or hours of blackouts in a year. SAIFI means System Average Interruption Frequency Index and measures the frequency or number of blackouts in a year. Were the SAIDI to be computed for 2019 in my community served by Eko DisCo, the average cumulative hours of blackouts in a year is in excess of 4,000 hours. There are only 8760 hours in a year. In simple terms, Eko DisCo delivered only six months’ cumulative electricity supply to my community in 2019. Many Nigerian towns and cities experience more than 6,000 – 8,000 hours of cumulative blackouts in a year. For SAIFI, blackouts are quite frequent and may occur at least three or four times in a day, if and when there is electricity supply for that day.

Reducing both the duration (SAIDI) and frequency (SAIFI) of blackouts (scheduled or unscheduled) should be the new driving philosophy of the NERC. With the seismic shift in key domestic macro-economic indices, there is perhaps no better time for the NERC to abandon the price-fixing mindset underpinning its current tariff setting processes (including its reluctance to review retail tariffs when due) and focus on using improved service delivery to determine retail electricity pricing. In this regard, the service delivery model for tariff setting is key to unlocking cost reflective retail electricity tariffs.

The Service Delivery Methodology

In the service delivery model, DisCos would be completely responsible for proposing to customers and setting their retail electricity tariffs, in accordance with (i) the DisCos’ commitment to provide a guaranteed minimum hours of supply to the customer, and (ii) the DisCos’ ability to collect such tariffs from its customers.

Under the service delivery model, the MYTO retail tariffs would be the baseline electricity tariffs sufficient to cover the market requirements to pay the Transmission Company of Nigeria (TCN), Market Operators (MO), Nigerian Bulk Electricity Trading Plc. (NBET), power generation companies (GenCos), gas suppliers and other market participants. DisCos are to propose electricity tariffs greater than the baseline MYTO tariffs for different communities and/or clusters of customers, in line with their commitment to deliver guaranteed and reliable hours of electricity supply to these customers. The regulatory role of NERC under the service delivery model would be to set the SAIDI and SAIFI performance threshold levels for DisCos, monitor and ensure that the hours of supply guaranteed for each customer cluster is met by the DisCos. The retail tariffs set by a DisCo should match the DisCo’s commitment to delivering guaranteed supply to the customers in line with SAIDI and SAIFI performance thresholds agreed with NERC.

NERC can easily monitor the SAIDI and SAIFI performance of DisCos and ascertain if the DisCos are delivering the committed hours of supply to electricity customers. All that is required is a regulatory Order mandating DisCos to meter all feeders and distribution transformers (assuming no such Order yet exists). Hourly or half hourly meter readings for feeders and distribution transformers can be collated by the Business Units/Undertakings of each DisCo and sent to NERC either manually, or via an automated central online meter reading portal to be developed by the Commission. Whatever means that NERC opts for, it must be robust enough to accurately record the hours of electricity supply to each feeder and distribution transformer on a daily basis, and ascertain the SAIDI and SAIFI performances of DisCos.

Where a DisCo fails to deliver the guaranteed hours of supply to the customer, for example: a customer gets only eight hours of supply daily, rather than 18 hours of supply as guaranteed by the DisCo, or where the number of blackouts is more than the SAIFI threshold value, the DisCo, or the upstream party (either TCN/TSP, GenCo or the gas supplier) responsible for such supply interruption/blackout should be financially sanctioned, while the customer is reimbursed for the value of energy not supplied, via a “true-up” mechanism to be applied by the NERC at the end of each billing period or at the next tariff review period. The true-up mechanism is a critical piece of the service delivery model.

Capping Estimated Billing and Improved Service Delivery

While commending the NERC for this Order, capping estimated billing will not improve electricity supply to customers. On the contrary, electricity supply and service delivery may deteriorate for the affected categories of customers. The cap on estimated billing assumes that the customer will have electricity supply for at least a fair period of time during the billing period. However, this is not the case. The cap on estimated billing only guarantees that a customer would pay a fixed amount for electricity, irrespective of the amount of electricity supplied to the customer during the billing period. The customer has no assurance whatsoever that he/she would enjoy reasonable supply of electricity for the billing period. As an example, if a customer on estimated billing doesn’t have electricity supply for two or three weeks due to a faulty transformer, that customer is still going to pay the capped amount due for that billing period.

The service model would prompt more investments into the electricity distribution segment of the power sector, as DisCos are now bound to make the necessary investments to improve their networks in order to guarantee their supply commitments to customers.

Examples of the Service Delivery Model

The service delivery model is already being practiced in various forms by some forward thinking DisCos. The premium power agreement between Ikeja Electric Plc. and Magodo Estate Community in Lagos State, is a good example of how the service delivery model works. Ikeja Electric committed to providing at least 22 hours of electricity supply to Magodo Estate residents, in exchange for the residents paying an agreed retail tariff above the MYTO tariffs.

Benin Electricity Distribution Company (BEDC) has also implemented its own form of the service delivery model for its maximum demand (MD) customers. BEDC constructed new 11kV feeders within the Benin City metropolis. Commercial customers and R2/R3/R4 customers desiring to have reliable electricity supply are encouraged (but not forced) to migrate from the existing and unstable 0.415kV and 11kV lines to the new 11kV lines, where they are assured of at least 22 hours of daily supply, in exchange for being classified as MD customers. Most hotels and commercial properties within the GRA area in Benin City have migrated to this service, enjoying almost regular and uninterrupted supply of electricity.

Many private residential estates in Lagos and Abuja that provide reliable and uninterrupted power supply to their residents also adopt the service delivery method in setting the electricity tariffs, which residents pay. The power supply scheme of the Northern Foreshore Estates in the Lekki area of Lagos is a good example of the workability of the service delivery model.

Conclusion

The implementation of the service delivery model in determining cost reflective retail electricity tariffs will be beneficial to the power sector. It will put an end to the perennial complaints of non-cost reflective tariffs by DisCos, a complaint that has plagued the power sector since the conclusion of the privatisation process.

The service model would prompt more investments into the electricity distribution segment of the power sector, as DisCos are now bound to make the necessary investments to improve their networks in order to guarantee their supply commitments to customers. This is different from what is obtainable under the present MYTO regime, where DisCos claim that customers have to pay the new tariffs first before they can make the investments, which in most cases, DisCos end up not making, nor can such investments be verified as claimed. It will also reduce the problem of load rejection by DisCos, and increase the utilisation of stranded generation capacity.

But the greatest benefits of the service delivery model will accrue to electricity customers, who would be assured of guaranteed hours of electricity supply, in exchange for paying a tariff that assures them of such supply. A clear example of this benefit is the experience of residents of Magodo Estate community, who now receive guaranteed electricity supply every day. Since they entered into the premium power agreement with Ikeja Electric Plc., Magodo Estate residents are enjoying significant cost savings, improvement to both their physical and mental health, as well as less noise pollution and better air quality.

Odion Omonfoman is an energy consultant and the CEO of New Hampshire Capital Ltd. He can be reached through orionomon@outlook.com

Postscript: This article was written before the NERC Tariff Order on March 31st, 2020 suspending the implementation of new tariffs on April 1st, 2020.