The Nigeria Electricity Regulatory Commission (NERC) wednesday disclosed it was considering a major adjustment in the calculation of electricity tariffs to be paid by consumers in the country’s electricity sector.
NERC in a consultation paper on the review of the Multi Year Tariff Order (MYTO) which it released in Abuja, stated that it was looking to introduce a flexible electricity tariff review, one that would see tariffs reviewed either on a monthly or quarterly basis to reflect periodic changes in the country’s economy.
The MYTO is the sector’s guiding document for determining the tariff charged to consumers by electricity distribution companies (Discos). It is often reviewed annually and bi-annually by the regulator, wherein changes in fundamental aspects of the industry’s business like foreign exchange; inflation rates; gas prices; and capacity generation amongst others are captured and inputted in the tariffs of the Discos to their customers.
But the commission in the consultation paper stated that it was proposing changes in this, and thus requested stakeholders to respond to this.
Backing its proposal, NERC said in the consultation paper: “Since the commencement of the Transitional Electricity Market (TEM) in February 2015 and corresponding application of contract terms in market settlement/invoicing in the NESI, these concerns have become more pronounced.”
“Particularly, Discos are concerned that the Power Purchase Agreements (PPAs) they executed provides for a monthly indexation formula where the monthly changes in the exchange rates are reflected in the energy invoices issued to them.
“This is quite different from the provisions of the MYTO methodology where indexation is applied semi-annually during the minor review process. This disparity has created undue stress in the sector given the contract provision that Discos are expected to settle 100 per cent of their energy invoices without consideration to the time lag in the adjustment of end user tariffs,” it added.
It explained that irrespective of the provisions in the 2012 MYTO amendment, industry stakeholders, especially the licensed utilities and financiers have continued to express their concerns on the minor review framework as it relates to cost reflectivity of tariffs and cash-flow profile of the industry.
The regulator thus buttressed its reasons for the monthly review proposal, saying: “It immediately provides a credible basis for the recognition of regulatory assets/liabilities where there is a lag before retail tariffs are adjusted; it provides incentives for continued improvement in services even where the results of the review are not immediately reflected in end-user tariffs; it provides a basis to secure finance to deliver on expected services given the formal recognition of the real trajectory of tariffs by the regulator; and may deliver stable prices to consumers where end-user tariffs are not expected to change immediately.”
NERC equally stated that there could be some demerits in reducing the time lag between the minor reviews, and listed these shortcomings to include: “Consumers may not be fully aware of the costs they impose on the licensee’s business where end-user tariffs are not adjusted immediately; may lessens utilities’ incentive to manage risks associated with macroeconomic changes in the economy; may deliver higher tariffs to consumers in the long run resulting from associated finance costs where retail tariffs are not adjusted immediately; and may demand additional resources on both the regulator and the utilities.”
It explained that it was giving stakeholders up to 30 days to respond to the proposal, after which it would take a final stand in it.