OPINION PIECE: RECOMMENDATIONS FOR EFFECTIVE SERVICE BASED TARIFFS IN THE NIGERIAN ELECTRICITY SUPPLY INDUSTRY

The lingering liquidity crisis in the Nigerian power sector occasioned by the lack of cost reflective tariffs and resulting in huge shortfalls amounting to the tune of about N21.8 billion (NGN) which was estimated to be the market shortfall for the year 2020, necessitated the need for several key interventions to plummet the electricity industry to cost recovery levels.

One key intervention to address the ongoing liquidity crisis was the implementation of the Service-Based Tariffs (SBT) by the Nigeria Electricity Regulatory Commission (NERC) which kicked off in November 2020. The methodology under the SBT is based on hours of supply availability to various customer classes across the value chain, evinced by guaranteed levels of service by the electricity distribution companies (DisCos) to end-users, following regular consultation processes and monitoring by the Commission. This is to be undertaken in alignment with the Performance Improvement Plans (PIP’s) of the DisCos which is a requirement of the Power Sector Recovery Program (PSRP) approved by the Federal Government with the support of the World Bank.

One of the primary motivations for the initiation of the SBT regime by the Commission was the need to put an end to the bedeviling practice of estimated billing of end-users by the DisCos. It goes without saying that one of the necessary requirements to enable effective monitoring of the level of actualisation of the SBT regime by the Commission is adequate metering of customers to ensure improved services by the DisCos, measured by hours of electricity supply to end-users in terms of availability, reliability of supply which is defined by the frequency and duration of supply interruptions and quality of supply which is measured by the voltage and operating frequency of electricity by the DisCos.

It is anticipated that following the just-concluded extraordinary tariff reviews which are to take effect from 1st July, 2021 for the market to transition to cost reflective levels, tariffs may be amended upwards to factor changes in key indices such as inflation, foreign exchange and other macroeconomic factors that are computed into the tariffs. The key concern is the extent to which the SBT regime has attained its intended objectives from a liquidity, revenue collection, monitoring and end-user satisfaction viewpoint.

Key recommendations to ensure adequate yield to the sector include:

• Increased Customer Awareness Programmes need to be put in place and deployed as majority of end-users are unaware of their service level bands and the expectations of the DisCos in terms of service requirements.
•  Contract enforcement is key in terms of ensuring that the DisCos adhere to binding contractual commitments to end-users and adequate compensation mechanisms need to be developed to cater to instances where expected standards fall below contractual service levels, except in permitted exceptional circumstances. More importantly, is the need for the Commission to undertake sufficient monitoring of the respective commitments and obligations of parties. One way around the issue of compensation is to adopt the approach taken by Peru, whereby service quality regulations are outlined and catered for in the Law of Electric Concessions (i.e., Electric Concession Act- Decree-Law No. 25844) and the Service Quality Regulation (Supreme Decree No. 009-93-EM) which requires suppliers to compensate customers for low quality power supply, below agreed voltage tolerance levels. Although the Electric Power Sector Reform Act (2005) makes provision for service quality, its provisions can be vaguely interpreted, bearing in mind though, the fact that primary legislation(s) ideally should not go into detailed specifics, given the difficulty in effective changes to such types of legislation. In Bangladesh, the electricity regulatory commission (BERC) mandates DisCos to publish KPI’s (akin to the PIP’s in Nigeria) including targets and achievements. The indicators include indexes to monitor technical quality of services to customers in terms of outage frequency and duration which also exists as one of the parameters for DisCos services in Nigeria under the SBT regime. In Sri Lanka, the Multi-Year Tariff makes provisions to penalise DisCos for approved investments that are not implemented. This approach can be adopted by the regulator based on the expectations of the implementation of the respective DisCo PIP’s.
•  Effective monitoring and adequate sanction mechanisms need to be developed and employed by the Commission via the deployment of regulatory compliance tools and structures for the DisCos and regular consultations and public hearings for end-users. The Commission should also put in place mechanisms for tracking the effect of the SBT on revenue collection in the sector. In addition, the regulator will need to build sufficient capacity to take on complaints from end-users and resolve issues appropriately. The DisCos will also need to deploy effective complaints handling systems.