DisCos Give FG Conditions For New Tariff Regime

July 5, 2020

The proposed service reflective tariff scheduled to take off on July 1, 2020 may have been suspended as a result of the conditions given to the federal government by the electricity distribution companies (DisCos) prior to the take-off date.

In a letter addressed to chairman of the regulator, Nigerian Electricity Regulatory Commission (NERC), the DisCos urged the federal government to suspend the
new tariff regime until certain critical issues bedeviling he Nigerian Electricity Supply Industry (NESI) are addressed.

Expressing their concerns, the DisCos
urged the commission and the federal
government to among several other
demands look into the possibilities of
ensuring that the distribution firms’
balance sheet which is being encumbered to the tune of 1.7 trillion is cleared.

This, they said, is to enable them
access the financing that is critical for
the magnitude of capex needed to reverse decades of underinvestment in the sector, as well as inject the efficiencies that would benefit Nigerian electricity customers.

The letter obtained by LEADERSHIP
Sunday reads in part: “To date,
regrettably, the DisCos financial books
remain encumbered with N1.7 trillion of
tariff shortfalls (subsidies to customers),
as well as the liabilities associated with the Nigerian Electricity Market Stabilization Facility (NEMSF) given in 2015 to given to liquidate legacy gas debts and tariff shortfalls resulting from adjusting Aggregate Technical, Commercial and Collection (ATC&C) baseline losses.

“This encumbrance will inhibit the
DisCos ability to access the financing that
is critical to supporting the remittance
and the contract-based requirements of
the July 1st, 2020 tariff implementation,
if not addressed.

“Accordingly, the DisCos have proposed
that historical tariff shortfalls and MDA
debts as at December 2019, should be
taken out of DisCo books; NBET and MO
should be mandated to take off the Tariff
shortfall and MDA debt, and then issue
credit notes to DisCos and, henceforth,
not reflect the liability; and clean up
the DisCos’ balance sheet, to make the

“The transition to cost reflective
tariff requires investment by Discos to
improve the quality of service delivery
to Customers, in other to meet the
expectations of all stakeholders. Discos
ability to raise funds from lenders cannot be overlooked”.

The DisCos also made case for
annulment of the Estimated Bill Capping
Order earlier issued by NERC, saying they had lost N13.9 billion in complying with the order since it came into effect about three months ago.

They stated: “Capping of estimated
billing compounds the liquidity crisis
in NESI and with the planned tariff
increase will result in a much-worsened
situation that will further constrain the
DisCos ability to meet their remittance

“Unfortunately, while the objectives
of the regulation were to provide
accountability and balance between
consumption and billing, the converse
has occurred.

“Discos collect over 75% of bills
issued to metered customers and 25%
from unmetered customers. This is
an indication that Discos suffer more
losses from estimated billing. Therefore,
metering is the only means of revenue

“With the capping of estimated bills
order the financial impact is an average
loss of N13.9bn, which will materially
reduce the 25 per cent collection efficiency for unmetered customers.

“The impact of the continued
implementation of the Order of Capping
of Estimated bills will lead to at least
three-times the impact today.

“The capping of estimated bills, from
all indication, has created a perverse
incentive as meter acquisition by
customers is no longer desired due to the
perception of the reduced amount of bills
under capping”.

The DisCos argued that with the
capping also, customers are much less
encouraged to subscribe for meter.
They warned that implementing a tariff
increase, while capping estimated billing,
when metering level is at 40 per cent, is
suicidal for the NESI value chain.
The distribution firms therefore
urged NERC to give consideration to
comprehensive metering, post-COVID-19
tariff increases and over graduated period to enable them meter either a substantive number of their customers or all of their customers, a situation they say will result in greater collection efficiency and improved remittances.

The DisCos expressed fear that by
implementing the service-reflective
tariffs in a bid to move electricity tariffs
towards cost reflectivity, the market may
be heading down the road once again, as
it would create more market turbulence
that will result in even greater market
anomalies and shortfalls.

Noting that essential details required
for effective transition in Service
Reflective Tariff prices were yet unclear,
they continued: “By no means do we
object to the move towards tariff cost
reflectivity, which provides the right price signals to attract much required capital in NESI.

“Our concern is driven by the fact
that the actions of NERC and FGN in the
implementation of this tariff increase
will be premature without addressing
or resolving the important issues
highlighted here”.

The DisCos recalled that NERC in its
Order No NERC/2020/198 on Transition
to Cost Reflective Tariffs in the Nigerian
Electricity Supply Industry issued on
March 31, 2020 had mandated them
to submit a reviewed Performance
Improvement Plan (PIP) outlining their
proposal for service-reflective Tariffs
beginning from July 1, 2020.

“All Discos were mandated to
disaggregate their respective service
areas and/or customers in accordance
with quality of service and supported by
a proposal for service reflective tariffs.
The Order further informed that the
federal government shall provide tariff
support during the transitional period to
full revenue recovery from July 1st 2020
ending June 30, 2021”, the letter noted.

The DisCos also alleged that the
Commission had changed the criteria
and template at different intervals and
continued to do so close to the eve of
change in retail tariff pricing, leaving
little or no time for effective stakeholders’ consultation on the planned tariff price increase.

They also claimed that NERC had
forbidden them from mentioning NERC
or federal government as having been
part of or approved the tariff increase
which has led to serious confusion with
the public as to the legality of the exercise, adding that “the law is clear that only NERC can approve tariff increases.”

According to the DisCos, since   NERCin its Order No NERC/2020/198
acknowledged the adverse effect of
the COVID-19 pandemic and the
consequential impact on the average
Nigerian, it would be unwise to embark on about 120% increase in retail tariffs with significant gaps in the understanding between the regulator and its market participants.

They also frowned at new remittant percentages which required some DisCos
to make 100% remittance to the market,
“contrary to the provisions in Section H
of the Order No. NERC/2020/198 and
against the earlier understanding for
a need for a transitional period to cost
reflective tariffs”.

The DisCos also argued that use of
service reflective tariffs was a novel
concept in electricity pricing methodology in Nigeria and globally.

The added: “Service reflective tariffs
have never been used before in Nigeria
and our independent study suggests it has never been employed in any other country in the world.

“Notwithstanding this fact, whilst we remain optimistic that the
implementation of this new tariff design
will bring the much required liquidity
relief to the sector, we must state for
the record, that this new venture could
be risky and may likely face teething

“We will however work jointly with the
Commission to surmount these expected
issues. In this vein, ample consideration
must be given to the possible impact of
the learning curve on market revenues
during this learning period”.

proposing that a transition period
that envisages these risks and provides
adequate safeguards through a graduated increase in minimum remittances be considered in the Commissions planned tariff order”.

The DisCos said they were in total
disagreement with the parameters used in the setting of the Minimum Remittance levels due to the dispute arising from several issues highlighted already, including.

They listed the parameters to include
the foreign exchange rate which has been used historically in tariff calculations and in the new order and the losses used in the computation following the removal of MDA loss component which is contrary to the dictates of the Performance Agreement.

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