26 September 2017, Sweetcrude, Lagos —Electricity Distribution Companies, Discos, Manufacturing Association of Nigeria, MAN, Network for Electricity Consumer Advocacy of Nigeria, NECAN, and others are at loggerheads over the recent proposition on the review of the Multi-Year Tariff Order, MYTO by the Discos.
A survey titled “Stakeholders’ Consultation on The Review of MYTO Methodology” carried out by the Nigerian Electricity Regulatory Commission, NERC on the appropriate period for tariff review, put forward three categories of questions to stakeholders, after which responses were published.
On whether minor reviews should be conducted monthly or quarterly as against the current practice of semiannual reviews, with a view to reducing the time lag in reflecting Power Purchase Agreement, PPAs and other tariff/cost assumptions which adjust monthly, Eko Disco, EKEDC, said monthly reviews should account for all variables which are trued-up in the current system of biannual review.
According to the EKEDC, twice a year review is necessary given the current non- cost reflective nature of the tariff and considering the pressure being placed on the Discos to meet their commercial obligations to Nigerian Bulk Electricity Trading, NBET’s monthly indexation formula applicable to invoices issues under the various industry PPAs.
Port-Harcourt Electricity Distribution Company, PHEDC, supported a semi-annual minor review.
According to the company, there is the need for customers to get a relatively stable tariff or avoid the perception of frequent tariff movement.
“In the minor review parameters, a support mechanism that triggers a bond or subsidy should be explored”.
KEDCO argued that the monthly cost adjustment in the PPA contracts is not consistent with the MYTO methodology which currently assumes semi-annual MYTO methodology path be reduced to 4 years as against the 10 years to reduce the uncertainty.
“This has created a lot of challenges for the Discos. Monthly reviews may not be feasible for all customers because prepaid customers may end up paying lower tariffs than the post-paid customers if they have been vending huge sums of money before prices are reviewed”.
The Ibadan Electricity Distribution Company, IBEDC said it supports a monthly review of the tariff “however given the additional complexity in the monthly tariff review, IBEDC believes that it will be very challenging for NERC to successfully implement it”.
NECAN’s stand on monthly review is a no-go area as the group said it will destabilize consumers.
“The monthly or quarterly tariff review not recommended. Keep Status quo”.
On its part, MAN said the demerits of this proposition are completely more prominent in the consultation paper than the merits.
“Monthly or quarterly review concept will create more chaos for the end user for whom the review is extremely chaotic in its present state itself. MAN recommends that the tariff review be done annually as the implementation of this concept of monthly or quarterly reviews will be counterproductive.
ZKJ Energy Partners LTD said most PPAs in the market provides for monthly price adjustments in response to changes in macroeconomic indices and other factors.
“ZKJ’ proposes a cost reflective tariff based on monthly reviews of tariff assumptions, which will be reflected in end-user tariff on quarterly basis”.
Minor reviews should be conducted monthly subject to some caveats that address the perceived demerits of the increased review frequency, according to Proton Energy Ltd.
On whether the frequency of updating end-user tariffs with the minor review results as well as accounting for over/under recoveries recorded between minor reviews be reviewed from semi-annually to monthly, quarterly or annually, NECAN suggested that semiannual minor review is continued as allowed in the MYTO.
“The uncertainty the proposed amendment will cause will certainly be enormous”.
An operator, Peter Michael argued that electricity as a commodity changes in price due to market forces and cost of production, so end‐user tariffs should directly and immediately be tied to cost.
“Since our goal and desire is to create an electricity market that is competitive and self‐sustaining, it is important that we develop a standard for determining daily true costs of electricity from which daily or real‐time retail prices can be determined”.
According to MAN, frequent tariff changes are bound to lower demand /consumption of electricity, lower consumer purchasing power, increase legal disputes and overall GDP slowdown in the long run. “MAN objects to the idea of tariff changes.
Man recommends that until it is required, there must be no tariff hike and if necessary; increase in tariff must be only to an acceptable extent”.
A consumer, Nwachukwu Lokki explained that end-user tariff should trail minor reviews by a period of 3 months.
“This is to allow for greater transparency and performance evaluation tariff must be only to an acceptable extent. Quarterly tariff updates recommended”.
PHEDC said it does not support frequent update of the tariff as this will create frequent tariff shock, erode trust on the Disco, affect the planning process for most Maximum Demand, MD customers and negatively influence collections.
“Recognition of industry shortfalls should be the major concern instead of frequent tariff reviews. Semiannual true up/true down is the best for the customers”.
According to EKEDC, rather than focusing on reducing the stipulated periods between minor reviews, efforts should be put into honouring stated commitments to conduct minor tariff reviews as and when due i.e. semiannually/bi-annually or otherwise as utilities are more concerned about regulatory certainty and cost recovery.
“The false assumptions made in previous tariffs created the problems for the Discos and customers and not the current frequency of semi-annual reviews and it’s associated under/over recoveries”, KEDCO argued.
“There is no need to change the current practice of the semi-annual minor reviews and the calculation of the associated under/over recoveries”, it submitted.
ZKJ Energy Partners pushed for a time lag of three months to give the NERC and the market to articulate the next end user tariff.
“In doing so, ZKJ Energy restates that it is important that provisions are made in the tariff for adequate working capital”.
The third part of the question was on whether provision be made to include Revenue Decoupling Mechanism in the form of annual energy adjustment clause to track variances between actual and allowed revenues and make periodic true-ups annually or more frequently: semi-annually, quarterly, or monthly, Peter Michael argued that breaking the link between revenue and energy sales in terms of revenue decoupling should not and should never be introduced into the tariff structures.
“It is cumbersome and complex to reconcile and serves to benefit only the operators at the expense of the consumers. The concept of revenue decoupling is contradictory and paradoxical. Revenue Decoupling should not be introduced”.
NECAN said it strongly rejects the proposal to include revenue decoupling mechanism in the form of annual energy adjustment clause to track variances between actual and allowed revenues to make true-ups annually or more frequently.
“Accepting this proposal would mean transferring risk associated with volumetric risk to consumers. No to revenue decoupling”.
According to MAN, transfer of full risks associated with volumetric energy throughput to consumers is not acceptable.
“MAN also rejects to bear the burden of TCN and the Discos inefficiency. Revenue decoupling not recommended”.
A simple answer is “No”, Nwachukwu Lokki said.
“It is quite premature to bring new variables into the MYTO formula at this time. A drawback of the draft consultation is the failure to define rate decoupling. No to revenue Decoupling”.
PHED said revenue decoupling might not be a great approach to the challenging regulatory issues in the sector.
“MYTO methodology be maintained with the following adjustments- Capital Expenditure, CAPEX be reviewed to be commensurate with Aggregate Technical, Commercial and Collection, ATCC loss reduction target, Operating Expenses, OPEX be revised using a good benchmarking approach, regulatory asset base and depreciation should be reviewed to reflect realistic estimates, and the ATCC should remain the same. However, the loss reduction target per loss category should be reviewed and set in tune with reality”.
Provision should be made for decoupling, EKEDC argued.
“Its frequency, however, cannot be determined by EKEDC until more details are obtained on this. For this system to work effectively there will be a need for a sector bond or other funding structures that ensure operators are made whole prior to the adjustments of end-user”.
KEDCO said if the proposed decoupling is meant to ensure that discos are made whole for revenue shortfall arising from low generation, then the company is in full support because Discos should not be forced to borrow to finance shortfalls in the sector.
“Given a different approach to decoupling, NERC should develop a more detailed consultation paper on options for decoupling including funding mechanism, the Commission should take a pragmatic approach to resolving contractual inconsistencies should be done on a semiannual basis in tandem with the current biannual minor reviews”.
ZKJ Energy Services reiterated its stand that it does not support the provisions of energy decoupling mechanism at the development stage of the market.
“The disassociation of utilities profits from throughput removes the pressure to increase production, thereby reducing the rate at which energy resources are depleted”.
On its part, Proton Energy Ltd said revenue decoupling mechanism should be implemented.
Milhouse Generation said a provision should be made to include a revenue decoupling mechanism for TCN and the DISCOs.
“The mechanism should account for the variance between expected and actual generation capacity on a semi-annual basis. However, this adjustment should be made in light of DISCOs refusal to accept the power that is made available to them. Monthly and even quarterly variances above or below a certain threshold can be implemented on a quarterly basis”.