WHY INVESTORS ARE PUSHING FOR HIGHER ELECTRICITY TARIFFS

Chairman/Chief Executive of the Nigeria Electricity Regulatory Commission (NERC), Dr. Sam Amadi, who confirmed the planned increase, said the regulatory body had, for some time, been working out details on how to change tariffs.

NERC justified the increase, saying one of its primary functions, as contained in the Electric Power Sector Reform (EPSR) Act 2005, is to ensure that the prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operations.

The regulatory agency said it would kick-start the pilot scheme of the new tariff scheme on March 1, 2011 in selected cities, while the policy would be spread to other states of the country as from April.

But quite significantly, it will mean citizens having to cough out more to foot energy bills (electricity and petrol) within the first quarter of the year. Pump price of petrol had been upped early January from N65 per litre to, first N141, and later to N97 per litre after mass protests across the country.

The government said it had invested over N1.3 trillion between January and October 2011, in subsidizing petroleum products and appealed to citizens that it would run the economy aground if it had to sustain such huge budgets on fuel subsidy at the expense of other social projects like schools, hospitals, potable water, roads, and security.

In the power sector, government has similarly described the tariff paid by Nigerians as 'the lowest in Africa' although officials would not budge to demands to show concrete data on government spending in relation to the amount spent to subsidize electricity for citizens. However, if electricity tariffs go up by 88 per cent, it will mean residential consumers may pay as much as N13.72 per kilowatt on an hour (kwh) of electricity from the current N7.30; commercial consumers will pay N20.68 per kwh; and industrial customers N28.2 per kwh from the current N15 per kwh.

The new tariff was calculated to reflect the real cost of supplying electricity, with a return on investment factored in, according to the NERC. This comes to about 23 naira/kwh, which is near the average price in Africa and less than half the cost of self-generated power in Nigeria. Signs that the government might increase electricity tariffs emerged early in the year when Power Minister, Prof. Barth Nnaji, said government would halt further investments in the construction of thermal (gas) power plants to allow private sector investors enjoy some sort of free market enterprise.

'Government will not be involved in the building of power stations at all in the future,' Nnaji said. 'We want to allow the aspect of the business to be private sector-driven, while we provide the enabling environment for them to do their business efficiently.' These pronouncement was the first indication that the government had finally bowed to the pressure of investors to back out of the sector as active player, and rather undertake a more softer role of a regulator. And when news of tariff increases came a few weeks later, it was like a seal to prove the deal had been done.

Reginald Odiah, Chairman, Infrastructure Committee of Manufacturers Association of Nigeria (MAN), says although the power sector needs urgent private sector funds, any further increase in electricity tariffs will create inflation in the system and make life unbearable for citizens. 'Government cannot just increase electricity tariffs in a way that shows it is insensitive to the plight of citizens. We have a lot of our citizens who are poor and they all require electricity. So, investors should not just compel the government to take tariffs up without related measures - things that cushion the hard effects on citizens. In fact, we have the market in our population that the government should use in bargaining with investors,' he noted.

Odiah's position is also corroborated by the Lagos Chambers of Commerce and Industry (LCCI) which, this year, noted that increases in energy cost would result in high inflationary expectations across all sectors of the economy and a devastating impact on the psyche of the common people, as the new policy poses a serious risk to their survival. The simple explanation is that under the new tariff regime, it is most likely that the lowest charge a consumer on a one phase meter will pay will be about N5,000 a month.

'Current electricity tariff regime appears highly subsidized and too low, or inappropriate to provide the right profit margins that investors require to recoup their monies on time,' a top government official told Daily Sun.

'We have to be honest with ourselves at this period; tariffs must go up if we have to attract investors to come into the sector. And investors must have margins (profits) that allows them get back their investments, and on time…it is not charity work, but business,' said the official, who works in the Power Ministry and preferred to remain anonymous. It was the same argument put up by the government to justify the deregulation of the petroleum industry and the increase in pump price of petrol from N65 to N97 per litre early January, after popular protests resisting the initial N141 per litre.

But Daily Sun learnt that government has been under so much pressure from foreign interest groups to deregulate totally the pricing of electricity in the country for market forces to determine. The government has been more cautious in not tilting completely towards the demands of private investors and was rather dissipating energy in working out a balanced tariff structure that will favour both the consumer and investors. This explains the decision to carry out an 88 per cent tariff hike, but even that is considered too astronomical, given the high poverty level in the country. But government, according to Power Minister, Prof. Barth Nnaji, has not completely jettisoned the idea of some form of subsidy for the poor.

'We are making sure that the urban poor and rural dwellers be provided a subsidy, so that they don't see a significant increase in tariff,' Nnaji said. 'The rest should be able to pay for it.' Government has, therefore, made provision for a N60 billion subsidy this year, allowing the tariff for the poorest customers to be fixed at 3.3 naira. Nigeria sells power below cost at an average of about N10, or six US cents, per kilowatt hour, one of the cheapest rates in Africa. But a sample survey carried out by Daily Sun shows that four out of every five electricity consumers' would prefer higher tariffs, if stable power supply is guaranteed.

'People will pay more if the power coming in is stable; a lot of Nigerians don't mind,' said Reginald Odiah of MAN. 'In the manufacturing sector, we spend more on powering our facilities, and this is in addition to paying bills brought to us by the Power Holding Company of Nigeria (PHCN). In fact, the cost of running private generators and PHCN increases our cost of production by between 30 and 35 per cent. I'll be happy to pay higher tariff for public electricity supply…if it is stable,' Odiah added.

And that is where the snag is found: In the electricity sector, the tariff structure may jump by 88 per cent, but such increase will not be accompanied by an improvement in quality services to customers, at least in the immediate future. Many analysts are worried that customers will simply be paying more for the same inefficiency served by PHCN.'The hike in electricity tariff must go hand-in-hand with improved quality and availability of power supply,' said Sola Fanowopo, CEO of eMaginations.

Fanowopo noted that at present, power generation is low; transmission is bad, and distribution is terrible.

'We cannot say the issue of corruption has been eliminated in the system, and the issue of crazy billings is yet to be resolved,' he noted. Some customers may go for weeks without electricity and, at the end of the month, the bills are brought to them and they are forced to pay or threatened with a total disconnection of power. The pre-paid meter billing system is yet to spread to all nooks and crannies of the country, so estimate bills still floods the country, where many customers are grossly cheated.

In fact, in no aspect of public utility scheme operated in Nigeria is the customer abused like in the electricity sector.'Having to pay more to PHCN and later resorting to private generators will do no good to private incomes,' Odiah of MAN said. Indeed, the infrastructure - generation, transmission and distribution - remain in a comatose state. For instance, power generation continues to hover around 3,000 and 3,500 megawatts and even if it were to be increased to above 4,000 megawatts, the transmission and distribution infrastructure are too weak to support such load flowing through to end-users.

Last year alone, PHCN reported 11 cases of systems collapse. And no solution has been found to the crisis in gas supplies to the thermal stations. All the gas-fired stations are starved of normal supply of gas, and this is a huge problem that often forces the plants to load-shed available power to consumers, or shutdown completely. There should, therefore, be a firm commitment on gas supply between PHCN and the Nigerian Gas Company (NGC).

There is also the problem of frequent tripping of critical transmission lines. This is a major cause of system disturbance, according to officials of PHCN. In fact, about 90 per cent of the system collapse recorded this year had tripping of transmission line as the immediate cause. Most of the tripping are traceable to fouling of the line conductors by vegetations.

The other identifiable factor is the poor performance of line protector relays. The essence of protection is to isolate as minimum as possible of the faulted circuit, leaving the rest of the system intact. But what happens sometimes is that a fault on a line trips other adjourning lines as well. The issue here is proper relay settings and co-ordination. The implication is that there is no guarantee that between now and the end of April when the new tariff is expected to come fully on stream, the situation will improve to ensure quality service delivery to match the increased tariff hike.

And there is even no guarantee of consumers' protection against abuses. Early this year, when pump price of petrol went up, most filling stations took advantage of the confusion to make brisk business by cheating on customers selling products at prices above the N140 and N141 per litre on petrol. Prices of goods and services similarly increased across the country in response to the hike in transport cost, which followed the fuel price increase. Although, there has been a slight reduction in transport cost with the government reducing petrol price from N141 per litre to N97 per litre, there still exist some goods and services, whose prices went up and have stayed that same way, despite the government's reduction in petrol pump price.

It will appear that the various reform programme in the energy sector is devoid of consumer protection but, instead, a quest to attract private sector funding into key - and moribund - state utility firms to resuscitate them.

'Nigeria is a country in a hurry to develop,' Power Minister, Barth Nnaji, told Daily Sun. 'She wants to be among the 20 large economies in the world by the year 2020,' he added. That aspiration, the minister said, is one that 'requires a stable power sector that can support the industrial sector to throw up vibrant industries that will engage millions as workers.' Nnaji also said 'stable power is also an imperative in bringing down the cost of running social services and hospitality industries that also create wealth and jobs for citizens.'

The minister reiterated his resolve to end the electricity blight in the country as soon as possible.

Fanowopo of eMaginations, an IT-based consultancy and public relations firm, said it was important the government set up mechanisms that will ensure the effective management of the transition of the industry from public to private investors. The challenges in the telecoms sector, he said, should serve as enough lesson books for operators of a private sector driven power sector to learn from. But he does not agree the higher tariffs will translate to and immediate stable power for consumers given the inherent challenges in the system.

'Will the increment guarantee continuous and improve power supply, I am not very sure of that,' Fanowopo told Daily Sun. 'But what I know is that the majority of Nigerians will welcome higher tariffs if it comes with uninterrupted supplies of electricity to their homes and businesses.

'And I say this with considerations to the colossal sums spent daily by millions of Nigerians on fuel to power their generators. And I also talk about the cost of maintaining these generators and the inconveniences it creates.'We are not even talking of the hazards of noise and air pollution to the health of citizens. I think what we spend presently and what we suffer as citizens far outweighs the 88 per cent hike in tariff. People will pay more if things work out well,' Fanowopo concluded.

Mr. Rasheed Bolarinwa, spokesperson for the Nigerian Institute of Personnel Management (NIPM) said: 'If the essence of the higher tariff is to make public power constant, available and ensure appropriate pricing to attract investments into the sector, I am for it; I totally support it and I think the majority of the people will support it.'

Bolarinwa, who is a Public Relations Strategists, however, wants the government to take urgent steps to boost the growth of the economy to ensure that personal incomes grow to support any upward tariff adjustments in the energy sector. According to Bolarinwa, increasing energy tariffs without looking at the poverty index of the country and the number of people that can afford such higher tariffs amounted to a disservice to the people.

'The government should do what is right by providing empowerment to Nigerians to enable them pay for whatever tariffs they come up with in the energy sector. It is unfair if you increase pump price of petrol and the majority of the people cannot afford it. Or you increase electricity tariffs and it translates to many people cutting out power supplies from their homes because they are too poor to sustain the tartffs,' Bolarinwa said.

'I would there also urge the government and NERC to prevent waste by providing pre-meter for electricity consumers in the country. If the pre-paid meters is made available to every consumer of electricity it will go a long way to ensuring that people consume what they can pay and pay for what they can consume and that they are no abuses with the estimate billing currently in place,' he added.

The Bureau of Public Enterprises (BPE) which is charged with the responsibility of selling the six state-owned power generation and 11 distribution companies carved out of the Power Holding Company of Nigeria is moving ahead with the deregulation of the industry. Many companies have expressed interest in investing in the sector. The transmission company will also be privately managed, with Canada's Manitoba Hydro and Power Grid Corporation of India shortlisted to submit bids.

The World Bank, which is providing partial risk guarantees to investors, said Nigeria's power sector reform was one of the most complex undertaken in Africa. Last year, the global world body on industrial activities, the United Nations Industrial Development Organization (UNIDO) through its Regional Representative and Director in Nigeria, Mr.Patrick Kormawa stated that Nigeria's aspiration for industrialization cannot be achieved without a reliable source of energy.

Providing a simple illustration between Nigeria and Austria, Kormawa said electricity consumption in Nigeria is estimated as 73 kwh per capita, compared to 8,094 kwh per capita for Austria, according to data from World Bank while the Gross National Income per capita for Nigeria is $1,190 compared to $32,330 for Austria. Overall, he argued that countries without reliable power supply per capita happen to be the poorest countries in the world, stating that clearly there is a correlation between poverty and energy access.

'Thus, an energy sector development policy must facilitate industrialization and promote use of energy for productive purposes, and not just shining electricity on the poverty,' he affirmed.

Even major industrialists will support higher tariffs if it will result in improved power supply.

Manufacturers support the power sector reform and will welcome the privatization of PHCN.

Executive Vice Chairman and Chief Executive Officer (CEO) of Honeywell Flour Mills Plc., Mr. Babatunde Odunayo, lamented that for over 13 years of the existence of Honeywell, it has never been on public power supply for one seconds.

Odunayo maintained that manufacturers are still in the waiting game expecting a time when the privatization of PHCN will happen, saying that, when it finally happens, it will have a beneficial effect on the real sector because then, it would translate to greater efficiency on the part of manufacturers.'So for us at Honeywell at the moment, it is business as usual. If it comes, then it means that we can only run our operations at a lower production cost. But in all, we hope that the realization of privatization will come soon,' he said.

To boost investors confidence the government has created reforms in Gas pricing. Pricing from gas suppliers to wholesale and local distribution companies has been revised. The new gas-pricing regime yielded its first major dividend with the signing last year of a Gas Supply and Purchase Agreement between the NNPC/Pan Ocean joint venture and other gas-based industries. The signing of the GSPA was a key milestone in the government's drive to reposition the Nigerian domestic market for sustainable growth.

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