The electricity sector as a service industry has the main objective of delivering electricity to consumers. Like every other business, the electricity sector is governed by rules and regulations, ensuring service delivery is, most importantly, affordable to the consumers. In determining the affordability of electricity, the costs along the value chain are calculated using a methodology approved by the Nigeria Electricity Regulatory Commission (NERC).
It has become routine for the public to be outraged by the approval of new tariffs; however, little is known about the tariff processes and how it works.
What is a Tariff?
According to Meriam Webster’s dictionary, a tariff is “a schedule of rates or charges of a business or a public utility”. In the electricity sector, for a licensee to carry out the business of electricity service delivery, the tariff must be said to be Cost-Reflective.
A Cost-Reflective Tariff is a tariff that enables the licensee to finance capital and operating expenditure, optimize available resources, and make a reasonable return on investments. While a tariff must be Cost-Reflective, it must also be affordable to consumers.
Methodology for Tariff Calculation
The approved methodology for calculating electricity tariff in the Nigerian electricity sector is the Multi-Year Tariff Order (MYTO). The MYTO methodology allows for the recovery on investments through a 15-year tariff path which, allows stakeholders to finance their activities in the sector while easing the burden on the consumer by implementing retail tariffs deemed by the Regulator to be reasonably affordable.
Enabling Legislation
The Multi-Year Tariff Order (MYTO) is enabled by the Electric Power Sector Reform Act (EPSRA) 2005. The EPSRA in S. 32 (d) empowers the NERC to
“to ensure that the prices charged by licensees are fair to consumers and are sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation”.
According to the above section, the EPSRA in S. 76 empowers the NERC to establish a methodology for determining electricity tariffs in the Nigerian electricity sector. The tariffs developed in line with the approved methodology must be fair and affordable to the consumers and allow licensees a return on investments.
MYTO Tariff Review Process
The MYTO undergoes two review processes; A major review and a Minor review.
Major Review – The Major review of the MYTO takes place every five years. This review takes into account major parameters for the calculation of the tariff. When the Major review of the tariff is carried out, all components and inputs in the methodology are reviewed by stakeholders/licensees. Following the completion of the review process, NERC approves an affordable tariff to the consumer. When a Major review is carried out, there is usually a significant increase in the electricity tariffs.
Minor Review – Unlike the Major review, the minor review is a biannual process (every six months). While the Major review affects all components and input of the tariff, the Minor review only affects specific components such as inflation, interest rates, exchange rates and generation capacity.
While it is understandable that Nigerians are going through economic hardship, the review process is backed by the EPSRA 2005. Accordingly, NERC is bound by the Act to implement the tariff methodology and its processes. It is, therefore, the duty of NERC to enlighten consumers on the tariff processes.