The Nigeria Electricity Regulatory Commission (NERC) uploaded a document highlighting reviewed electricity tariffs for distribution companies a few days back. For many people, the appearance of this document was worrying as it implied yet another tariff increase. The Commission, however, dispelled fears noting that there has been no new tariff increase. The document released was for the last minor tariff review in December 2021. Many people are not aware of the process of reviewing electricity tariffs, and it is quite routine for an increase in the price of electricity to lead to public outrage.
According to the Meriam Webster’s Dictionary, a tariff is a schedule of rates or charges of a business or a public utility. NERC established a methodology for determining electricity tariffs in the Nigerian Electricity Supply Industry (NESI). The Tariff Order, called the Multi-Year Tariff Order (MYTO), sets out tariffs for the generation, transmission and distribution of electricity in the country. The methodology incorporates parameters such as inflation, foreign exchange rates, gas prices and certain economic variables to determine the cost of electricity for consumers. Tariffs developed according to this methodology must be fair and affordable to the consumers and allow licensees a return on investments.
Economic conditions never remain constant. NERC is mandated to conduct MYTO tariff reviews that reflect changing economic realities to ensure a cost-reflective pricing structure. This ensures a fair return on investment to efficient industry operators and promotes investment in the sector. MYTO tariff review is categorized into a minor review and a major review. The Commission is mandated to perform a minor review once every six months. This process is mainly determined by specific components such as interest rates, exchange rates, generation capacity and inflation. A Major MYTO review, on the other hand, occurs after every five years. This review factors in major parameters used in the calculation of the tariff. When it happens, all components and inputs in the methodology are reviewed by stakeholders/licensees. Usually, following the completion of the review process, there is an upward increase in electricity tariffs.
While a major tariff review always results in a significant increase in electricity tariffs, minor reviews only slightly alter the cost of electricity.