INTRODUCTION

The Nigerian Electricity Regulatory Commission (NERC) recently released its 2016 – 2018 Minor Review of the Multi Year Tariff Order (MYTO) 2015 and Minimum Remittance Order for the year 2019 (the Order) in order to adjust electricity tariffs in line with the macroeconomic variables for 2016 – 2018 and set minimum market remittance requirements for Electricity Distribution Companies (DisCos).

The Minor review was undertaken pursuant to Section 17 of the MYTO - 2015 Order which provides for a biannual minor review of tariffs taking into consideration changes in variables outside the control of the DisCos in line with the requirements of the MYTO Methodology, i.e. Inflation rates, Foreign Exchange rates, Gas prices and .Available generation capacity.

The Order has been issued to reflect the impact of changes in the minor review variables in the determination of cost reflective tariffs and relevant tariff and market shortfalls for the years 2016 to 2020.

OBJECTIVES OF THE ORDER

The major objective of the Order is to ensure that tariffs remain competitive and cost-reflective. It seeks to achieve this by ascertaining the revenue shortfall occasioned by the differential between cost reflective tariffs for the relevant years and allowed tariffs in the industry. NERC states that the Order seeks to gradually propel the electricity market to Transitional Electricity Market (TEM) whilst implementing a framework to manage future revenue shortfalls in the industry. Furthermore, the Order provides for a minimum market remittance requirement to account for the differences between cost reflective tariffs and allowed tariffs in the settlement of invoices issued by the Nigerian Bulk Electricity Trading Plc. (NBET) and the Market Operator (MO).

MINOR REVIEW OF MYTO - 2015 TARIFF ORDER USING EKO ELECTRICITY DISTRIBUTION PLC. (EKEDC) AS A CASE STUDY

The Order takes into consideration the actual changes in relevant macroeconomic variables and available generation capacity in reviewing the operating MYTO - 2015 Tariff Order for the period January 1, 2016 to December 31, 2018 in line with the provisions of the MYTO Methodology. These variables are Nigerian and United States inflation rates, Naira/USD foreign exchange rates, gas prices and available generation capacity. NERC made projections for macroeconomic variables for the year 2019 and beyond based on best available information obtained from the Central Bank of Nigeria ("CBN"), National Bureau of Statistics ("NBS"), System Operations ("SO") Division of the Transmission Company of Nigeria Pic ("TCN") and NBET for the update of the MYTO - 2015 financial model. NERC would also make necessary adjustments to reflect actual values at the time of the next minor review that will take effect on 1st January 2020.

With respect to the exchange rates used for the Minor Review, NERC utilized the average NGN/USD exchange rates of N255.90, N308.80, N309.14 and N309. 97 used for the years 2016, 2017, 2018 and 2019 respectively. However, from the DisCos’ perspective, it may be recommended that the interbank rates should have been utilized for the Minor Review as the rates are higher and more favourable. Also, although the Order did not address the foreign exchange disparities, it is advocated that a phased introduction of the parallel market rates into the market should be implemented where the DisCos’ Performance Agreements are extended.

In addition to macroeconomic variables, NERC also considered the projected loss reduction targets contained in the Performance Agreements with the Bureau of Public Enterprises (BPE). By virtue of the Performance Agreements, the DisCos committed to an Aggregate Technical, Commercial and Collection ("ATC & C") loss reduction trajectory over a period of 5 years, which NERC applied in MYTO 2015. However, arising from the uncertainties that shrouded full revenue recovery in the years 2017 - 2018, NERC, after due consultation with BPE, agreed on the following:

a) The ATC&C loss reduction trajectory, based on the Baseline Loss Studies as provided in the Performance Agreement of Eko Electricity Distribution Company Plc ("EKEDC") was applied in the tariff computation with effect from 1st January 2015;

b) The Performance Agreement was considered as fully effective in the years 2015 and 2016 and the applicable loss reduction targets were applied in line with provisions of MYTO - 2015 Tariff Order of EKEDC;

c) The years 2017 and 2018 were recognised as years of mutual non-performance to account for the non-implementation of the previous Minor Reviews, Forex challenges, and uncertainties on cost reflective tariffs and revenue recovery. Hence, ATC&C loss improvement targets will not apply in computing tariffs and relevant revenue deficit/surplus in the respective years. In this regard, the provisions for CAPEX for the years of non-performance have been netted-off the revenue requirement of DisCos.

However, the recognition of 2017 and 2018 as years of mutual non-performance, and as such the non-applicability of the ATC&C loss improvement targets in computing tariff and relevant revenue deficit/surplus in the respective years disproportionately ignored the Force Majeure (FM) years particularly 2015 and 2016. If the FM years are not considered, it would impact the investments made by DisCos to reduce its ATC&C during those years. Thus, the ATC&C loss improvement targets should also not apply in computing tariffs and relevant revenue deficit/surplus in 2015 and 2016.

TREATMENT OF 2015, 2016, 2017 AND 2018 SHORTFALLS

For example, the Commission computed and recognised the sum of N95.6billion as the tariff shortfall for EKEDC for the years 2015 - 2018. The Order provides that all accrued liabilities in EKEDC’s financial records arising from tariff shortfalls shall be transferred off the balance sheet and fully settled under the financing plan of the Power Sector Recovery Plan ("PSRP") initiative approved by the Federal Government,

The Order further provides that all funds retained by the DisCos as represented by excess of market (remittance) shortfalls over tariff shortfall are to be recovered as a full liability of the DisCos, including applicable interest thereon, in line with the provisions of the Supplementary TEM Order, the Market Rules and respective industry contracts with NBET and the MO. All DisCos with excess of tariff shortfall over market shortfall shall be compensated accordingly for the difference. All interest payable by DisCos on unpaid invoices issued by NBET and the MO and attributable to tariff shortfall shall be transferred off the balance sheet of the utilities.

In other words, where market (remittance) shortfalls are in excess of tariff shortfalls, such liability will rest on the Discos including applicable interest. However, where tariff shortfalls exceed market shortfalls, the Discos will be compensated for the difference.

The Order recognises that interest on unpaid invoices issued by the MO and NBET and attributable to tariff shortfall will be transferred off the balance sheet of the utilities; however, the Order fails to recognise the interest on unpaid invoices occasioned by market shortfall and in essence, interest on unpaid invoices in general as the DisCos are unable to charge similar interest to customers on unpaid electricity bills.

MDA DEBTS

The Order emphasizes the responsibility and initiative of the DisCos regarding revenue collections from all customers including Ministries, Departments and Agencies ("MDAs") of States and Federal Government rests. Accordingly, the Order makes it mandatory for all DisCos to meter all MDAs with appropriate meters within 60 days from the effective

date of the Order and it further states that all DisCos have the right to disconnect any MDA defaulting in the payment for electricity in line with the Regulation on Connection and Disconnection Procedures for Electricity Services. This may not be possible, considering the ongoing resistance from the MDAs particularly the military agencies.

DisCos have however argued that the privatization was premised on an assurance that MDAs would meet their electricity consumption obligation and have insisted that MDA debts be included in losses. Previously, MDA debts were removed from the calculation of collection losses of the DisCos and coupled with this is the continued non-payment by the MDAs. However, it is advocated that for the proper computation of DisCos’ reduction of collection losses, MDA debts should be re-included as was initially envisaged by the sector participants. It is also worthy of note that the partial reconciliation of MDA debts between DisCos and the Federal Government of Nigeria, with the reconciled amount to be paid directly to NBET, and any credit to the respective DisCos, remains outstanding.

MINIMUM REMITTANCE BY DISCOS USING EKEDC AS A CASE STUDY

NERC proposes in the Order that an intermediate review of end-user tariffs on January 1, 2020 and transition to full cost reflectivity shall be achieved by July 2020. The rationale for the retroactive nature of the Order is unclear given that the reset of the market has been long overdue, and the swift implementation of the Order would produce quick gains for the DisCos.

However, in the interim, the Federal Government, under the PSRP, has committed to fund the revenue gap arising from the difference between cost reflective tariffs determined by the Commission and the actual end-user tariffs. Further details have not been provided regarding the modalities of the PSRP funding. The Order provides for a “waterfall of market revenues” during the transitional period which shall be in line with the following:

a. All DisCos are obligated to settle their market invoices in full as adjusted and netted off by applicable tariff shortfall approved by the Commission.

b. All FGN intervention from the financing plan of the PSRP for funding tariff shortfall shall be applied through NBET and the MO to ensure 100% settlement of market invoices as issued by Market Participants.

c. Under this framework, the minimum market remittance threshold for EKEDC is determined after deducting the revenue deficit arising from tariff shortfall from the aggregate NBET and MO market invoices. EKEDC shall be availed the opportunity to earn its revenue requirement only upon fully meeting the following payment obligations:

i. Repayment of CBN-NEMS facility.

ii. 100% settlement of MO's invoice based on the tariffs applied by the MO in determining respective invoices prior to this Order. Effectively, this Order places a freeze on the tariffs of TCN and other admin  charges covering NBET and the Commission throughout 2019 at the rates applied in generating MO invoices for the period of January - May 2019.

iii. Full settlement of 45.4% of NBET's monthly invoices being the minimum remittance threshold prescribed in this Order.

The Order provides that EKEDC shall liable to relevant penalties/sanctions for failure to meet the minimum remittance requirement in any payment cycle in line with the provisions of its respective contracts with NBET, MO and the provisions of the Market Rules and Supplementary TEM Order. Furthermore, EKEDC shall maintain an adequate and unencumbered letter of credit covering three (3) months based on the minimum payment obligations to NBET and the MO.

Only after all these payment obligations have been satisfied, would the Disco be entitled to utilise the balance for its CAPEX and OPEX operations.

CONCLUSION

This 2016 – 2018 minor review of MYTO 2015 is a welcome development for stakeholder investors in Nigeria’s power sector as it represents a clear plan to gradually move electricity tariffs to a level where investors can recover their costs and make decent returns on their investment subject to stipulated conditions. The review also provides for an interim strategy where the resulting shortfalls from non-payment of cost reflective tariffs are dealt with by Federal Government via the PSRP. The effect of this is that the Discos can engage in projects that can ultimately increase supply of electricity to customers.

NERC should also fast track the passing of the franchising regulation following the implementation of cost-reflective tariffs as this remains outstanding. DisCos would be able to procure additional generation to augment their energy requirements via Embedded generation. Consideration should be given to ensuring that the tariff incorporates the cost of such additional energy. Pricing of such energy in the tariff could be based on a pro-rata recovery across all customer classes or for a selection of customers.

Going forward, NERC should endeavour to conduct and implement minor reviews as at when due. Given the constantly changing economic variables that apply to the Nigeria Electricity Industry, it is important that the tariffs and other relevant data be continuously updated to reflect current market realities in order to attract sufficient investment into the industry.