NERC’s amended MYTO 2015 and changes in electricity tariffs

As Nigeria Electricity Regulatory Commission (NERC) continues to come up with different strategies to revamp the Nigeria power sector, investors and consumers will be hoping the amended Multi Year Tariff Order (MYTO) 2015 will provide lasting solution to the many challenges that has plagued the sector over the years.

Stakeholders have been dissatisfied with MYTO 2015, which set the tariffs for the privatised PHCN Successor companies as it was generally considered inadequate because it failed to achieve the objectives of incentive -based regulation which seeks to reward performance above certain benchmarks, and reduce technical, commercial and collection (ATC& C) loses.

There are still some scepticism in the air in respect to how successful and impactful the new MYTO will be giving the past failures of MYTO 2015. Oladotun Alokolaro senior Partner and head of the Energy and Infrastructure Group at Advocaat Law practice said amended MYTO 2015 is a step in the right direction given the non-reflective tariff for electricity consumption as the new plan will also factor in fluctuation in inflation and foreign exchange.

“We should see a reduction in revenue losses and also an improvement in the payments for other segments of the value chain which should allow the discos to invest in the necessary metering technology to reduce collection losses,” Alokolaro told BusinessDay.

Alokolaro also noted that the way forward is to decentralize the industry so that there are mini transmission grids across the country while the discos should be recapitalized with cost reflective tariffs introduced.

Olayemi Anyanechi, Managing Partner at leading law firm Sefton Fross said the amendments to MYTO 2015 was necessary as it sought to address the economic hardship on consumers, especially in view of poor supply of electricity and less than stellar performance by Discos.

Power consumers will consider the amended MYTO 2015 as a welcome development as it took away the recovery of collection losses from the consumer and passed these loses onto the Discos by more than 50 percent in some places as NERC warned that henceforth Disco’s collection losses, which is defined as the ‘amount billed but not collected’ is within the control of the Discos and such losses should not be transferred to customers.

“Any Disco that wishes to pass through to its customers certain collection losses shall indicate same when applying to the Commission for Tariff review, providing justification with evidence the proportion of losses to be passed through to customers,” NERC warned in amended MYTO 2.1.

However, Anyanechi managing Partner at leading law firm Sefton Fross noted that the major challenge with MYTO 2015 as amended was that setting collection losses at zero was a distortion of the contractual ATC&C losses reduction levels agreed to by the new owners of the Discos under their Performance Agreements, which led them to declare force majeure under their respective Performance Agreements.

“The beauty of amended MYTO 2015 is also its vulnerability, because as long as the variables are not stable, reflective of arm’s length negotiations, or optimal, it becomes very difficult for the tariff methodology to achieve its objectives,” Anyanechi managing Partner at leading law firm Sefton Fross said.

However, NERC noted that during Disco privatization process, that one of the major criteria for identifying preferred bidders was a consideration of the most aggressive but feasible ATC&C loss reduction trajectory over a 5-year period, from a Net Present Value (NPV) point of view.

“Commitments on the reduction of aggregate losses will remain one of the primary determinants for determining successful Disco core investors,” NERC said in the amended 2.1.

One of the main thrusts of the Electric Power Sector Reform Act (EPSRA) 2005, which established the Nigerian Electricity Regulatory Commission (NERC), was for NERC to come up with a tariff methodology for the power sector. Section 76 of the EPSRA provides for NERC to adopt an appropriate tariff methodology, which, amongst other general tariff principles, should allow for the recovery of efficient cost, including a reasonable rate of return to the power sector and provide incentives to market operators to improve efficiency and quality.

To this effect, in 2008, NERC adopted the MYTO tariff methodology to regulate tariffs and the tariff setting process a plan which is supposed to be reviewed every 6months (minor reviews) and every 5years (major review).

MYTO is simply a tariff setting methodology to set wholesale and retail electricity prices using a set of assumptions and inputs such as price of natural gas, exchange rate, inflation, retail customer numbers per Disco, available generation and few others.

Recall last year, DisCos said Manufacturers Association of Nigeria (MAN) owes the Nigerian electricity market about N30 billion in unpaid electricity bills after MYTO 2015 was implemented.