The interesting issues arising from NERC’s order
A few weeks ago, an Order was issued by the electricity regulator, revising conditions of fixed charge by electricity Consumers
This week, we review that Order and raise interesting points worth considering.
NERC and Its Powers
Section 76 of the Electric Power Sector Reform Act (“EPSRA”) stipulates that electricity tariffs in Nigeria shall be regulated according to one or more methodologies. Further to section 32 (1) (d) and (f) of the EPSRA which speaks to fairness and approach to the tariff methodology to be adopted, the Nigerian Electricity Regulatory Commission (“NERC”) approved and began the implementation of the Multi-Year Tariff Order (MYTO) which amongst others, sets the prices for both retail and wholesale services in the electric power sector.
For easy understanding, suffice to say that the MYTO is generally a tariff determination framework issued by NERC to indicate the costs of electricity generation and regulation of electricity tariffs. In the month of July, 2008, MYTO was issued for the first time and NERC has stated severally, that the purpose of the MYTO is to set cost reflective tariffs which will allow the power sector to be properly funded and functional.
To be cost-reflective, the MYTO considers the implicit and efficient costs of generating electricity, transmitting same and finally distributing it to consumers in homes and workplaces (the burner-tip). By the year 2012, the MYTO was reviewed and a revised framework also known as MYTO-2 was issued. The MYTO-2 (like the initial MYTO) covers amongst other matters, wholesale and retail electricity tariffs. It specifies, for example, the tariffs payable by various classes of end users of electricity. Under the MYTO-2, customers of distribution licensees are expected to pay both fixed (capacity) and energy charges.
The fixed charge is generally paid by the customer, irrespective of actual consumption of electricity, and its purpose is to recover the capital cost, fixed operations and maintenance cost of the various utilities across the industry. The Energy cost is paid by customers when electricity is/was actually consumed, and it recovers fuel cost, variable operation and maintenance cost and apportion of the tax cost incurred by market participants.
NERC’s New Order
NERC, by Order No. NERC/FC133 (Order Revising Conditions of Fixed charge by Electricity Consumers) dated May 1, 2014 ordered as follows: “effective from May 1, 2014, where any customer of a Distribution licensee has not received continuous or cumulative electricity supply for a period of 15 days in a month, such a customer shall not be required to pay the fixed charge; PROVIDED that the disruption is not due to non-payment of electricity bills or customers action.”
NERC specified in its notice issuing the Order, that, the Customers’ persistent complaints of continuous payment of the fixed charge, irrespective of non-delivery of electricity to them influenced NERC’s decision in making the new Order.
Some Interesting Issues to Consider
Determination of Continuous or Cumulative Electricity Supply
A point I have been considering since I first read the notice by NERC was what would amount to ‘continuous’ or ‘cumulative’ and in what sense the words were used. Before I go on, it is germane to look at the meanings of the terms ‘continuous’ and ‘cumulative’. A review of the Oxford Dictionary suggests that the term ‘cumulative’ means increasing or increased in quantity, degree, or force by successive additions, whilst the term ‘continuous’ means forming an unbroken whole; without interruption.
What NERC would then seem to be communicating is that the fixed (capacity) charge is only payable by the relevant customer where electric power is provided for a period of 15 days non-stop or where in a period of one month there is electricity supply for an aggregate period of 15 days. The tricky points and issues that I have been considering include whether the 15 day cumulative test, would be passed where there is light for only a few seconds or minutes for a combined period of 15 days in a month? Recall that there are two options with the use of the term ‘or’ and these options, include electricity supply for (a) an aggregate period of 15 days or (b) 15 days non-stop. This is an important point that may require clarification.
Where the argument that a few hours or minutes of electric power supply for 15 days in a month passes the test, then, it may be pertinent to find out who has the burden of proof as to the number of days there was electric power supply, albeit, for those few hours; especially in scenarios where for several hours no one is at home as kids go to school and probably attend after-school classes and parents are not home until very late at night.
The Treatment of Unusable Brown-outs
According to Steven Blume, a brownout is an intentional or unintentional drop in voltage in an electrical power supply system. Several Nigerians refer to this as low voltage and in such circumstances several people would rather not have electricity supply than have brown-outs that may be damaging to their home or office appliances. It is, therefore, pertinent for NERC to explain the treatment of brown-outs; in other words, whether brown-outs fall within the precinct of having or not having electric power supply in the practical sense of things. I reckon the answer would depend on whose interest tilts the balance – the consumer, the distribution company or the lender.
Lending to Distribution Companies
Another issue worth considering is the effect of the new Order to lending in the power sector and the actual outstanding loans. For new loans, this may not be so much of a big problem; although, the fixed charge element could ordinarily make lending more attractive as the lenders know that come what may, the borrower is guaranteed a fixed amount cash-flow (all other factors working out well) every month, from fixed payment which are not dependent on the actual use of electric power such that even when several customers are out of the country or away from their homes for a fairly long period of time, they still would make capacity (fixed charge) payments. The foregoing, then drives lending as same improves the bankability of the particular transaction. This is, however, no longer the case; at least for the period the Order is in place or the industry substantially improves.
For more information on issues such as this in the electric power sector, read the text, “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business” by Ayodele Oni.
Ayodele Oni (ayodeleoni@outlook.com), a solicitor specializes in international energy (oil, gas & power) investment law and has a mini MBA in power & electricity. You can follow me on twitter @ayodelegoni.