Sam Amadi is a lawyer, political analyst and former Executive Chairman of Nigerian Electricity Regulation Commission (NERC). Very knowledgeable in economic and social dynamics, the Harvard-trained academic spoke to Chooks Oko on the current situation in the power sector.
One of the key things harassing the Nigerian consumer is the cost of electricity, which has defied solution over the years. What is the actual problem and how can it be surmounted?
Well, many people in the sector will think otherwise, that the problem in the sector is that the tariff is actually too small and doesn’t reflect the cost of doing business. The problem of the sector is that they think that the price of electricity in Nigeria is low. Objectively, if you look at West Africa, we are not one of the highest at all. We’ll probably be in the middle. As at 2014, I’m aware we used to be the worst but we have improved. The problem is not that the price is high, the problem is that there is no supply. The problem is not the per unit cost but the supply. Most houses in Nigeria will spend between five to ten thousand naira per month, if they are metered. In other places in the world, if you look at the percentages of income, electricity bill will take more than that especially if you have full supply. In my office, for instance, it could be six to seven thousand naira in a month, and that’s not big. So, the real problem in the sector for consumers is that they are not getting enough supply of electricity, no stable power and not that they are paying more. They are paying more where they have no meter. They are probably over billed or have estimated bills. But primarily, the problem consumers have in the electricity industry is that of no product and no accurate measurement of what they have consumed. And so, the issue of pricing would go down slightly if we have increased capacity. If we have increased capacity, unit costs will go down if it reaches a satisfactory level where price and cost are properly aligned. You will expect less cost with increased capacity because you are producing more with less, technically. So at that point, price would go down, all things being equal. But at this point, I think the crisis is more about the quantity of supply and the quality of service in the sector.
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But the rural areas are mainly affected because even with meters, you find people in houses with just bulbs and fan paying as high as N15,000.00 per month
Okay, that will probably be because, the pricing of electricity is actually the management of the costs. For example, most of these households are not supposed to be on R2. If the distribution companies did their customer enumeration and their classification properly, the customer’s load bill is what he consumes, what he needs for his everyday running, these will inform the classification of the customer. I can agree with you that we are not having an efficient customer classification in that we have too many people lumped together whose use of electricity are totally different and disparate. The woman who has a bulb and maybe a fan in the rural area or semi urban area needs not be on the same level with you who are in the town. May be you have a two-bedroom flat but when you look at the bill, you discover that they are all on R2, so the question is not about tariff per se but classification of customers themselves. Secondly, in every country in the world, we have what you call two-tier tariff rate, meaning that you can say that x unit to so so unit of power will cost so so and so. If you consume more, the price changes. So that is one way those who stay at the lower level, who don’t consume more, who put off their lights or have fewer gadgets will pay a different rate. So they have two-tier rate. At this level, if you are consuming less than 50 megawatts per month, your rate will be, let’s say 10,000 per unit. Once your consumption goes higher, you pay higher. It will show more equity and the assumption here is that those who are consuming less are the lower income level. So, those are two ways you can do it. Create two levels of pricing based on quantity and some mark up after the threshold, then you enter into a higher tariff classification and properly classified consumers where those who are consuming less are priced differently. And this is for unmetered customers. But if you have a meter, the issue of consuming one bulb won’t arise because at the end of the day, you will only be billed for what you consume. So basically, the problem of cost to consumers is complicated by the fact that they are not metered mostly and sometimes DISCOS may affix them with a rate that may not be for their class. So such people who are probably running a small eatery in a semi urban area may be classified as commercial. Maybe in the eatery they don’t use electricity apart from the fan, they are not even using a cooker. They could be classified as what we call R1 which is livelihood consumers, those who consume electricity at a small level who are also subsidized by the bigger consumers. So they are having problems of clarity, accountability and proper management of tariff. If you ask me, the pricing is not too high, considering the cost of production. Because of our inefficient system, and inefficient pricing the consumer pays the price.
So, what can the consumer do?
What they can do is basically appeal. You have to know what the pricing is from NERC before you can appeal. Consumer education is important. Maybe NERC should do more, even though it involves cost too, let consumers know what units they are supposed to be in, R1, R2, R3. Let them also crosscheck that they are being billed and classified appropriately by the distribution companies. The first thing is that customers should find out where they are classified; are they paying the appropriate bill? Two, if you don’t have meter, you put more pressure on the regulator and the operator to provide meter. If the meter is properly set, it will guarantee that, all things being equal, you are not paying more than you are consuming. Thirdly, we need to all be speaking about more investment in the power sector and better management so that the inefficiencies will go down and if they go down the pricing will go down as well. Again, there is corruption in the value chain. Some of the operators are extorting consumers, not giving receipts, not giving them meters, just giving them bills. The consumers need to go to the consumers’ forum, which NERC has set up. And also complain to the regulator from time to time.
There is a general feeling that the DISCOs are not doing well, what’s your assessment of them?
Clearly they are not satisfying their customers. Basically, there are some improvements here and there. Some are apparently doing better than others, but NERC has a much more scientific assessment of them, but as a consumer myself, and one who lives with consumers, I know we are not satisfied. Again, on the other side they will say tariff is low, but consumers are saying tariff is high. The DISCOs are saying tariff is low and not paying their costs and putting pressure on the regulator and government to unhinge the tariff to go up to a level that covers cost. Secondly, they will also argue that the operating environment is harsh and the foreign exchange crisis. When they came in, and even now, their investment is in dollars. If the exchange rate goes higher, then their cost will increase, then the naira related consumption will go higher, so that is about how the tariff control has been. For the past four years they have not had tariff change. By now they ought to have two to three reviews. Those reviews should capture those fluctuations in dollars, the exchange rate and interest rates. They will argue that they are losing money and that the physical conditions, social and economic environment are harsh and their inability to meet up the consumers’ expectations are not entirely their own fault, that it is environmental. Again, I will think they are failing in their duties because they have not yet put up strong change management strategy in terms of addressing the consumer concerns. But they should know that improving their infrastructure determines how much power they can sell, but sometimes you hear them rejecting power or their system have collapsed or their infrastructure is not able to deliver power to the consumers. They are also to blame because they are not making appropriate investment both in strategy, in human management to be efficient, and also in technology to improve service delivery. That is my assessment. Generally, they have performed badly. They are faced with economic and the physical environment difficulties, but nevertheless, they could have done far better than they have done.
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If they deploy prepaid meters, will that change anything?
Yes, of course prepaid meters will give consumers first the guarantee that they are not being cheated. So, even if you do not like the tariff rate, you will be sure that based on that unit, every month you can control your consumption. Assuming you are a very disciplined consumer, when you are going to work in the morning you shut down everything, you may not change the bill you pay, you will not come back and pay estimated bill, which is usually given to you irrespective of your consumption. Consumers are happy when they have meter. Meter guarantees to them that when they have it, they are masters of their own fate. They can consume less or more. Meters help consumers control their consumption and their costs too. If you are not getting product and getting high bill, it is infuriating. And it further destroys the willingness to pay and that will affect the revenue of DISCOs and weaken their capacity to invest, which will result in poor service. It is a vicious cycle and metering can help break the cycle.
So, will it be right to say that they are reluctant to give consumers the meters so that revenue can keep coming to them the way it is?
There is a conspiracy theory that it works in two ways, yes and no. Yes, because from the lazy man’s point of view, some DISCOs might prefer to over bill especially if the consumers are willing to be raped, they are not complaining. If people pay their estimated bills willingly and freely, then the DISCOs have no business providing meters. Because the billing method is such that they recover everything that they didn’t recover from the meter customer through the estimated billing. If they recover everything and have no revenue loss it’s ok for them. So, that is yes. But some metering customers are very stubborn. They don’t pay, they quarrel and destroy things, so they lose money as well. So in the long term, it is just better for them to bill directly so they can recover costs. So, from that perspective yes. It might look like in the short term, get money from people by escalating their bills but it’s difficult to get payment from unmetered customers because you need to invest your human cost in going after them. Probably you go and disconnect them, you suffer some physical losses, you even lose track because there are some difficult consumers. It is arguable if they are gaining by over billing when they could have gained more by metering. I think the proper thing for them is to begin to make upward investment in metering. It’s an investment they can recover in the first two, three, four years. It requires massive investment that can be recouped over time. But some of them are reluctant or incapable of making those investments.
Do you think we are making any progress in the power sector?
We are making progress in snail speed and sometimes going backward. In a way, yes, we can say we have privatised. Ideally, government is not supposed to be spending much money in the power sector, such money would have been free to focus on human development or other sectors, other infrastructure, but the signals show that government is still getting financially involved, which is not the idea of privatisation. So, if the companies are weak, such that government is spending so much money in support through CBN interventions and all that, then the little relief that government had because it had privatised is now sacrificed. I will say we are not making progress at all. Some will say we are now attracting foreign investments, and that we are almost getting to stable power, that some states are already approaching 24-hour stable power. Well, if that’s the truth, one can say we are making progress but I doubt if that is true. That will really be a good development.
So how do we make progress in the power sector?
We should first do an appraisal of the journey we have undertaken so far, the assumptions. I have issues with the policy framework itself. I also have problem with implementation. Government should sit down and review what has happened since 2005 after the reform. There are things that should be changed. They also need to depoliticise the sector. Identify the issues and be careful with the World Bank and all these models. Look at those that have worked and those of them with reasonable tactics and who has been pragmatic and practical in managing their power sector. Government shouldn’t be eager to run away from investment. They should invest and look for private sector to manage those investments. That’s what I think, I don’t think the private sector will make much investment in the sector.
You are saying that given the option, you want us to go back to NEPA and all that?
No, I want us to go forward strategically. First of all, some will say we made a mistake by privatising. That’s not true. We need to look at models where government can still be willing to make investment and allow investors to manage it in the best possible way. I don’t believe that government cannot get involved in managing things. If a country cannot resolve its private sector crisis, by managing its resources efficiently, then it can’t even manage the private sector. What it means is that we have created a market leaving the private sector to make investments and take all the risk, I don’t think so. Government should make investment in some areas and I think the best model for us is a hybrid where government is forced to be disciplined and efficient by private markets working alongside government. Why I think this is important is because there are risks in the market that the private investors might not like to take. So, you won’t expect the private sector to do the things that need to be done. But you can do those things with the private sector so that they can take areas they can manage, the risks they can carry and you can bear the risks they can’t carry. It looks better when government is decisive on what has to be done in a smart way leveraging on the private sector to get it done.
General take
For the consumer, I think they should come together. The first thing I did as NERC chairman, the first of such action throughout the world was to organize the consumers to fight us. We set up a consumer network. We need consumers to come together to have the power to impose their own preference on the system. Consumers are scattered individuals. Maybe government should consider setting up a real consumers association, different from consumer protection council, find a way to mobilize the consumers of electricity so they can have a voice. And they can be part of shaping the way things are done. Secondly, consumers should also be a force. That will make them improve their influence, improve complaint and put the regulators and operators on their toes. The truth is that market is easily captured by producers and producers can easily capture the regulators. But what will make them not capture them is that consumers are wise. Consumers can vote with their voice and put down their feet.
