Tariff hike: DisCos playing with fire

The privatization of Nigeria’s distressed power sector has become one huge burden on the economy.  Architects of the project expected private investors to breathe life into the cash-strapped industry by building more power plants and upgrading the archaic distribution facilities.
Three years after the power generating companies (GenCos) and distribution companies (DisCos) rose from the ruins of the Power Holding Company of Nigeria (PHCN), they have become huge financial burden to the federal government and ruthless exploiters of consumers.
Last year, the federal government bailed out the new investors with a lifeline of N233 billion.  Consumers have endured three debilitating tariff hikes. The DisCos want even more.
Consumers were told that the cost of generating a kilowatt hour of electricity through private generators was N50 and that public power was cheaper.  Now the DisCos are demanding almost twice what it takes to generate power from a micro generator.

The lack of transparency in the power sector privatization exercise is just manifesting by the day.  The companies that rose from the ruins of PHCN are incompetent, inexperienced, inefficient and cash-strapped.  The firms lack the financial muscle to upgrade their distribution system to enable them distribute enough power that would generate funds to balance their budgets.  They are therefore not benefitting from the economy of scale.  That explains why they demand tariff hike every six months.
The DisCos may be earning less income from tariff at N22.8 per kilowatt hour than PHCN was making with less than N10 tariff.  Since privatization, electricity tariff has risen by 120 per cent, yet DisCos’ cash flow remains precarious. Banks experience such diminishing returns in loans recovery when lending rates are atrociously high. That is a simple economic logic that the DisCos are yet to accept.  They believe that higher tariff brings in more revenue, but bills payment by Nigeria’s impoverished consumers actually tumbles with higher tariff.
The discordant tunes from the DisCos over fresh demand for tariff hike indicate that operators do not believe in the economy of scale.
In the last two weeks, there have been claims and counter-claims over the need for fresh electricity tariff hike. Azu Obiaya, the chief executive officer of the Association of Nigerian Electricity Distributors (ANED), the umbrella body of the DisCos, fired the first salvo.  He told a newspaper reporter that the DisCos have informed the Nigeria Electricity Regulatory Commission (NERC) of a proposed 200 per cent tariff hike, but that the regulator was yet to respond.
Obiaya listed surging inflation rate, forex scarcity and mounting consumers’ debt as reasons for DisCos’ fresh demand for tariff hike.

The most infuriating reason for the proposed tariff hike is the mounting debt by electricity consumers.  The DisCos have done it before.  They factored consumers’ bad debt into the tariff hike that came on stream in February. As usual, ANED believes that the best way to collect debts is to hike tariff.  And the debts are mounting.  As at the last count in June, consumers’ debt to the DisCos stood at N568 billion.  Government ministries, departments and agencies were the major culprits.
The DisCos do not know how to collect the debts.  They have therefore decided to follow the line of least resistance.  A chunk of the proposed tariff hike is designed to cover consumers’ bad debts.
The ANED boss wants tariff raised to N70 per kilowatt hour for residential consumers, up from an average of N22.8.  However, poorer DisCos demand higher tariff. Cash-strapped DisCos, like the one in Jos, charge as high as N31 per kilowatt hour under the last tariff hike. Obiaya suggested that such DisCos might charge as high as N105 under the new proposal.
A few days after Obiaya’s bombshell, Sunday Odutan, ANED’s executive director (research and advocacy) countered his boss’ claims in a rather infantile manner.  While Obiaya claimed that NERC was aware of the planned tariff hike, Odutan said the matter has not been discussed with the regulator.  No one knows who to believe.

The truth however is that the DisCos are itching for fresh tariff hike, and given government’s soft spot for them, they might get at least a 50 per cent hike.  Barely eight months ago, DisCos stampeded NERC and the federal government into conceding a 45 per tariff hike. No one could risk a showdown with the power of darkness.  Even a Federal High court order halting the implementation of the tariff hike was passively ignored.  The matter is now in the Court of Appeal.  No one expects the court to uphold the ruling of the court below.
Obiaya was apparently flying a kite. Odutan’s counter-statement is an after-thought borne out of fears that a fresh campaign for tariff hike at this time could trigger a mass protest with unpredictable consequences.
The DisCos want fresh tariff hike to cushion the effect of mounting bad debt.  Ironically, half of the bad debt emanates from fraudulent estimated bills.  Three years after privatisation, the DisCos cannot muster the funds to meter every consumer. They leverage on the dearth of meters to defraud consumers with noxious bills. DisCos must look inwards for funds. With consumers pushed to the wall, it is dangerous to raise tariff every six months. The trend could trigger a civil uprising.