Electricity Tariff Hike: Is it Lawful?

cont'd from page VIII judicial review, the court can deny it due deference because it fails the test set by the US Supreme Court in the classical Chevron case, that a regulatory decision deserves judicial deference as long as it is legal, logical, and reasonable. A decision of a regulator that violates its principal enactment or its subsidiary legislation, is an illegal exercise of power and subject to judicial nullification. The obligation in Section 33 is translated into ‘incentive regulation’ which characterises the work of utility regulators. Why incentive regulation? Incentive regulation emphasises that the objective of regulation, is to incentivise the operators to deliver services at the most efficient level possible. The idea is that the ultimate public interest is that, utilities can deliver the best quality services at the least cost. Therefore, the focus of regulation is to push or nudge the operators to that level of efficiency, that will result in the best service at the least cost. Incentive regulation has implications, for the design of tariff structure. Oftentimes, the regulator will use the cost of service model, which results in cost-plus or rate of return or price cap. Each of these pricing models has its advantages and disadvantages. In rate of return or cost-plus model, the regulator estimates the cost of producing the service and additional profit, and fixes the price at that level. This means that to be profitable, the firm should not exceed the allowable costs. But, the negative side is that it does not incentivise the firm to invest in innovation that will be more efficient, since such may not improve much its revenue. This has led to some other incentive regulatory models, that allow the firm to share from the gains of its innovation.

The bottom-line of regulation is that the service should be produced efficiently, and the customer should be protected from exploitation in terms of poor quality of service and high pricing. In a natural market that is perfect, there would be no regulation since the forces or demand and supply will ensure that the price that the customer pays is the most efficient price, because of the pressure of competition. But, in a natural monopoly like the electricity market in Nigeria, where there is no competition and entry and exit into the market is constrained, the market price will not be efficient. Therefore, it should be regulated.

The nature of the market, is the major difference between telecommunication and electricity markets. In the telecommunication market there is relative free entry and exit, and customers can easily switch service providers if the price rises or quality of service falls. But, in the electricity industry there is no easy entry and exit, and there is no choice of service provider. This is the reason, for regulating price and quality of electricity services. Legislation and judicial opinions recognise that the two markets are different, hence, the law establishing them reflect the economics of their services.

The fundamental law and economics of price regulation, focus on three basic things. These were well articulated in 1961 by Professor James Bonbright in his classic, The Principles of Public

Utility Rates. He listed these as (1) establishing the revenue requirement of the industry, (2) apportioning cost of service to different customers, and (3) ensuring optimal efficiency. The law requires a regulator to determine the revenue required to generate, transmit and distribute a particular amount of electricity in a year. The revenue requirement will depend on the efficiency of the sector, and the quantity of power expected to be supplied to customers. The key point is that since many costs will be capital costs that do not vary much with change in quantity, it is more efficient to supply higher quantity of electricity than less.

The second important work of regulation, is to apportion the costs to different customers to recover the revenue requirement. In doing so, the regulator ensures that the burden that falls on a customer class is fair, in that it is proportionate to the cost that the utility incurs in serving that customer class. This principle discourages cross-subsidy. There should be little cross-subsidy, such that one customer group pays a disproportionate portion of the cost of service. This will violate the principle of non-discrimination. This is a controversial point, to the extent that there is always some degree of cross-subsidisation because of policy. But, where it is gross, then the principle of far regulation and its fundamental tenet of ‘just and fair’ tariff have been violated.

Due Process Regulation

In ensuring just and fair tariff, the regulator ensures that the utilities consult with their customers, and secure their consent to tariff changes. This is a fundamental principle of fair regulation. Professor Bonbright listed the fundamental principles of rate setting as simplicity, practicability, consultation, consent, and stability. A tariff must arise from consultation, and receive the consent of consumers. It must be simple, non-controversial and stable.

Consultation as a fundamental aspect of fair regulation, is embedded in the administrative law and procedures that regulate the management of public agencies. The laws establishing the regulator, in this case, the Nigerian Electricity regulatory Commission (NERC) requires it to consult with stakeholders, especially customers before making regulations, including tariff regulations. In establishing the methodology for tariff, the NERC Business Rules requires that it consults with stakeholders, especially before signing a tariff order. The failure to do so will invalidate a tariff order.

Consultation is not just putting out an advertorial and asking for submission. That is not consultation, in the regulatory sense. The NERC regulation for tariff enacted in 2014 requires that before NERC approves a tariff request from its licensees, it must review evidence of real and sustained consultation with the affected customer class. NERC staff will attend such consultation and provide internal report, to use to second guess the report of consultation filed by the distribution companies.

Application of Regulatory Due Process to the Current Tariff

The approval of the current tariff offends the law and principle of regulation, as established under the Electricity Act and regulations issues by NERC. First, there is no evidence of consultation with customers on Band A, before approving hike in their tariff. At such consultation, the DisCo will show evidence of historical performance that justifies confidence that it can deliver 20 hours of electricity to the customers. This proof is empirical. If the DisCo has not supplied a minimum of 18 hours of electricity to the customer group in the preceding six months, how would it be reasonable to believe it can offer 20 hours without any significant increase in generation capacity and network reliability? This is preposterous. It is at such consultation, that the regulator would have realised that the request would amount to exploitation of those customers. Interestingly, the many complaints in less than a week of the approval about failure of service by the DisCos since the increase of tariff, shows that there is no capacity to supply minimum of 20 hours to any customer group. Therefore, the basis of the price increase does not exist.

Another serious defect of the tariff order, is the discrimination against customers banded under other bands. Chapter 2 of the Constitution prohibits discrimination, in access to social services. This is because such discrimination is unjust, and violates equal opportunity under the law. By granting discretional 20 hours of guaranteed electricity to one customer group and less than 6 hours to another category of customers, the regulator has violated Chapter 2 of the Constitution whose provisions have been enacted in a statute – the Electricity Act 2023. As the Supreme Court noted in Fawehinmi v Abacha, although the rights under Chapter 2 of the Constitution may not be readily enforceable, once they re-enacted in a statute, they become enforceable by the court by virtue of the enactment. Therefore, the discrimination in access to electricity not based on price but on discretional allocation, violates Section 16 of the Constitution and Section 116 of the Electricity Act.

It is clear that NERC did not apply the required regulatory rigor in the approval of the current tariff. The chief failures are that there was no real consultation with the consumer class that would be affected by price increase and no consideration for the right of other consumer groups to have equal access to electricity on equal terms like Band A customers. This is not withstanding other socioeconomic considerations that suggest that this is not the right time for such a large tariff increase. It is obvious that the regulator fell under the fiscal pressure of saving the sector from assumed financial collapse and passed unjustified costs to a category of customers perceived to be able and willing to pay. That is not good regulation.

“But, the electricity distribution companies have started publishing their inability to meet the required 20 hours per day power supply for Band A customers, as directed by the NERC. Having not met the conditions stipulated by NERC, the DisCos have forfeited the right to sell electricity at the rate of N225 per kilowatt.”