Will NERC’s recent effort end ‘Crazy Billing’ by Discos?

How To Save Your Electricity Consumption - NERC
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A quick overview of the Nigerian Electricity Supply Industry

For decades, the Nigerian Electricity Supply Industry has been plagued with several challenges across the entire power value chain. To put the severity of the crisis in context, aggregate technical, commercial and collection (ATC & C) losses in Nigeria averaged 49% as of Q2-19, higher than the World Bank’s estimated global average at 8.3% as far back as 2014. The challenges range from the sub-optimal supply of gas to inadequate supply from Generating Companies (Gencos). Aside from inadequate wheeling capacity, the Transmission segment (TCN) – fully owned by the government, continues to record huge transmission losses. For the Distribution companies (Discos), accumulated ATC&C losses have constrained profitability. More importantly, issues around metering, the estimated billing system, inadequate and the deteriorating state of infrastructure, incidence of energy theft, illegal connections, as well as the huge amount of MDAs (Ministers, Departments, and Agencies) debts, have weighed on revenue.

Specifically, the inability of Discos to meet the minimum remittances to the Nigerian Bulk Electricity Trader (NBET) and the Market Operator (MO), has created a severe liquidity crunch across the entire power value chain. In this report, we look at some of the recent regulatory measures put in place by the Nigerian Electricity Regulatory Commission (NERC) to stabilize the sector.

The Meter Asset Provider (MAP) Regulation 2018

To reduce some of the ATC&C losses borne by Discos and to serve as an interim solution pending the widespread adoption of meters, the Discos have relied on estimated billing for unmetered customers across classes (Residential, Commercial, etc). As a response to the challenges and fast-tracking metering, the NERC issued the Meter Asset Providers (MAP) Regulation in 2018, giving authority to third party companies to supply, install and maintain end-user meters. This new set of industry players, in conjunction with the 11 operating Discos, were given a timeline to achieve full metering of all electricity end-users in 3 years (I.e. 2021). Also, following the successful roll-out of meters from May- 2019, after the completion of the MAP bidding process, the NERC specified a timeline of 10 working days, for end-users who have made payment to the specified Meter Asset Provider, to be metered.

Despite huge benefits for both end-users in terms of fair pricing and reduction in collection losses for Discos, metering progress has remained abysmal. As of Jun-2019, the average metering progress across the 11 Discos was 43% of registered electricity customers, with players such as Yola Disco (21.0%) and Kaduna Disco (22.0%) at the bottom of the table. More so, the rapid growth in the number of electricity end-users continues to outpace the metering growth. According to the NERC, the number of registered electricity consumers has increased from 5 million in 2012 to 10 million as at Dec-2019, with 52% being invoiced on estimated billing.

The Contentious Estimated Billing: Repealed, Abolished or Capped?

First off, it is imperative to explain the different classes of electricity consumers. Broadly, Nigerian electricity end-users are segmented into Residential (R), Commercial (C), Industrial (D), Special (A) and Streetlights (S). These classes are further segmented based on energy demand as explained further in the table below:

Figure 4: Classification of Electricity end-users in Nigeria

Notably, Discos have failed to capture total actual consumption across these different segments. While the default rate is lowest amongst the C and D class of consumers, the default rate is highest among the R, A and S classes of consumers. For instance, collection losses can be assumed to be relatively higher for the R class of consumers due to over-billing, energy theft and related issues. For practicality, assuming a Disco sends energy worth 2,000 kWh to a street in a month, where several R2 & R3 end-users are located, and only two end-users are properly metered – and account for 300 kWh. To account for the remaining 1,700 kWh, the usual practice is to prorate or spread the energy consumed evenly, among all remaining unmetered end-users. This results in some R2 end-users being invoiced inflated estimated bills – way above their actual consumption – with many of these users paying only part of the bills and pushing the balance forward. Furthermore, A and S consumers, being mostly MDAs, are the largest debtors, owing an estimate at about N90.0bn nation-wide.

To address fairness in the billing of different types of consumers, recently, the NERC published the “Order on the Capping of Estimated Bills in the Nigerian Electricity Supply Industry’, effective from 20th February 2020. The focus of the order is to promote parity in the billing of metered and unmetered electricity customers, given the several complaints about Discos issuing unrealistic estimated bills.

Going forward, electricity end-users within the Residential and Commercial class, belonging to the single and 3-phase segment (R2 and C1), that are unmetered, will be billed subject to an energy cap. After consulting with various stakeholders, the NERC finalized that the energy cap will be determined by an average vending of customers of the same tariff class, within the same business unit (area). To explain further, If Mr. A lives in Mushin (a business unit) and registered as a single-phase R2, and his building is unmetered, pending the time he will be metered, he will be required to pay according to the energy cap determined by the average energy consumed by R2 customers that are metered in Mushin. As depicted in the table below – that amount will be 110 kWh x N30.93/kwh = N3,402.3. Interestingly, for end-users whose current estimated billing is lower than the energy cap, the new order stipulated that they will continue to pay the lower price, without an upward revision to the energy cap. Notably, this is a transitional arrangement, until all customers in these categories are metered.

By the order of the commission, all other consumers, other than R2 and C1 class, must be metered before 30 April 2020. If not, they are not liable to pay any estimated bills and will remain connected to the supply, which is a loss for the Discos. Also, to plug revenue leakages from these segments, Discos are mandatorily required to migrate all high energy consumers (above R2 and C1), to cashless settlement platforms, which must account for energy flow and metering infrastructure by 31st December 2020. Finally, all customers that reject the installation of a meter on their premises, will not be entitled to electricity supply and will be disconnected.

…is this the end of ‘Crazy Billing’ by Discos?

Overall, the benefits of this order accrue to both Discos and electricity end-users. First, unmetered R2 and C1 consumers will be able to pay charges that are more commensurate to their consumption. Second, the order eliminates the incidence of inflated estimated bills and creates customer satisfaction and fewer complaints, which are integral goals the NERC set out to achieve. Third, the deadline to meter high-end customers will prompt Discos to fast track metering, which is positive for the reduction in collection losses. More importantly, this will increase overall electricity supply to Nigerians, lower collection losses, buoy revenue, and reduce the incidence of liquidity crisis across the value chain by giving Discos a better shot at meeting their minimum remittance to NBET and MO.

The biggest advantage of all comes in play when the transition to cost-reflective tariffs takes place in April 2020. If the previously estimated billing practice was still in place, and tariffs were reviewed upwards, this would have had a severe implication on consumer wallets belonging to the R2 and CI class. With energy demand now similar to metered counterparts, tariffs paid for will be relatively fair.