tariff regulation in the nigerian electricity supply industry: myto and lifeline tariff

8/8/2019 Tariff Regulation in the Nigerian Electricity Supply Industry: Myto and Lifeline Tariff

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TARIFF REGULATION IN THE NIGERIANELECTRICITY SUPPLY INDUSTRY: MYTO AND

LIFELINE TARIFF

PRESENTATION AT NATIONAL WORKSHOP ON STATEPRESENTATION AT NATIONAL WORKSHOP ON STATEPRESENTATION AT NATIONAL WORKSHOP ON STATEPRESENTATION AT NATIONAL WORKSHOP ON STATEGOVERNMENT PARTICIPATION IN POWER SECTORGOVERNMENT PARTICIPATION IN POWER SECTORGOVERNMENT PARTICIPATION IN POWER SECTORGOVERNMENT PARTICIPATION IN POWER SECTOR

BYBYBYBY

MALLAM ABDURAHMAN ADOMALLAM ABDURAHMAN ADOMALLAM ABDURAHMAN ADOMALLAM ABDURAHMAN ADO

VICE CHAIRMAN, NERC ABUJAVICE CHAIRMAN, NERC ABUJAVICE CHAIRMAN, NERC ABUJAVICE CHAIRMAN, NERC ABUJA

30TH JULY, 2008


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Competitive Electricity market and TariffRegulation

To promote competition and stimulate investment in the

Nigerian Electricity Supply Industry (NESI), NERC wasestablished in 2005 with the following objectives:

to create, promote, and preserve efficient industry andmarket structures, and to ensure the optimalutilization of resources for the provision of electricityservices;

to maximize access to electricity services, bypromoting and facilitating consumer connections todistribution systems in both rural and urban areas;

to ensure that an adequate supply of electricity isavailable to consumers;

To ensure that the prices charged by licensees arefair to consumers and are sufficient to allow thelicensees to finance their activities and to allow for

reasonable earnings for efficient operation.


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Activities Subject to Tariff Regulation

1. According to Section 76(1) of the Act, the following activities are

subject to tariff regulation: Generation and trading, in respect of which licences are

required pursuant to this Act, and where the Commissionconsiders regulation of prices necessary to prevent abuse ofmarket power and

Transmission, distribution and system operation, in respect ofwhich licences are required under this Act.

2. In the transition and medium term stages of the market, the MultiYear Tariff Order (MYTO) will derive a tariff for: Transmission and Distribution/Retail using a revenue

requirement approach determined by the building blocksmethodology while

Prices for generation will be based on the long run marginalcost method (LRMC) to produce proxy for a market price.

3. Generation price in the long term will be determined by market

forces and also retail tariff.


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Market Development and the Extent of PriceRegulation

Market StagesTransition S tage

(1st 5 years)

Med ium S tage (years

5 to 10 )Long Term

Part unregulated (based on

bilateral contracts)

Part regulated based on

vesting contracts (matches

the regulated load)

TransmissionRegulated prices using

building blocks

Regulated prices using

building blocks


building blocks

Distribution Regulated prices usingbuilding blocksRegulated prices usingbuilding blocks

Regulated prices for the

regulated load

Unregulated prices for thecontestable load

Generation


vesting contracts based

on life cycle costs of an

efficient new entrant

Unregulated (based on

bilateral contracts)

RetailingUnregulated (all load is

contestable)


building blocks


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Tariff Principles

1 The pricing of electricity in Nigeria was based on a set of pricing

principles and cost assumptions and designed to provide tariffsfor each of the generation, transmission, distribution (includingretail) sectors.

2 The underlying pricing principles that guided the development ofthe tariff model were:

Cost recovery/financial viability regulated entities should bepermitted to recover their (efficient) costs, including a reasonablerate of return on capital.

Signals for investment prices should encourage an efficientlevel and nature of investment (e.g., location) in the industry.

Certainty and stability of the pricing framework is also importantfor private sector investment.

Efficient use of the network Generally, this requires efficientprices that reflect the marginal costs that users impose on thesystem and the reduction of cross-subsidies.

Allocation of risk pricing arrangements should allocate risks

efficiently (generally to those who are best placed to managethem).


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Tariff Principles (cont.)

Simplicity and cost-effectiveness the tariff structure andregulatory system should be easy to understand and not excessively

costly to implement (e.g., facilitate metering and billing). Incentives for improving performance the way in which prices

are regulated should give appropriate incentives for operators toreduce costs and/or increase quality of service.

Transparency/fairness prices should be non-discriminatory and

transparent. Non-discriminatory access to monopoly networks isalso a key prerequisite for effective competition in the contestablesectors.

Flexibility/robustness the pricing framework needs to be able tocater for unforeseen changes in circumstances.

Social and political objectives the pricing framework needs toprovide for the achievement of social policy goals such as useraffordability, universal access and specific policies such as theNational Uniform Tariff, etc.


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Legal and Regulatory Basis of TariffMethodology

1. Section 76(2) provides for NERC to adopt appropriate tariffmethodology within the general principles established in the Act,

which: Allows recovery of efficient cost including a reasonable rate of return Gives incentives to improve efficiency and quality Sends efficient signals to customers on costs they impose on the

system

Phases out or reduces cross subsidies2. NERC had adopted three basic principles in the determination of an

appropriate methodology. These principles require that a regulatorymethodology: Produces outcomes that are fair;

Encourages outcomes that are efficient in that it involves the lowestpossible costs to Nigeria and encourages investment in electricitygeneration; and

Is simple, transparent and avoids excessive regulatory costs.


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MYTO Methodology

1. After extensive consultation with industry stakeholders,consumers ,labour unions and relevant government

institutions a tariff methodology was developed and adoptedfor the sector

2. NERC adopted the use of a Multi Year Tariff Order (MYTO)pursuant to the authority given under Section 76 of theElectric Power Sector Reform Act (2005).

3. The MYTO provides a 15 year tariff path for the electricityindustry, with minor reviews each year in the light ofchanges in a limited number of parameters (such asinflation, exchange rate and gas prices) and major reviewsevery 5 years, when all of the inputs are reviewed withstakeholders.

4. It uses building block approach to determine cost ofproviding electricity services and equate price to reasonablecost include reasonable return to capital invested.


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MYTO Methodology.. (Cont)

5. The methodology to determine the MYTO tariff path isknown as the building blocks approach.

6. This was selected from a number of alternative methods,such as price cap regulation and rate of return regulation,which is also called cost of service regulation.

7. The advantage of the building blocks approach is that it

combines the positive attributes of rate of return regulationand price caps.

8. This type of regulation is known as incentive-basedregulation.

9. The Nigerian electricity supply industry needs to improve

performance on a number of levels and this form ofregulation provides incentives to do so.

10. The regulated entities have an incentive to do better thanthe projected performance levels built into the tariff path.


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What are the Building Blocks?

Return on capitalReturn on capital, payments to both, payments to bothdebt and equity providers, estimated bydebt and equity providers, estimated by

WACCWACC

Return of capitalReturn of capital, depreciation, depreciationallowance to pay for run down of capitalallowance to pay for run down of capitaland replacementand replacement

Operating costsOperating costs, includes fuel, variable, includes fuel, variable

and fixed O & M, overheads,and fixed O & M, overheads,administrationadministration

There are three standard building blocks used in this approach:


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Why Building Blocks Approach?

1. The Electricity Supply Industry is being restructured

into a number of companies, some of which may beprivatised each with different financing, rates ofreturn & cost structures

2. Need a uniform regulatory framework that can apply to

all fairly. It does not matter whether individualcompanies have different costs, capital structures, anduse different accounting methods

3. Within the framework we can apply government policy,such as the development of a market, and provideincentives for new investment and efficiencyimprovements.


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The Process Used to Construct the MYTO

and Set the Average Tariff

Inputs to the tariff; forecasts of load, capacity, fuel costs, iInputs to the tariff; forecasts of load, capacity, fuel costs, investment,nvestment,

levels of losses, customer numbers, O & M costslevels of losses, customer numbers, O & M costs

Generation costs,Generation costs,

life cycle costlife cycle costmethodologymethodology

Transmission tariffTransmission tariffBuilding BlocksBuilding Blocks

Distribution & retailDistribution & retail

tarifftariffBuilding BlocksBuilding Blocks

Final retail tariffFinal retail tariff

To consumersTo consumers


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MYTO Assumptions for Projected Generation,Losses and Final consumption

Load 2008 2009 2010 2011 2012

Total Generation (GWh) 22,548 36,424 60,707 97,131 109,272Transmission Losses % of SO 8.05% 8.05% 8.05% 8.05% 8.05%

Delivered to Distribution GWh 20,733 33,492 55,820 89,312 100,476

Distribution Losses % of DD 11.00% 11.00% 11.00% 11.00% 11.00%

Delivered to customers GWh 18,452 29,808 49,680 79,488 89,423

Non-technical losses (non-billed energy) % of DC 20% 18% 16% 14% 12%

Billed to Customers GWh 14,762 24,442 41,731 68,359 78,693

Revenue Collection losses % of 16% 13% 10% 8% 6%

Sales where Revenue is collected GWh 12,400 21,265 37,558 62,891 73,971

Revenue based sales as % of Sentout energy 55% 58% 62% 65% 68%

Total technical and non technical losses % of SO 34.5% 32.9% 31.3% 29.6% 28.0%


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MYTO forecast of System Losses

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Percentage

lo

sses

Transmission Losses (% of SO)

Distribution Losses (% of BSP)

Non-technical losses (% of Deliv from Dist)

Revenue Collection losses (% of Billed sales)

Total losses (% of sentout)


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Methodology-Generation (Vesting Contracts)

1. The price for generation as contained in vesting contracts

will be based on the most economically efficient newentrant, determined as an open cycle gas turbine (OCGT)

2. All generators (existing and new), regardless of their ageor conversion technology, will be paid this vesting contract

price.

3. Those generating under PPAs will continue to operate and

be paid according to their PPAs

4. Vesting contracts will be securitized under the marketsecuritization process and should take on the form of a

standard bilateral contract which is now being developed


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Wholesale Price for Generation

Year commencing 1 July 2008 2009 2010 2011 2012

Total wholesale ContractPrice (N/MWh) 3,104.1 3,179.1 3,364.6 3,570.7 3,777.4

Capacity Charge(N'000/MW/month) 1435.1 1468.2 1502.1 1536.8 1559.6

Energy Charge (N/MWh) 1156.5 1186.6 1326.1 1485.0 1660.9


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Allowed Revenue forTransmission Company

2008 2009 2010 2011 2012

Total Operation & MaintenanceCosts (include capacity

development)7,205,828 10,551,980 16,403,993 25,435,536 29,498,607

Return on Capital4,203,778 17,827,760 33,842,697 46,280,420 91,352,273

Return of Capital (depreciation) 6,329,823 9,794,178 11,535,707 17,640,530 24,203,450

Annual Corporate HQ Admin charge

3,037,482 2,429,985 1,943,988 1,555,191 1,555,191

Regulatory Charge311,654 609,059 637,264 909,117 1,466,095

Ancillary Service Charge (1%)177,394 381,739 617,824 893,565 1,450,543

Total21,265,957 41,594,701 64,981,473 92,714,359 149,526,160


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Allowed Revenue for All theDistribution Companies

Year starting 1 July 2008 2009 2010 2011 2012

O & M, admin, metering, billing 12,776,617 14,182,045 15,742,069 17,473,697 19,221,067

Return on capital 13,594,425 35,839,767 58,296,998 80,952,244 147,968,167

Return of capital (depreciation) 3,805,815 4,945,667 6,190,990 11,696,541 16,007,458

Corporate HQ charge 4,364,007 3,491,205 2,792,964 2,234,371 1,787,497

TSO charge 76,636 137,414 254,216 451,487 558,715

Regulatory charge528,845 889,578 1,256,242 1,699,988 2,791,793

Capacity building638,831 709,102 472,263 524,211 576,632

Total35,785,174 60,194,778 85,005,741 115,032,539 188,911,328


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Incentives Provided to Operators in the

MYTO Model

MYTO gives the regulated entities the incentives to do better than theprojected performance levels built into the tariff path.

Some incentives given to the operators in the tariff model include:1. The capacity factor has been set at 70%. New plants will have a high

level of availability and should be running at maximum output for ahigh proportion of the time in order to meet demand.

2. Internal Use of station this was set at 1% but most stations use less

than this.3. Sent out efficiency for Gencos was taken to be 34% but usually

stations deliver more than this.4. Higher level of technical and commercial losses (34%), operators

more especially distribution companies could do better than this.

5. Operators can keep any gain for at least five years before next majorreview

6. Price of gas , exchange rate and inflation risk eliminated by annualminor review

7. Annual provision of over N1billion( over the next 5 years) for capacitybuilding of PHCN staff to improve productivity and quality of service.


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Current Status of Tariff Development and

Rates Approval - Approved RevenueRequirement

Regulated costs (nominal) (NGN '000) 2008 2009 2010 2011 2012

N'000Total Generation Vesting contract costs + PPAs 81,017,719 123,304,225 204,243,476 334,996,488 395,153,914

Annual NERC Licence charge 810,177 1,233,042 2,042,435 3,349,965 3,951,539

Total 81,827,896 124,537,267 206,285,911 338,346,452 399,105,453

Transmission Opex Var O&M Costs 4,479,846 7,526,142 13,045,313 21,707,400 25,397,659

Admin costs (fixed) 2,725,980 3,025,838 3,358,680 3,728,135 4,100,949

Fixed O&M Costs 0 0 0 0 0

Total 7,205,827 10,551,980 16,403,993 25,435,536 29,498,607

Return on Capital 4,203,778 17,827,760 33,842,697 46,280,420 91,352,273

Return of Capital 6,329,823 9,794,178 11,535,707 17,640,530 24,203,450Annual Corpoarate HQ Admin charge on TC 3,037,482 2,429,985 1,943,988 1,555,191 1,555,191

NERC charge 311,654 609,059 637,264 909,117 1,466,095

Ancillary service charge 1% 177,394 381,739 617,824 893,565 1,450,543

Total 21,265,957 41,594,701 64,981,473 92,714,358 149,526,160

All Discos Opex O&M Costs 0 0 0 0 0

Admin costs (fixed) 13,415,448 14,891,147 16,214,332 17,997,908 19,797,699

Fixed O&M Costs 0 0 0 0 0

Total 13,415,448 14,891,147 16,214,332 17,997,908 19,797,699

Return on Capital 13,594,425 35,839,767 58,296,998 80,952,244 147,968,167Return of Capital 3,805,815 4,945,667 6,190,990 11,696,541 16,007,458

Corporate HQ Admin charge 4,364,007 3,491,205 2,792,964 2,234,371 1,787,497

Market Operator charge 76,636 137,414 254,216 451,487 558,715

NERC charge 528,845 889,578 1,256,242 1,699,988 2,791,793

Total 35,785,174 60,194,778 85,005,741 115,032,539 188,911,328

Total 138,879,027 226,326,747 356,273,126 546,093,349 737,542,942


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End User Tariff and ResidentialConsumers

Tariff schedules are created for the years 2008 to 2013

inclusive and use the existing tariff schedule as a startingpoint.

This schedule includes fixed charges under the titles offixed, meter and minimum charges.

Two variable charges in the form of a demand (per kVA)and energy (per kWh) are also included.

R1 and R2 tariff move from N1.2 to N1.3 per KWh and

N4 to N4.4 per KWh. Against an average cost of N11.20per KWh

R1 and R2 customers have the least tariff rate and alsolowest rate of increment.


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Socio-Macroeconomic Benefits

1. Economic empowerment of citizens of the state

2. Improvement to state revenue in addition tostatutory allocation and local taxes

3. Stable, certain and positive stream of income bytaking advantage of the large Market

4. Reduction in unemployment by more than 25%through job creation

5. General improvement in social and economicservices

6. Improvement of the real sector through expansionin industrial and commercial

7. Improve security of lives and property.


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Future Challenges

Increase in power generation( participation of Stategovernments and Private sector)

Minor and major reviews of tariff rates

Monitoring performance of operators

Valuation of regulated assets base

Uniform Industry reporting framework and accountingstandard

Public awareness on electricity consumption andpayment

Tariff design to reduce cross subsidization and retainlifeline tariff principles.

More incentives to attract investment in generation ofelectricity


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THANK YOUPlease visit us @

www.NERCNG.org

PLOT 1099 1ST

AVEABUJA -NIGERIA

tariff regulation in the nigerian electricity supply industry: myto and lifeline tariff

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