Nigeria: Consequences Of The Tariff Increase

Last Updated: 28 September 2016
Article by Perchstone & Graeys


Following the privatisation exercise that took place in the Nigerian power sector, investors that took over the power assets have been unable to realise a return on their investments. Many took loans from banks to finance the acquisition of these assets and their operations thereof, and have failed to meet up with their loan repayments due to a host of reasons including the adoption of a non-cost-reflective tariff.

In a bid to avert a crisis and promote commercial viability and further investment in the power sector, the NERC implemented a 45 per cent tariff increase, which came into effect on February 01, 2016. The tariff increase was however nullified by a recent decision of the Federal High Court (FHC) and has thus generated mixed reactions considering the controversial nature of the circumstances leading to the increase. Whilst organized labour has hailed the decision of the Court, others, mostly energy industry practitioners, have criticized it. Supporters of the nullification have insisted that the Nigerian Electricity Supply Industry (NESI) improve its performance before considering a tariff increase while the opponents have stated that an improved electricity supply hinges on the implementation of cost-reflective tariffs. In light of the foregoing, it becomes imperative to analyse the rationale behind the judgement of the Court with a view to understanding the possible consequences thereof.

Background to the Nullification

The suit, which was filed by Mr Toluwani Adebiyi at the FHC, sought a declaration that the tariff increase was illegal, null and void having been made by the Nigerian Electricity Regulation Commission (NERC) without following due procedure and without a corresponding improvement in electricity supply. The judge, Justice Mohammed Idris, found in favour of the plaintiff and ordered NERC to revert to the former tariff having failed to comply with the relevant provisions of the Electricity Power Sector Reform Act (EPSRA) 2005. The key provision in this regard being section 76(6), which states as follows –

"prior to approving a tariff methodology, the Commission shall give notice in the Official Gazette, and in one or more newspapers with wide circulation, of the proposed establishment of a tariff methodology indicating the period within which objections or representations in connection with the same may be made to the commission".

The judge found that, of all the procedural requirements, the only one complied with was the announcement/notice given in newspapers. As a result of such a failure to comply with the relevant provisions, he described the increase as "procedurally ultra vires, irrational, irregular and illegal". In addition, he restrained the NERC from further increasing the tariff unless it complies strictly with the relevant provisions.

Consequences of the Nullification

The nullification of the tariff increase could result in a crisis in the Nigerian power sector as most of the NESI stakeholders are operating at a deficit. For instance, some of the Distribution Companies had already declared force majeure even before the tariff was increased; most will be forced to completely shut down operations if the tariff remains at its present level. Consequently, such a crisis in the electricity sector will have far reaching effects; the financial institutions that financed the acquisition of the power assets during the privatisation exercise will ultimately be exposed to loan defaults running into billions of Naira, which has the potential to destabilize the Nigerian economy at large.


On the face of it, it appears that the judge set aside the tariff based on what some might refer to as a 'slight' procedural omission by the NERC to give notice in the official gazette pursuant to Section 76(6) of the EPSRA. The rationale behind giving notice, is to invite members of the public to raise objections and make representations in connection with same should they wish to do so. However the Act does not impose an obligation on the NERC to adopt any representations made in this respect; their only obligation is to 'consider' any such representations as may be necessary or desirable. Thus one might argue that preparation and approval of tariff methodology is at the sole discretion of the NERC and as such any representations made by industry stakeholders in this regard may not necessarily have had an effect on the tariff eventually approved.

Given the current state of the NESI, and the circumstances leading up to the tariff hike, some have criticized the decision of the Court and its failure to adopt a purposive approach in coming to its decisions. In other words the sustainability of the Nigerian Power Sector should take precedence over the procedural malpractice by the NERC. That said, it is important to reiterate the importance of rule of law. In other words, there is no justification for the NERC's failure to follow the procedural requirements for tariff increases as set out in the EPSRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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