Proposed MYTO Review: How far does this take us to cost-reflective pricing?


In preparation for a minor review of the Multi-Year Tariff Order (MYTO) in July 2022, the Nigerian Electricity Regulatory Commission (NERC) has requested feedback from the public and industry stakeholders on the review. proposed that guides the review of electricity tariffs in the country. In the meantime, we recall that two weeks ago (May 4, 2022), the Commission gave certain electricity distribution companies (Discos) authorization to increase
their prices.

Discos were; Port Harcourt Electricity Distribution Company (PHEDC); Jos Electricity Distribution Company (JEDC); Kano Electricity Distribution Company (KEDC); Kaduna Electricity Distribution Company (KEDC); Ikeja Electricity Distribution Company (IKEDC); and the Ibadan Electricity Distribution Company (IBEDC).

The regulator said the rate hike was based on the extraordinary review of the multi-year rate order which came into effect on January 1, 2022. The MYTO methodology consists of a formula to arrive at a rate that will cover the marginal cost of production long-term, transmission and distribution.

Our analysis of generation, transmission and distribution tariff models indicates that while the methodology used is theoretically sound and has precedents in other developed electricity markets, the financial model does not stand up to scrutiny in regarding its underlying assumptions. The result is a pricing plan that currently does not reflect costs and is not commercially viable. It’s an unequivocal fact that MYTO prices weren’t set at the right level to begin with: they were set too low. Even after the many adjustments made in minor revisions, they are still too low.

The cash flow generated by end consumers (in the event that they are paid for whatever they distribute) is well below the break-even point needed to keep operations going. Grid electricity is actually much cheaper than the alternatives used to supplement inadequate grid supply, so more grid supply should be accommodated at a higher cost. The FGN is also very sensitive to the unfavorable reception of the electorate to the increase in tariffs.

In our opinion, this is one of the main reasons why the government is reluctant to increase tariffs to the level commensurate with the costs required by the industry. That said, we reiterate that any upward revision to utility costs at a time like this will put a strain on an already impoverished Nigerian consumer.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission of Nigeria. CSLS is a member of the Nigerian Stock Exchange.


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