Building measurable, cost-reflective tariffs in state electricity markets (4)

The first three parts of this series established that cost-reflective tariffs require verifiable data, consumer protection begins with measurement, and feeder-level regulation offers the precision needed to uncover network realities.

This leads to a pivotal question: What should regulators do with the data once they have it?

The answer requires a fundamental shift in regulatory philosophy. For decades, electricity regulation in Nigeria has focused heavily on costs. Utilities submit expenditure plans, regulators calculate revenue requirements, and tariffs are adjusted to enable cost recovery under the assumption that guaranteed revenue drives improved service.

Experience has proven otherwise. A utility can spend vast sums of capital and still deliver erratic supply, maintain high losses, and leave consumers dissatisfied. The next generation of state regulation must move beyond expenditure recovery and embrace Performance-Based Regulation (PBR).

The problem with traditional cost-plus regulation

Traditional utility oversight relies on cost-plus regulation, where utilities recover operating expenses, capital investments, and an approved return on equity. In weak monitoring environments, cost-plus regulation creates perverse incentives. The regulatory dialogue becomes preoccupied with inputs rather than outputs:

Instead of asking: How much did reliability improve, or how much were losses reduced? 

The system asks: How much was spent, and how much tariff increase is required to cover it?

Consider two operators under traditional regulation:

Operator A aggressively reduces losses from 40 percent to 15 percent, achieves 95 percent collection efficiency, and delivers 20 hours of daily supply.

Operator B tolerates high losses, weak collections, and chronic outages.

If both operators seek tariff increases based on rising operational expenses, consumers naturally ask why efficiency and waste are treated identically. A modern regulatory framework must evaluate what consumers receive, not merely what utilities spend.

The principle of Performance-Based Regulation

Performance-Based Regulation directly links financial returns to measurable outcomes: 

Better Performance = Higher Returns

Poor Performance = Reduced Financial Recovery

PBR aligns the economic interests of utilities, investors, and consumers. When utilities deliver value, they earn appropriate returns; when they underperform, consumers are protected from absorbing the cost of inefficiency.

Key performance metrics for state markets

Emerging state regulators should establish five core metric categories, monitored at the feeder level wherever possible: 

Reliability: Daily hours of supply, frequency of interruptions, and restoration timelines. 

Metering: Customer metering coverage and functional meter rates. 

Technical efficiency: Technical loss reduction, transformer failure rates, and network uptime. 

Commercial efficiency: Billing accuracy, collection efficiency, and energy accounting precision. 

Customer experience: Complaint resolution velocity and customer satisfaction indices. 

Automatic incentives and penalties

A major weakness of traditional regulation is excessive discretion, where every under-performance turns into a protracted negotiation. PBR replaces discretion with predictability through rule-based adjustments.

If a utility commits to delivering 20 hours of daily supply on a designated feeder but achieves only 15 hours, an automatic financial adjustment or bill credit should apply. Conversely, exceeding baseline reliability targets should unlock pre-defined financial incentives. 

Automating outcomes shifts the sector from endless debate to structural accountability.

The power of benchmarking

PBR gains immense strength when paired with granular benchmarking. If Feeder A achieves 10% losses and 95% collections while neighbouring Feeder B records 45% losses and 60% collections, the regulator can pinpoint the performance gap immediately.

Bench-marking replaces speculation with evidence, highlights best practices, and prevents under-performing operators from hiding behind broad utility-wide averages.

Strengthening the social contract

Tariff adjustments face fierce public resistance primarily because consumers see little connection between higher prices and improved service. PBR restores public trust by establishing a transparent bargain: consumers pay for value, not inefficiency.

Contrary to common assumptions, serious investors also favour performance-based frameworks. Capital providers do not merely seek higher tariffs; they seek regulatory certainty. Transparent rules, clear metrics, and predictable return structures significantly lower regulatory risk and enhance project bankability.

Conclusion

As new state electricity markets take shape across Nigeria, regulatory commissions face a clear choice: replicate cost-plus models centred on expenditure debates, or adopt an outcome-driven framework centred on performance.

The future belongs to regulators who evaluate utilities by a single fundamental question: What service did consumers receive for the revenue collected? Because consumers do not purchase utility expenditures—they purchase reliable electricity service. The most effective regulatory systems are those that reward utilities not for what they spend, but for what they deliver.

Next Week:  Part 5: The Role of  the Digital Regulator in Building Investable State Electricity Markets

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Masah Emmanuel Ikus

Masah Emmanuel Ikus is a Power and Energy Infrastructure Strategist and the Principal Consulting Partner at EMI Resources Limited. A University of Lagos-trained Electrical Engineer with an EMBA from Lagos Business School, he possesses over 27 years of experience managing complex infrastructure projects across the ICT, Oil & Gas, and Power sectors, specialising in the design of decentralised power systems and solar integration. He currently advises investors, project sponsors, and public institutions on leveraging Nigeria’s energy deficit into bankable commercial opportunities. He can be contacted via masahikus@gmail.com