Towards A Rational Electricity Tariff

  • CEB incurred losses of Rs 9.7 billion due to failure of Norochcholai
  • CEB still made profit of Rs 21 billion due to hydro power and hike in electricity tariffs
  • Is it fair to keep taxing the poor consumer by piling on to the tariff burden?

By Camelia Nathaniel

Patali Champika Ranawaka, Bandula Chandrasekara, Dr Tilak Siyambalapitiya, Kanchana Siriwardena and Dr Narendra de Silva

High electricity prices have truly become a two-prong hit, affecting not only consumers but also our economy through their impact on business and industry.

The Ceylon Electricity Board (CEB) has failed in keeping their targets of generating power through alternative sources such as coal power; they keep taxing the poor consumer in order to cover up their failures. The Minister of Power and Energy has repeatedly stated that the second stage of the Norochcholai Coal Power Station, which was to be commissioned last October, would definitely be commissioned this December. However, let alone commissioning the second stage, even the first stage of 300MW cannot be derived from this trouble ridden coal power station.

For this year, the CEB planned for 2800 GWH of hydro power, and, now, they have generated over 6000 GWH of hydro power due to the abundance of water in the catchment areas.

Out of the total power generation, 51% of the power requirement was obtained through hydro power, while coal power only contributed 1464 GWH which is only 12% of the total power generation. However, the CEB expected to get 16% of the total power generation through the first phase of Norochcholai and nearly 4% from the second stage. Since the second stage of Norochcholai could not be commissioned in December, as expected, they could not get the anticipated 20%.

Due to the unexpected hydro potential, however, this year’s profit increased to Rs 21 billion. The loss to the CEB was recorded as Rs 6.2 billion in the first phase and the second stage Rs 3.5 billion, amounting to a total of Rs 9.7 billion, due to the failure of Norochcholai alone.

If Norochcholai had performed as anticipated, the CEB would have recorded a profit of around Rs 30 billion this year. However, the CEB still made a profit of Rs 21 billion due to the favourable hydro potential and the hike in electricity tariffs.

The question that arises in the minds of many is – in order to cover up the failures, inefficiencies and corruption within the CEB – whether it is fair to keep taxing the poor consumer by piling on to the tariff burden?

When the fuel adjustment charge was introduced, the minister in charge assured the consumer that once hydro power potential had increased, and the drought had eased, this tariff would be removed.

However, throughout 2013, even while having generated over 50% of the power requirement through hydro power, the CEB has absconded from its promise to remove the tariff.

Recently, the Electrical Engineering Society (EESoc), the social arm of the Department of Electrical Engineering at the University of Moratuwa, organised its annual panel discussion on the topic “Towards a Rational Consumer Tariff” with the participation of an eminent panel of professionals. Several eminent persons in the power sector expressed their views on the electricity tariff structure and its shortcomings.

Bandula Chandrasekara, Advisor to the National Electricity Consumer Movement

To my knowledge, there are so-called technical methods for electricity pricing, and even the outcomes of some methods can be justified with all defined and manipulated cost elements involved in the power sector. However, end of the day, the typical consumer is not going to look into the method of pricing, they are only concerned about the outcome, because they have to pay for it. So, what was the experience along with the last tariff announcement? There was a huge opposition from different social segments and they raised the issue of affordability. Did we prepare to listen to it or accept the fact that there is an issue of affordability that was not addressed properly?

The country we live in has a vast disparity within its society. Economic and purchasing power of different social layers be at variance. A number of academic level studies have categorically revealed these issues. Living standards, purchasing power and priorities in purchasing different consumer goods and services are categorically discussed.

However, consultants, experts and engineers who are involved in the tariff formulating process have not made a considerable effort to address that affordability issue in a scientific manner.

Subsidies may or may not be the solution, but it should be defined by a proper socio–economic analysis, not in a politically motivated or ad-hoc manner. We have not studied how the existing tariff formula has affected low and middle income families.
My second point is on the transparency of costing and estimating. We all know that current tariff policy is cost based. Therefore, we need to have ample and accurate data for a perfect calculation. Unfortunately, there are valid reasons for us to state our concerns on figures of costs and estimates that are not at the contentment level. It leads to the lack of transparency in this process. It should be properly addressed.

However, we welcome the conditions imposed by the PUCSL to CEB along with the last tariff announcement. I hope that the CEB would act in response on those conditions for a sound tariff system which can be derived by implementing a transparent and better consultation process. It can be further strengthened by apposite data put in public domain.

Last point, we know that oil based generation is a significant portion of power generation in Sri Lanka. Fuel cost of power generation is a huge concern for any stakeholder. We don’t have a pricing formula policy for the fuel sector. It created huge financial losses to the CEB, not only at the point of fuel purchasing but also at the point of accumulation of revenue which is snatched by its lenders and suppliers. With this scenario, do you think, ultimately, that the consumer should pay such an unrealistic cost by paying his or her electricity bill?

If you have a rational consumer tariff, you should be able to address those points with respect to the consumer voice and their representation.

Dr Tilak Siyambalapitiya,
Consultant Power Generation and Energy Management Expert

Sri Lanka’s policies on electricity pricing, and the associated laws and regulations, are clear and consistent. The national energy policy of 2008 states that energy prices will be cost-reflective, and that subsidies would be targeted to deserving customer groups. It further states that “costs” allowed to be recovered will only be the prudent costs, not just any costs.

While ensuring the basic energy needs would be provided at affordable prices, the implementation plan of the policy further describes how the targeted subsidies would be provided to deserving household electricity customers.

The Sri Lanka Electricity Act of 2009 empowered the Public Utilities Commission to be the economic regulator of the electricity industry and states that “Transmission and bulk sale tariffs and distribution and supply tariffs be set by the relevant licensee in accordance with a cost reflective methodology approved by the Commission”. It further allows each distribution license to contain clauses to provide “life-line tariffs to deserving customers”.

The Commission, in its first public consultation on electricity tariffs, presented to the public of Sri Lanka in late 2010, (i) the approved tariff methodology, (ii) comprehensive calculations of the costs of supply and tariffs to be charged for inter-licensee transfers and for sale of electricity to end-use customers, and (iii) a road map to restructure and re-balance the tariffs such that Sri Lanka achieves cost-reflective tariffs by year 2015.

Accordingly, Sri Lanka is presently in the first five-year “tariff period”, in which many of the principles and reforms envisaged in policies and laws were planned to be implemented. The objective was to systematically implement all the provisions in the National Energy Policy, the Electricity Act and the Tariff Methodology by 2015. The next phase of tariff reforms is expected to be implemented from 2016 onwards.

I wish the panel will focus on the following crucial questions: How much of the planned tariff reforms have been implemented? What are the impediments and how can they be overcome? What new reforms are awaiting consideration for the period from 2016?

Kanchana Siriwardena,
Director, Tariff and Economic Affairs Division, PUCSL

PUCSL approved and issued the Tariff Methodology in 2010 (and amended in 2011) which featured:

• Multi Year control period for Transmission and Distribution Licensees – 5 years; forecast costs are reviewed and benchmarked every five years.

• Generation costs reviewed every six months, and possible end use tariff review

• Five year network loss targets

In my view, PUCSL was being too ambitious; a multi-year tariff regime was introduced too early, considering the data availability and readiness of Licensees. Although this was identified at the inception, even the mild targets set to improve the data issues and extraordinary review started in 2011 was aborted. The data issues didn’t improve even after one year; e.g. audited accounts were not there, financial separation/Bulk Supply Transaction account was not operating, boundary meters were not ready. Most of these issues are now sorted out, after a lot of pursuing from PUCSL. Middle level management of CEB is now very much at ease with PUCSL. Now, Bulk Supply Transaction Account is prepared monthly, Licensee-wise audited accounts will be available from this year, boundary metering is in order, realistic figures are available on actual network losses, demand forecasting error is low and separate officers or divisions are in place to deal with PUCSL.

Although at Licensee level, PUCSL and power sector regulation is quite well established, CEB as a whole and Government as the policy maker are not playing the ideally expected role. As I understand, there are many, very valid, reasons for this. CEB has a long term loan portfolio of Rs 240 Billion and a short term loan portfolio of about Rs 40 Billion, and, as a result, CEB, as an entity, are not able to raise finance without Treasury Guarantee. The costs that we show in a tariff review are without the annual long term loan repayment, which is about Rs 30 Billion that is, at the moment, paid by the Treasury. As a result of this financial situation, CEB is highly dependent on the Treasury for survival. What really disturbs us is the fact that CEB seems to be quite ignorant or comfortable with this situation. As a result of this massive cash deficit situation, CEB has become numb to PUCSL’s mild regulatory interventions to control losses, or costs – they all go as deficit. This is quite the opposite when we look at LECO, who is responding well. The recent claw back done for actual investment has hurt them, now we feel that a 2% ROE that they also agreed in 2010 is too low.

As per the legal provisions, PUCSL is quite independent. However, we know that independence in decision making is achieved – not a mere legal provision. Internationally, regulatory capture and political influence in decision making is quite common. In tariff review processes, both of these issues were not there or at least manageable. To my understanding, most of the influence that came or at least attempted to influence our decisions were from the Government officials and sector experts/ energy specialists who think that their ideas are 100% correct and must be implemented to save the country or, mostly, their reputations. These individuals are not comfortable with expertise developing at PUCSL, as they would not be able to continue with their agendas. This situation is quite unique to Sri Lanka, as far as I know. PUCSL may not be able to control all these factors, but we are starting to evade them.

Dr Narendra de Silva, Head of Engineering, Lanka Electricity Co. (LECo)

What is the meaning of rational? According to the Oxford dictionary rational means “based on or in accordance with a cause, explanation, or justification or logic”. In simple terms, the rational tariff must have a justifiable reason. The real question is: justifiable to whom? The consumers need a low price. The suppliers need high profit. The country needs a tariff with high economic yield and the environment needs an environmentally sustainable energy system. The real challenge towards a rational tariff is to achieve justifiable tariff to all these stakeholders with diverse and mutually competing needs.

The second question to ask is whether electricity is a state welfare activity which should be directed according to the state directives or a commodity sold and bought in the marketplace. The state directive principles of the Constitution of Sri Lanka clearly identify social welfare and social security as directive principles of the state. On the other hand, the market economics tells us the commodity transactions should follow the basic norms of the market – whether competitive or monopolistic. Therefore, depending on the answer to the above question, the modality by which the above challenge is to be realised will be decided.

We, as a small utility, have not much concern in the state attempting to create social welfare through electricity tariff. But we firmly believe that the cost of such welfare should be borne by the state. The state should not let the electricity sector to bear such cost. Similarly, in effectuating such welfare, the tariff should not be made too complicated to be managed by the utilities. Utilities have no skill and capacity to counter the lack of statistics, compensate for the social workers’ incapacity to identify the needy groups and to provide solutions in setting up targeted subsidiary schemes.

Further, we firmly believe that the electricity consumption of a household does not directly refer to the economy of the household but a much more complex set of parameters such as the number of family members, their ages and occupations, their health status, their location, religion, culture and even their customs. 250kWh consumption for a family in a village is really luxurious but for a slum dweller it would be a basic need due to his lack of ventilation. Sometimes, poverty creates higher demand of electricity. Similarly, we have experienced the difficulty in targeting subsidy to the industries in promoting the country’s industrial growth through electricity tariff.

How to exclude a candy floss counter from a large industry by definition simple enough to be executed by an electric utility whose skills are in a totally different area is a question which we have not answered yet.

Today, the tariff is too complicated to be operated by an electric utility. The definition of an industry by its consumption wholly or mainly motive power is well outdated. Charging high rates for higher consumption has seen consumers attempting to break their demand into multiple accounts. Disparity between the domestic and General Purpose tariff has seen small commercial customers trying to define their businesses as houses and large households trying to define their houses as offices.

All these social vectors are placing the utilities at the point of exposing into functions for which they are neither competent nor paid for. If this tariff is to continue, we may need a large department equipped with sociologists and arbitrators – a tariff arbitration tribunal will become a must.
If my memory is correct, I think we had a fairly good road map to the simplification of the tariff system conducive to the utilities and helpful the economy. I would be glad to find what has happened to it.

Patali Champika Ranawaka, former Minister of Power and Energy

The consumer tariff is a very important tool in managing the energy demand of the country. Price signal is the most important signal that is received by the consumer in determining his or her consumption behaviour.

A recent study conducted by the University of Colombo revealed that monthly consumption of a modern family of five members would need to be at least 60 units for maintaining a fair life. Any family that is consuming less than 60 units per month can be considered as living below the energy poverty line.

It is unfortunate to recognize that about 50% of the Sri Lankan domestic sector consumers live below this energy poverty line. It is the duty of the country to uplift the living conditions of this 50% of the population by assisting them to consume more energy. The study shows that the main reason for this energy poverty of the 50% of the consumers is the high electricity bill.

The low-end consumers cannot afford to purchase electricity due to their low income level. The report says that the poorest category show that the electricity bill is 19% of their food expenditure and the electricity expenditure is as twice as education expenditure. In this context it is clear that the present electricity tariff is irrational. The consumer tariff should be rationalized in such a way that these consumers can afford to consume at least 60 units per month.

This clearly shows that the tariff formulation has not adequately considered the affordability factor of the consumers. Further, for the power sector to become cash neutral there should be a revenue stream as well, otherwise the power sector has to depend on treasury grants – which is not advisable.

If the consumer tariff of the low-end consumers is below the average cost of production and supply, then the question is raised as to how the gap can be bridged without burdening the general treasury. The simple answer is, once again, the affordability factor. The electricity bill of the high end consumers is only about 2-5% of their earnings. They can afford to pay more for maintaining their higher consumption levels and affluent lifestyles.

Hence, rationalizing the consumer tariff should happen by reducing the consumer tariff of the low-end consumers and increasing the consumer tariff of the high end consumers. This needs to be seriously studied before arriving at a decision.

A similar approach should be adopted in determining the consumer tariff of the other sectors, mainly in the industrial and general purpose sectors. Those sectors are more complex than the domestic sector as the consumption is for diverse purposes. In the industrial sector, the IP1, IP2 and IP3 categorization is simple and inadequate to reflect the real energy needs of the industrial sector. The type of electricity connection, i.e. single phase, three phase and capacity is not the only factor that should be considered for determining the tariff.

What is more important is what the industry produces. If the products are to cater to basic needs of the citizens, then the electricity should be provided at an affordable rate to the industry to ensure that the general public can afford to buy such products.

If it is a luxury item, then the electricity tariff should be higher for that category. Further, if the industry is targeting an export market, then the industry should be able to compete at the international market. In that case, the number of employees in the industry is also an import factor that should be considered while fixing the tariff. On the other hand, small and medium scale industries and enterprises should be protected by giving a fair tariff so that they can compete with large industries.

All these factors need to be considered while determining the industrial and general purpose tariff structures. Unfortunately, the entities that have the responsibility in setting the consumer tariff do not have such data available for conducting a proper study on consumer tariff.

At present, only the engineers are involved with conducting consumer tariff related studies and coming up with tariff proposals in Sri Lanka. This is an unfortunate situation. We need to recognize this matter is not purely technical but multi-disciplinary. The engineers, sociologists and economists should get together and work together in conducting consumer tariff related studies. As it is not happening at present, at least the engineers should try to learn the social and economic aspects of consumer tariff in Sri Lanka to come up with rational electricity consumer tariff proposals.

2 Comments for “Towards A Rational Electricity Tariff”

  1. MaPer

    First they couldnt manage with hydro electric power and went in for coal. Now they cant manage coal power either. Now the boast of introducing atomic power – THIS WILL END IN CATASTROPHE.

  2. Dammika

    It is the JR Jayawardena Government who paved the way for Victoria and Kotmale power projects which are producing several 100MWs of cheap electricity for Sri Lanka. Chandrikas government ruined CEB by setting up expensive private power plants at Exhobitant rates. MR government setup the poor quality coal power plants which is struggling to stand up for the last 3 years. They charged 20% commission and Chinese could not provide a good plant with the commission. End of the day consumers are to pay the high tariff.

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