Making sense of Sri Lanka’s electricity tariff controversy

COLOMBO – Sri Lanka’s current crisis in the power sector and the battle between the government and regulator over raising prices is taking place despite the existence of a well thought out tariff methodology for more than a decade.

The cost-based tariff methodology was devised following chronic losses, coming partly from delays or deliberate scuttling of lower cost plants, initially large hydros and later coal plants.

Unlike in countries with monetary stability and better central banks, where energy prices go up as well as down, in Sri Lanka, currency depreciation has played a key part in energy utility losses.

The existing cost-based tariff methodology was formalized shortly after the 2008 currency crisis to prevent the power companies from going into financial crises again.

However, the regulator failed to ensure that it was implemented.

Tilak Siyambalapitiya, a power sector expert who had warned of impending crises in the sector several years in advance explains how the tariff methodology was supposed to work.

He says all the main actors, the regulator, the Ceylon Electricity Board and successive administrations have contributed to blocking cost-based pricing.

Question: Can the cabinet increase the power tariff? Can it suspend the current tariff methodology?

Answer: The tariff methodology, a document recognized in the Electricity Act 2009, was published in 2010. Rules related to implementing the tariff methodology were gazetted by the Public Utilities Commission of Sri Lanka (PUCSL) subsequently.

Under the Electricity Act, the PUCSL has to approve a tariff submission, which must be based on the approved tariff methodology. Licenses issued to CEB, LECO and private power producers under Electricity Act and the PUCSL Act empower them to engage in the respective activities in the electricity industry.

Other documentation such as the tariff methodology and rules for its implementation, are third level documents.

According to the Electricity Act, the government, through a Cabinet decision, can issue policy guidelines. However, there is no provision in the Electricity Act for the government to suspend the tariff methodology or to determine how much each customer should pay. The worldwide practice is for a regulator or a regulatory commission to do that task, based on a professional analysis of submissions by electricity utilities.

In Sri Lanka, each transmission and distribution licensee must submit their forecast costs once every six months. They also must submit their actual costs for the past six months. PUCSL has to examine whether the forecast costs are reasonable, whether the actual costs for the past six months are reasonable, and then approve the forecast costs to include a correction for the past six months. Once the costs are approved, distribution licensees (CEB and LECO) should request a tariff revision, and that too, once every six months.

There is a streamlined process to determine costs. Once approved, these are called allowed revenue of each licensee. For example, LECO has an allowed revenue of Rs 8494 million in 2022.  Costs and their approvals need not be in a black box. Tariffs have to be revised every six months.

But all parties (CEB, PUCSL, governments) for various reasons have not done that since 2014, and allowed matters to worsen. Cancellation of power plants and the gas terminal projects, all too well known, have caused electricity production costs to significantly increase.

Q: If the tariffs were revised regularly would the CEB be in this situation?

A: The requirement for customer tariffs to be cost reflective tariff is not a new thing. It is stipulated in the Electricity Act 2009. The tariff methodology was brought in to make tariffs cost-reflective.

All parties, meaning governments and ministers, CEB and PUCSL, since 2015, are responsible for the situation and have not acted according to the timelines or procedures set out in the tariff methodology.

The CEB did not make the tariff submissions on time. Maybe the CEB Board was acting on the signals it receives from the government and delayed the submission. The PUCSL too has not acted to prevent losses and ensure the prices reflect the costs.

From 2011 to 2020, once CEB and LECO submit their costs and PUCSL approves, determining the customer prices was PUCSL’s responsibility. They never did it, until the political signals were right. In all the 12 years since 2010, there should have been 20 tariff revisions according to the procedures. The political signals came only four times out of 20; 2011, 2012, 2013 and 2014. The last one in 2014 was to reduce the prices.

Under the tariff methodology, costs for the first six months of the year have to be filed by CEB five months in advance, ie. by August 1 of the previous year. Then the PUCSL has to give a draft decision by October 1, and after considering comments, make a final decision by 15th of November.

CEB and LECO will then make the submission on customer tariffs by November 1. For the 2023 first half the tariff submission should have been made on November 1, 2022. None of these schedules are adhered to, by CEB, LECO or PUCSL.

The PUCSL has already approved an increase in costs for the second half of 2022. The August hike was based on the costs approved for the first half.

Q: Was the August tariff hike based on the costs submitted for the second half of 2022?

A: Definitely not. July 1 is the effective date of the second half of 2022.

By July 1, the review of tariffs in response to CEB’s May submission was in full swing. The August 10 customer price announcement is based on the May 2022 submission of CEB.

What CEB should have done is to make the regular submission to PUCSL by November 2021 for 1H 2022. CEB has not made a submission on customer tariffs based on the September 2022 approval of costs for 2H.

For 2023 there were reports that the CEB had made a submission to the Ministry of Power and Energy. The CEB had submitted the costs to the wrong office.

No law says CEB has to submit costs to the ministry. The PUCSL later said it had received a submission from the CEB. No one follows the law and the procedures.

Q: People are complaining that prices are already high

A: The 48 rupees a unit average cost I suspect is dominated by the share of electricity planned to be produced from diesel and fuel oil, amounting to about 25% of total electricity generation.

The PUCSL is right is saying fuel prices imposed on CEB by CPC, are too high.

Our fuel prices are 30 to 40% above landed cost. CPC attributes these to tax component and finance costs, but where is the calculation?

What the government can do is to say what will be done to bring costs down to about 36 rupees a unit.

In the last several years, the following decisions caused Sri Lanka to go into a capacity shortage (power cuts) and high costs (financial bankruptcy): the Sampur plant was cancelled by the president in 2016, one day before it was to enter the bidding stage; the fourth generator at Norochcholai was cancelled by the president in 2021, when it was ready to go for bidding; the liquefied natural gas (LNG) terminal project is stalled after the bidding round was sabotaged with a midnight agreement through the backdoor; numerous renewable energy power plants are delayed or cancelled.

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