By Dr Tilak Siyambalapitiya
A few years ago, when a minister tabled an amendment to the Electricity Act, most likely with ulterior motives, his colleagues shot down the amendment hours before it was to be presented in Parliament. The proposed revision would have removed the power vested with the Public Utilities Commission (PUC) to regulate the ‘economic’ operation of the electricity supply industry. The objective of the minister concerned may have been to remove the requirement for competitive bidding to procure power plants.
Was the PUC a good thing to have? Has it proved to be doing any ‘economic” regulation’?
Information in the table (given above) extracted from the PUC’s own publications says it all. Ever since the PUC was empowered (the Ministry or the Cabinet has no power over ‘economic’ regulation), the electricity sector has been making losses, ‘by definition’. The only exception was 2014, which was not because of the PUC’s efficient regulation. Year 2014 was the first full year of operation of the coal power plant, conceived two decades earlier and slowly pursued by the CEB, commenced producing electricity at one third the cost of using oil.
And it is. Rs. 502 billion (or USD 2.5 billion) by end 2021 was the cumulative loss owing to the absence of proper economic regulation of the electricity industry. Before the PUC was given the job of ‘economic regulation’, certainly there had been years when the electricity supply made losses, but was never making losses continuously for 12 years.
The law and procedures published under the Electricity Act 2009 are clear on who submits the costs to invest and operate the national grid. The licenses, meaning the CEB (its transmission and distribution divisions) and LECO, must submit the costs, once in five years. For costs of fuel and purchases of renewable energy into the grid, the submissions should be done once in six months, says the PUC-approved methodology. Fair enough! Transmission and distribution costs move up slowly and therefore change once in five years. Fuel and renewable costs change rapidly, owing to dry and wet seasons and fuel price movements.
The law is also clear on who approves the costs: it is the PUC, not the government. Not ‘any’ cost, but ‘efficient costs’ should be approved after the due process. How often? Eleven in five years for transmission and distribution, eleven in six months for generation.
So, the total ‘approved’ costs will be the cost of generation + transmission + distribution. They change once every six months. Up or down.
With approved costs in hand, what does the law say the CEB and LECO should do? It says they should now submit the customer prices for PUC approval. The law is clear. If government subsidies are forthcoming, PUC considers them, and approves adjusted customer prices. Otherwise, the selling prices submitted by the CEB and LECO are approved.
In short, Price = Cost + subsidies paid by the government.
If subsidies are not forthcoming, then Price = cost.
That is what the law says!
One may say this is unfair, and that electricity supply must be subsidized. Easy to say but where does the difference between cost and price come from? Three ‘sources’ as for the CEB:
(i) stop re-paying the loans taken from the Treasury. (So, citizens, unknowingly, pay through their taxes),
(ii) stop paying suppliers including your meager earnings from the solar rooftop. (Suppliers recently held a conference to explain their woes, but they were barking up the wrong tree.), and
(iii) borrow from state banks as short-term overdrafts. The money that should be slow by state banks to industries and small and medium enterprises to develop their businesses and create more jobs, and to renewable energy developers to accelerate development, too, is being conveniently slow at a higher interest rate to a reliable, convenient , submissive client––the CEB.
Money that does not produce any new jobs, goods or exports, but only more debts to be repaid by no one else but the electricity customers themselves.
The PUC was established to ensure fairness for all stakeholders. Industry stakeholders are not only the renewable energy developers; electricity customers and electricity suppliers, even if they are state-owned, are stakeholders whose interests and well-being should be guaranteed by the PUC by ensuring that the laws and regulations are implemented and enforced.
The table (given above) shows the performance of the PUC in its first 12 years of existence. It is up to the readers to judge whether the PUC is worth the cost incurred by electricity customers to maintain five commissioners and staff as it serves no apparent purpose. There is hardly any difference between the current situation and the one that existed before 2009, when it comes to (i) ensuring CEB’s costs are monitored and made ‘efficient’ (ii) electricity prices reflect costs so that the CEB will not be a burden on the banks and the Treasury.
Earlier, before the PUC was empowered, the Ministry of Energy was the de facto regulator. In its 50-year history, there was never a continuous period of 12 years during which CEB was forced to sell electricity below cost, and ‘report losses’. All because of the PUC?
Until the mid-1990s, the CEB was profitable and at times slow money to the Treasury!
Power transmission and distribution network expansion and maintenance work are repeatedly postponed. New investments have all been postponed for years. Very soon, even if power plants can be operated with more wind turbines rotating and solar panels shining, the distribution network will be in a state of disrepair, requiring eternal ‘power cuts’.
So, the electricity regulatory system, which has been a tremendous success even in India to uplift the electricity sector and liberate it from the clutches of politicians, has become a failure in Sri Lanka. There is nothing wrong with the Electricity Act 2009, which followed the international best practices of distancing electricity suppliers and their decisions from government control. Most countries have reaped enormous benefits from such laws.
It is not the concept of regulation but the institutions implementing regulation, and individuals running those outfits that have failed the public.
By how much? USD 2,500 million and increasing. The end is very near.