The Call For An Electricity Pricing Formula

By Tilak Siyambalapitiya -February 5, 2013

Dr Tilak Siyambalapitiya

There is nothing more to discover. The truth is that a pricing formula is already in place for electricity. Pricing formulae have been introduced many times in the past, but more recently since January 2011, after the new Electricity Act was approved in year 2009. Over a period of one year, a pricing formula evolved with the participation of many stakeholders.

Past Pricing formulae sabotaged

Each pricing formula in the past was shot down or blocked by the politicians, who wanted to continue with the populist policies of “showing off” that electricity is given at low prices to certain customers. What is not told is that the customers are taxed indirectly, to bridge the gap between what it costs and what they pay. In the end, it is a wasteful exercise, because one state bank effectively exists to provide overdrafts to Ceylon Electricity Board (CEB) whereas precious bank funds should be lent to industries and businesses to enhance economic output. The other more dangerous issue is under-pricing of electricity to subsidized customers, which is against the principle of pricing a depleting resource: it should be priced at least at what it costs. However, while being overly worried, ahead of the rest of the world community, about the depleting energy resources, the energy hierarchy has been encouraging subsidies on energy prices, which causes undue use of the very resources that require protection.

Repeated occasional displays of a half-hearted approach to proper pricing electricity by both the Power Sector hierarchy and the Public Utilities Commission, and in the background, the Finance Ministry, do no good to the overall objectives: to provide the best deal to customers from the electricity industry that is a monopoly. What is required is a focused effort to implement the pricing methodology already approved, to achieve the overall target to get (i) customers to pay the cost of electricity, nothing more, nothing less, (ii) electricity sector institutions to return to profitability, over a period of time, ideally over five years.

Need to implement the pricing reform plan

So what is required is to implement the pricing formula already approved, not to make a new one. There is one essential element linked to the pricing formula: a road map for tariff reform and rebalancing.

Sri Lanka’s electricity tariff structure has to be reformed to make it simple. For example, a business premises pays double the price for electricity when compared with the adjoining manufacturing industry. Both companies receive electricity from the same line, use the same quantity of electricity, but the commercial concern pays double the bill. Engineers and customers argue endlessly to decide whether a business is engaged in commercial activity or manufacturing. These archaic concepts and rules that do not match the modern knowledge and thinking of the electricity industry must go. Customers should pay for electricity on the basis of the level of the network they purchase from (bulk or retail) and the time at which they use electricity (those using at peak hours should pay more). No customer should be asked to pay more for electricity just because his business is “going well”. That is why there is a call to charge more from hotels. If hotels are doing well, that’s fine, and let them pay their taxes if the profits are good.

Fuel surcharge: another anachronism

Sri Lanka cannot avoid using fossil fuels for power generation in the foreseeable future. Therefore, there is no meaning in hanging on to the outdated concept of “fuel surcharges” on electricity bills.

Imposing fuel surcharges was a measure adopted in late 1970s when Sri Lanka’s population was only 12 million, 100% of electricity supply was from hydroelectric power plants, and when less than 20% households had electricity. Now the population has exceeded 20 million, with 90% households using electricity. Now, even a year with best rainfall can produce only 50% of the electricity requirements from hydropower. Fuel surcharges were introduced in 1970s and 1980s when rains failed, to cover the cost of fuel used, and withdrawn when things returned to normal. However, in the present situation and for decades to come, use of fossil fuel cannot be avoided, and hence the term “fuel surcharge” has no meaning, because it is here to stay. Therefore, there is absolutely no meaning in imposing a fuel surcharge. The only purpose, if there is any, would be to mislead the electricity customers, industries and businesses, that this “surcharge” is a temporary measure. No it is not.

What the Public Utilities Commission introduced in 2011, and now being prevented from implementing, is a more systematic approach to electricity pricing, where there will be no fuel surcharges, but the cost of fossil fuels and all other expenses smoothly distributed across all years, transparently calculated and disclosed in periodic documents and clarified further during public consultations. What will bring the electricity prices down is first and foremost, the implementation of the remaining components of the long term generation plan (ie the next coal-fired power plant, designated to be located in Trincomalee). When the Puttalam power plant is completed by 2014, the use of oil for power generation will be down to 25% from the 59% in 2012. Oil use will further reduce to 13% of generation by 2017 when the Trincomalee power plant is operational, and further down to 8% by 2020.

Ministers do not need to announce that they advocate to reduce dependence on oil for electricity generation; just allow the long term plan to be implemented.

Year 2016-17 critical

Years 2016-17 are critical, because the Trincomalee coal power plant was to be operational by that year. If the negotiations with India are not going to be successful, as it certainly appears to be, we still have time to finance and implement this USD 500 million power plant using other investors/financiers. Eternal negotiations will not do good for Sri Lanka.

The power sector can rise from two decades of miserable financial mess by 2017, only if the Trincomalee power project is implemented on time, and until then and thereafter, the customers are told the truth about electricity costs and prices. Implementation of large power plants, cheaper to operate such as Puttalam and Trincomalee, does bring a reduction in costs, and such benefits should be partly used to settle the debts of the sector, and partly to bring relief to electricity customers who have been so unfairly treated for nearly two decades of our “experiment” with oil-fired power generation…. Only if the political and finance hierarchy allow the Public Utilities Commission and the electricity suppliers to tell the truth, and work according to sound business principles.

The plan for reforms and the pricing formula are already in place, there is nothing the politicians need to re-discover. Just allow the professionals and the regulatory commission to implement it.