"In the recent past (since 2001), the CEB has lost its credibility and is operating as a burden to the government's budget," chairman Udayasri Kariyawasam said in a report submitted to the highest levels of government.
"It is now purely operating as a service provider but forgotten the fact that it is a commercial enterprise."
In 2002 the CEB has lost 7,426 million rupees, which was brought down to 3,750 million in 2003. In 2004 it had climbed to 15,707 billion rupees.
In 2005 the 'loss' was cut to 6,852 million with an 11,305 million rupee subsidy from the Treasury. In 2006 the loss was 5,861 million even with a 5,000 million subsidy from the Treasury.
Up to October 2007 the loss was 14,413 million rupees without a Treasury subsidy. Accumulated losses up to December 2006 were 53.299 billion rupees.
Managing in the Dark
Kariyawasam said the utilities' management information system was outdated and information was delayed, requiring modern enterprise resource planning (ERP) software to help decision making.
The Ceylon Petroleum Corporation has tied up with the Indian Oil Corporation to implement SAP ERP software starting with its common user facility.
Kariyawasam said the 2006 final accounts are still not ready as of February 2006, management information for September 2007 were submitted to the board in January 2008 and no officer was able to give accurate inventory levels.
He said the CEB used different types of software for different areas, some of which were dedicated to technical functions, but most were not linked.
"There is no functional IS (information systems) department in the CEB with modern systems and dedicated leadership," he said.
Multi Disciplines
Kariyawasam, a qualified accountant, said senior management should be boosted with people from finance, legal and human resource disciplines instead of a current structure which has a heavy bias towards engineers.
He said a position of chief financial officer (CFO) with full authority across finance functions of different divisions was needed.
At the moment corporate divisions - generation, transmission, distribution and projects and centralized services – came under 'additional general manager' positions, while finance was put under a 'finance manager' classification.
He said a chief information office and chief legal officer and a human resource division were needed. An audit and risk management committee and a people and performance committee were needed.
Kariyawasam said the influence of unions, especially the powerful engineers union, should be reduced.
However, other critics had pointed out that the engineers union had been able to prevent some of the more blatant attempts by politicians to land expensive and unsuitable plants especially unsolicited ones on the utility.
The engineers union had also been able to prevent the 'stuffing' of the utility by thousands of political supporters that had happened to other state utilities such as the Ceylon Petroleum Corporation (CPC) and the Sri Lanka Transport Board.
However, observers say such tactics should not be a substitute for an independent board which makes decisions for the long-term betterment of an institution.
Critics say the CPC is perhaps one of the few state institutions in the world that runs without a full-time general manager, but is now perhaps accidentally under a chairman with private sector experience who has been personally driving the institution.
Energy Mix
Kariyawasam said the utility should look more at alternative energy including liquefied petroleum gas and renewables rather than simply pushing for coal plants.
The report said more attention should be paid to the use of cheaper 'Naptha' fuel than others.
However, the report acknowledged that delays in coal and hydro plants "due to political issues" that were beyond the control of the utility were a prime cause of the current over-dependency on liquid thermal generation.
The CEB now bought power from independent power producers (IPPs) paying 39.947 billion rupees to them.
Kariyawasam said the government should look at the possibility of re-negotiating the contracts as well as pricing in Sri Lanka rupees instead of US dollars.
However, economic analysts point out that the issue of dollar denominated contracts comes about due to loose monetary policy (money printing) of the central banks of developing countries which result in constant depreciation of the currency.
If energy was market-priced, treasury subsidies reduced and fiscal undermining of monetary policy was ended the rupee would be automatically stabilized or even strengthened as had already happened in many developing countries, including India.
Private Returns
The report also called for the 'capacity charge', which is the price for a contracted energy volume that forms the basis of awarding a contract to an IPP, to be renegotiated.
The 'capacity charge' gives the return on capital for the owner of a plant. The actual energy production tends to be a pass-through which does not usually result in profits unless machines are kept super-efficient and energy savings are made above norms.
Analysts say dispensing with the capacity charge will create other problems where the utility will be unable to 'dispatch' the plant or close it down when demand is low.
Contracts without capacity charges are used to buy mini-hydro power, but they can cause other problems by forcing a utility to buy power even at the cost of allowing its own 'cost-free' hydro plants to spill.
The report also criticized the way Lanka Transformers, a subsidiary of the CEB, was run saying its officials were paid high salaries and operated with "minimum or no control" of the government.
However, other analysts in the past pointed out that Lanka Transformers had been able to outbid other private suppliers by giving the lowest 'capacity charge' for IPP contracts on several occasions, resulting in big benefits to the CEB.
The firm has also won the Kerawalapitiya combined cycle project which is due to come on line later this year.
The report itself showed that in 2006, its 'Heladhanavi' furnace oil plant had supplied 619 million units of energy at an average cost of 10.60 while the costs of other plants ranged from 11.62 to 13.58 rupees.
Tariff Reform
The report also recommended that authorities look at ways other than simply raising tariffs to increase revenue, though tariffs needed to be increased.
By 2006, an average unit was costing the CEB 12.19 rupees to generate while revenues were only 8.99 rupees. At the moment the cost was 12.80 while the average selling price was 10.80 rupees.
The report said while it was "imperative that there should be an upward tariff revision due to oil price increases," a comprehensive study was needed to find ways to raise tariffs in the future including peak hour pricing.
A 30 percent power tariff hike is already on the way.
Energy analysts point out that in other international power utilities tariffs are used not just to raise revenue but to distribute energy demand.
Sri Lanka especially needed tariffs to shift industrial demand away from the evening largely domestic peak. The high evening peak required the maintenance of generating capacity for a few hours in the night, resulting in unutilized capacity during the day.
The 'capacity charges' paid to IPPs was partly a reflection of this inefficiency. But analysts point out that even if the plants were CEB-owned the same problem arises.
The capacity cost of a CEB plant would not show up entirely in the profit and loss account, unlike private ones, but become a cash-flow item when loans are repaid, minus a profit element. Depreciation would show in the profit and loss account.
The depreciation and loan repayments are real, which is why 're-negotiating' capacity charges may not be practical except for a reduction in the profit element.
However, the risks of repudiated contracts may increase the costs of any future deals with suppliers demanding higher risk premiums.
Starting up and shutting down large plants, such as combined cycles, also result in penal charges for the CEB if it was a private plant and higher maintenance costs if it was a CEB plant.
If tariffs could be used to shift demand, the CEB's overall capital costs would come down and industry would also be able to get lower cost power without hurting the utility's finances.Updated
