Electricity tariff 2013: Forward or backward step for regulation

May 06, 2013 (LBO) – In early March 2013, the Public Utilities Commission of Sri Lanka (PUCSL) announced a public consultation as part of its decision making on the 2013 tariff submitted by the government-owned, integrated electricity company, the Ceylon Electricity Board (CEB).

The tariffs, once approved, were said to come into force in April 2013.

Following significant publicity given to the process by media, not limited to government media, over 200 submissions were received. Of these around 70 had indicated interest in making oral presentations. All of these individuals and organizations were given time, albeit limited to 5-10 minutes, to present their views to the Commissioners on 3 April 2013.

Soon after the Avurudu break, the Commission announced its decision, which more or less ratified the CEB proposal, attaching eight conditions intended to improve transparency. After a week or more of unremitting criticism and protest, the President announced at the government’s May Day Rally that the tariffs of the lowest users would remain unchanged and that the increases for another swath of residential users would be moderated.

Has the PUCSL suffered a fatal blow?

Among the multiple rationales for setting up independent regulatory agencies is the necessity of insulating tariff decisions from political considerations. When the President announced at a political rally that the PUCSL’s decision would be changed, was he in fact signaling the existence of an unwritten appellate body above the PUCSL?

By issuing a decision that more or less replicated the CEB tariff proposal, did the PUCSL harm its image among the public and the stakeholders? Except for the eight conditions that addressed transparency and a modification in the tariffs for the highest residential users (which violated the policy directive that tariffs must reflect costs), the PUCSL appeared to have given little weight to those who made submissions. Did it, by this action, betray the public’s and the stakeholders’ trust in the consultation process and confirm the widespread view that the PUCSL was merely a facade for politically-arrived-at decisions?

Since the law does not give power to the President to set electricity tariffs, the PUCSL will have to amend its decision to reflect the President’s speech. By so doing, will it sign its irrelevance certificate, since those wishing to influence tariff decisions in the future will directly approach the President, without wasting time on written and oral submissions to the PUCSL?

The PUCSL decision went some way, but not enough, toward implementing the 2009 National Energy Policy and Strategies (NEP&S) directive regarding cost-reflective tariffs. The President’s speech, directly contradicted the NEP&S, gazetted on 10 June 2008, both with regard to cost-reflective tariffs and the targeting of subsidies to groups considered deserving them for public policy reasons. By obeying the implicit directive in the President’s political speech, the PUCSL will violate the explicit directive given by the official policy of the government approved by the Cabinet of Ministers chaired by the very same President. How will it handle this conundrum?

The premise underlying the creation of independent regulatory bodies is political failure. It is because of decisions made for short-term political gain by leaders of all governments since the 1990s, starting from President Premadasa, that Sri Lanka finds itself in the present unviable position. In 2012, the government spent LKR 59 billion propping up the electricity sector, almost double the LKR 29 billion spent on the largest explicit subsidy: that spent on fertilizer. The approved tariff increases would have lowered, but not eliminated this hemorrhage of the fiscus. Now, the “concessions” made by the President for political reasons will impose further burdens on the Treasury.

These monies do not come from the personal funds of the President or even from the approved votes of his office and ministries under him. They will come from the technically bankrupt CEB, which will be rescued by various means by Treasury, which means that the budget deficit will widen and/or the non-performing loans of the government banks will further increase. In the end, it is we who will pay for the “concessions” so generously given by the President.

The mismatch of incentives and benefits will continue. A foundation for smart consumption of electricity will not be laid. The political failure will continue in more comprehensive form, now bringing within its scope the very instrument devised to remedy the failure.

What could the PUCSL have done differently?

It is not that the PUCSL was not provided advice on how technically correct decisions could be packaged in politically palatable form. The NEP&S explicitly recognized the political difficulties of correcting decades of gerrymandered and irrational electricity tariff structures and allowed for a gradual phasing-in of cost-reflective tariffs. It explicitly mandated the PUCSL to design targeted subsidy schemes to alleviate the short-term pain inflicted upon low-income groups. Intervenors in the public consultation, including my own organization, highlighted these directives and proposed practical ways of implementing them.

All the PUCSL had to do was to include the above element in its decision. Had it done so, it would have had political cover when the President sold them down the river in the face of opposition protests. The PUCSL has no power to establish subsidy schemes for Samurdhi recipients, as everyone knows. Yet if it had explicitly recommended them to the appropriate authorities, it would not look as impotent and cruel as it does today.

The pressures caused by over-reliance on oil (the most expensive five percent of electricity needed to meet peak-hour demand costs as much as the least expensive 50 percent of supply) will be reduced when Norochcholai Stage 2 comes online and/or effective demand-side management reduces peak demand. What we suggested was that the imposition of pain on all subscribers in the meantime be matched with a promise of future pleasure in the form of a PUCSL mandated reduction of tariffs after costs were brought down. Yet this too was ignored.

But not by all decision makers. The Secretary of the Ministry of Power went on record stating that the Fuel Surcharge would be lifted once Norochcholai came online. Some of the President’s concessions may take this form. What could have been a feather in the PUCSL’s cap is now being exploited by others.

Another intervenor suggested that the PUCSL disallow the component of the permitted revenue base constituted by the allowed Return on Equity. I supported this by pointing out the President’s statements in the last budget speech claiming that entities such as the CEB are not in the business of making profits. Implementing this suggestion would have allowed the PUCSL to shave off 6-7 percent off the rates proposed by CEB and would have defended the PUCSL against the charge that it is simply a rubber stamp that endorses whatever is proposed by the CEB. This opportunity too was not seized.

Hindsight is 20/20. It is easy to suggest what could have been done. I have tried to avoid that charge by pointing to specific recommendations that reached the ears of the Commission before they took their hasty decision.

Should the PUCSL be abolished?

In the aftermath of the protests and the President’s overruling of the PUCSL, several observers have suggested that the PUCSL is a redundant entity that should be wound up. I agree that it failed in this instance and that it has done grievous harm to itself and to the essential process of moving toward cost-reflective tariffs. Its strategic illiteracy opened the door to formal entry of political power into the regulatory process and created the perception of irrelevance.

But, I do not recommend abolition. Electricity regulation is a tough business anywhere in the world and one “duck” should not lead to immediate execution. The Act’s provisions require the continual replacement of members. It is hoped that those responsible for the 2013 fiasco will gracefully retire, allowing new members who are capable of learning from their mistakes to chart a path to building trust in the PUCSL and in its regulatory procedures. It behooves all of us who can help them in that regard to do so, because the key underlying problem of political failure has not gone away, but has only gotten worse. Unless we remedy this political failure, the electricity sector will continue to be a drag on the economy and on all those who seek to manage their livelihoods efficiently.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.

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