POWER AND ENERGY: WHY STILL A STATE MONOPOLY?

POWER CUTS AND FINANCIAL LOSSES AREN’T DUE TO A LACK OF LOCAL TECHNICAL EXPERTISE, BUT BECAUSE THE CEB REMAINS A STATE ENTERPRISE. TIME FOR A CHANGE?

For a month up to mid-April, the entire country experienced regular four-hour long power cuts. Ideally, this should not have happened in a middle-income country, but it did. Darkness became a time machine to discover how our great grandparents lived. Well, they may have been more comfortable with temperatures a few degrees cooler. We, facing impacts of climate change in full force, were sweating from head to toe.

Power interruptions were not mere inconveniences. While large businesses somehow managed with their own generator power, the SME sector was badly hit. Barber saloons and communication shops were closed. Dentists and veterinarians kept their patients waiting for hours. Small towns were at a standstill. For these small scale vendors who rely on daily earnings, these power cuts were a blow. It might have badly ruined their preparations for the festive season.

Stakeholders were deflecting blame. Ceylon Electricity Board (CEB) engineers blamed politicians for not building the Sampur power station, which was supposed to make uninterrupted power possible but also reduce average electricity tariff s. Politicians, in turn, blamed engineers for not having a Plan B. PUCSL, the electricity sector regulator, was blamed by the president himself for taking the CEB to courts. (As an independent regulator, PUCSL did have that power within its mandate and had acted accordingly.) Everybody asked ‘Who did wrong?’ Nobody asked the more important question: ‘What went wrong?’

What really went wrong? Why did we have to undergo power cuts? For that matter, why do we experience all sorts of service interruptions? Electricity? Water? Railways? Surely you see some pattern here. All these services are provided by the state. They are also state monopolies. Frequent service interruptions are inherent in all these cases because, in their business model, quality or value for money of service isn’t a priority. In case of a monopoly, there is no question of consumers leaving the vendor. In case of a state enterprise, there is no question of even being profitable. Most of these state enterprises have not shown profits for decades, if not ever.

For example, Ceylon Government Railways last showed a profit in 1943. For 76 years, the Treasury has borne the annual loss, whatever it has been. For all those 76 years, no serious measures were taken to make the business profitable nor let the private sector get in (except in limited cases) to lift the burden off the Treasury’s shoulders. Service improvements are negligible and some services are unchanged since colonial times. In some cases, the fare wasn’t even sufficient to cover the cost of the ticket printed on imported paper. Frequent service interruptions have become common.

THE CEB’S INABILITY TO SUPPLY ELECTRICITY DEMAND IS APPARENT

Like in case of railways, at the CEB, service interruptions are a symptom of the problem. The CEB has been historically making losses. Its losses for 2017, for the last fiscal year data is available, have been Rs46 billion. This is an increase from Rs13 billion a year earlier. For the last 10 years or so, annual losses have ranged Rs10-20 billion.

The CEB’s inability to supply electricity demand is apparent. Heavy financial losses, emergency power purchases at high prices and power cuts have become common during any prolonged drought. Had the loss come down a bit in a certain year, it was due to favourable weather.

When there is enough rain, CEB losses reduce due to two reasons. One, the contribution for hydroelectricity generation increases, significantly lowering the average unit cost of electricity for the CEB; and two, the use of air-conditioning is reduced. In short, it is the ‘weather gods’ that makes good years at the CEB, nothing else. So it may be reasonable that they hold pujas for these deities every year.

For example, 2017 wasn’t a good year. Drought reduced the hydro power contribution by 12%. Average costs of hydro, coal and fuel oil-based power generation has been Rs2.7, Rs9.7 and Rs25.7 per kWh. The CEB also purchased additional power at a cost of Rs23.73 per unit. All that made the CEB’s average cost of electricity at the selling point closer to Rs20 per kWh, but it sold those units of electricity at an average of Rs16.50. These data neatly explain the loss.

Isn’t the CEB aware that future demand will grow with Sri Lanka’s economic transformation? It is, for certain. The CEB, in fact, has a separate division for designing corporate strategy. CEB engineers work assiduously on future plans. Some of these planning documents are in the public domain and can be downloaded from the CEB website. For instance, there is a ‘Long Term Generation Expansion Plan 2018- 2037’. It estimates annual demand growth of 6.8% till 2020, and then 5 % till 2028. Thereafter, growth slides a bit.

So if the CEB forecasts demand growth, why cannot it build the power plants? It can. The planning documents present comprehensive future strategies. Anybody who goes through them gets the impression that CEB engineers know what they are talking about. That was how we felt years back too. We trusted CEB engineers to plan for increasing electricity demand. However, the power plants were not built. The CEB passed the resulting losses to taxpayers. Isn’t something seriously wrong there?

Maybe a century ago, it made sense to run electric generation, transmission and distribution all jointly as state monopolies. These required heavy investments with relatively low demand and significantly low returns, so not many private players would have been interested in making them. It also didn’t make sense to have parallel transmission and distribution systems. Such duplication would have increased operational expenditure. Given more living below the poverty line than not, some kind of subsidy too was essential. So it was no big deal that the state invested in electric supply on its own.

Times are now different. Technology advancement has made separation of generation, transmission and distribution possible. There is no need for a single party to run all. Since the 1990s, many regions have broken up the generation and distribution of electric power to provide a more competitive electricity market to reduce costs. Many countries and regions now have private- or investor-owned utility companies, city or municipally owned companies, cooperative companies owned by their own customers, or combinations. For those who need subsidies, it can be easily provided within the same business model.

What prevents implementing this system is only politics. Politicians love running large state sector entities. These concentrate more power, more funds for their election campaigns and more jobs for the boys. However, this is not something that can go on forever. CEB restructuring and liberalisation in certain business areas must happen soon. The longer the decisions are delayed, financial losses will mount and so will power interruptions.