Cost recovery electricity pricing?

Does it reflect true cost or higher costs, due to inefficiency, wastage, bad management passed on to consumer?

The International Monetary Fund (IMF) agreement states to reduce the state enterprises making losses and to maintain cost recovery in electricity pricing. This would mean that the state enterprises should be efficiently managed and if they are a monopoly like the Ceylon Electricity Board (CEB), then the inefficiencies, wastages, bad planning and management should not be passed on to the consumer, putting the blame on the IMF. They need to be accountable and free from political interference and be responsible to the regulator.     

The CEB now wants to make the third price revision and has submitted details to the regulator to obtain a price revision. The reasons given are the non-availability of rainfall and lack of water in the reservoirs, resulting in reduced power generation using hydro and reduction in coal power generation, due to outages, which will result in the electricity prices going up, adversely affecting the poor consumer, industrialists and other commercial users. 
In the CEB, there is a mix of generation of power, which include hydro, thermal fuel, thermal coal and non-renewables, wind and
solar power.     

This would mean that the power generation should be undertaken at the least cost and this would require technological inputs as well as good cost and management accounting to enable the right cost to be calculated and to provide the least cost pricing to the consumers, industries and other commercial users.
In order to arrive at the correct pricing of electricity generation of the plants before making a price revision, it is necessary to carry out a cost audit of all the generation plants for which they should have maintained cost records, in order to determine their efficiency and calculate the direct cost of electricity generation of each plant. This will also enable to identify indirect costs as well as the usage of raw materials, which are a major cost in the generation of power. 

It will also help to identify inefficient plants having very high costs of electricity generation, which need to be scrapped and not be a burden to the consumer. Cost records for all these generation plants should be maintained as this will enable the regulator to satisfy themselves by doing a cost audit using the cost records maintained as well as the efficiency of the plants and arrive at the actual cost of generation before undertaking a price increase.

The reason for the increase in the price is given as the non-availability of the low-cost hydropower, as a result of low rainfall and as a result, the thermal power plants have to run either owned by the CEB or to purchase from private producers at a higher price. But it is noticed that in thermal generation, the cheaper coal power generation too has been reduced, due to non-availability of coal or repairs to the plant. This is indeed a management decision and hence, the losses incurred, due to bad management decisions, cannot be passed on to the consumer and should be taken note of by the regulator. 

In the year 2021, as per the available annual report, the generation mix was hydropower 43 percent, coal power 33 percent, thermal fuel 16 percent and wind and other renewables 8 percent. That year, the losses were reduced as a result of more hydro and less fuel used. 
But the performance could have been further improved by having a very effective costing system and the CEB should have a separate costing department, under a DGM to calculate the true cost of generation and for efficient management decision-making to provide least cost generation, which will be beneficial to consumers. 
Since the government is not going to subsidise the supply of electricity, the consumers will have to pay for any increase in prices and pay the additional costs. This will also result in industrial users and other commercial customers becoming uncompetitive and unprofitable and may even have to close down.