Proposed Electricity tariff hike: Conflicts of interest between GOVT. and PUCSL to further burden consumers?

Collecting signatures for a public petition against the proposed electricity tariff hike

Following the electricity tariff hike revision in August 2022, the Power and Energy Ministry announced another tariff hike that would have come into effect from January 1, 2023 on the basis that the tariff hike in August 2022 wasn’t adequate to meet generation costs. According to the subject minister Kanchana Wijesekera, the Ceylon Electricity Board (CEB) estimates a cost of Rs. 56.90 per unit of electricity if consumers are to experience an uninterrupted power supply. However, the current average tariff is at Rs.29.14 and the deficit is estimated at Rs. 423.5 billion. But the Public Utilities Commission (PUCSL), which is the regulator is of the view that this is an attempt to burden people in households falling under low electricity consumer category. Energy experts are of the view that the CEB will not be able to generate the required amount of dollars to procure coal and fuel with a rupee tariff revision of this nature. On the other hand, many industries have agreed to continue operations with existing power cuts as they cannot afford another electricity tariff hike.

Disparity in data

A cabinet paper issued by the Ministry of Power and Energy dated December 23, 2022 states that ‘as per the provisions stipulated in Section 30 of the Sri Lanka Electricity Act and being consistent with the General Policy Guidelines, CEB being a distribution licensee has requested PUCSL a price revision on March 4, 2022 on a cost-reflective basis. Accordingly the PUCSL has granted its approval for the licensees to increase the electricity tariff with effect from August 10, 2022. However the revenue generated under the new tariff hike is not adequate to meet even the direct generation costs, apart from other corporate and overhead costs.’

As per the proposal, more rates are expected to be charged from households consuming electricity units between 0-30, 31-60, 61-90 and 91-120. Accordingly, the current unit rate of Rs. 8 for households utilizing 30 units or less will be raised to Rs.30, with a hike of 375%. The tariff for 31 - 60 units consumed, will be increased by 370%, which is an increase of the current rate of Rs. 10 to Rs. 37. The Rs. 10 tariff per unit for households using units between 61 and 90 will be increased to Rs.42. It is a 420% increase than the prevailing rates.

The paper further states that the CEB has been unable to procure sufficient cash flows to procure coal and that it has been incurring losses since 2014. “The supposed demand estimated by CEB is 14920 GwH and is marginally lower than 2021 (15,200 GwH). But after the electricity tariff hike there has been a drop in demand during the last three months,” opined energy expert Dr. Vidura Ralapanawa. “Global research suggests that a 100% increase in tariff will lead to a 8-10% reduction in consumption. Industrial energy use has dropped by 15% and this is unhealthy for the economy as it is leading to an economic contraction. The next tariff hike will further depress the demand.”

As per the proposal, the current unit rate of Rs. 8 for households utilizing 30 units or less will be raised to Rs.30, with a hike of 375%. The tariff for 31 - 60 units consumed, will be increased by 370%, which is an increase of the current rate of Rs. 10 to Rs. 37

Dr. Ralapanawa said that there are four elements that need to be considered when setting the tariff. “One is cost reflectivity – but this doesn’t mean that everybody should be paying average costs. This is better measured with marginal costs than average costs. In countries such as Germany, industrial tariffs are about 1/3 rd of domestic tariffs. Another element is equity which sets tariffs to match affordability. In theory, direct subsidy sounds attractive but it can only be applied to a small portion of affected people. Price elasticity on the other should be considered when taking tariff decisions and when designed correctly will incentivize demand reduction. The fourth element is conservation where having high fixed charges will dissuade people from conservation and demand reduction,” he explained.

It has also been noted that the recent tariff increase of approximately 75% has resulted in approximately 7% of the demand. “The 2023 tariff increase will also reduce consumption, but since elasticity is not 100% the 2023 tariff increase will depress the demand, but likely at a lower rate. The CEB has shown that electricity demand reduces during contractions of the Sri Lankan economy. But according to IMF and the World Bank, the economy is expected to contract to over 4% in 2023. The tax increase kicking in 2023 will also reduce the disposable income of a large number of Sri Lankans, forcing a reduction in the demand. An overly large tariff increase can further depress the economy by contracting purchasing power of people and businesses, making exports uncompetitive and driving businesses to closure.”

AG’s responses and conflicts of interest

Certain energy experts observe that the Ministry now seems to be relying on CEB data, bypassing the regulator, which is the PUCSL. However, it seems that the Minister has made two requests to the Attorney General, seeking clearance to amend General Policy Guidelines.
One of the responses by the Attorney General dated July 25, 2022 with the subject ‘Request for clarification on powers vested with the Minister in charge of electricity industry on revision

of electricity tariff’ explains the powers vested upon the minister to amend General Policy Guidelines. Following an explanation on Section 5 of the Sri Lanka Electricity Act which elaborates on powers vested upon the subject minister and Section 30(1) of the Public Utilities Commission of Sri Lanka Act No. 35 of 2002, the Attorney General states that PUCSL is duty bound and obliged to give effect to policy Guidelines issued with the approval of the Cabinet of Ministers as per Sections 14 and 17 of the PUCSL Act.

However, the Attorney General has issued another response on November 4, 2022 to a letter submitted by the Ministry of Power and Energy on November 2 with the previously mentioned title. This letter explains Section 30 of the SLEA which relates to tariffs ‘inter alia, provides that transmission, bulk sale, distribution and supply tariffs should be set by the relevant licensee in accordance with a cost reflective methodology approved by the PUCSL in accordance with policy guidelines approved by the Cabinet of Ministers. However, it again states that General Policy Guidelines of pricing could be issued by the Minister and that such policy may be framed in the form of a tariff structure formula or by any other method. ‘In terms of Section 30(2)(c ) the PUCSL would be statutorily obliged to give effect to such policy,’ the letter further read.

“But it is difficult to interpret the AG’s response without knowing what the request letter was. The response mentions about the minister being given the powers to amend General Policy Guidelines, but that is different to a specific tariff rate. General Policy Guidelines are mentioned in Section 5 of the Sri Lanka Electricity Act whereas tariffs are mentioned in Section 30. Tariff setting includes many processes including demand assessment, determining the reasonability of costs and so on,” Dr. Ralapanawa said.
“It is the PUCSL that will determine the appropriate tariff and will issue an order. The Attorney General’s response states that the minister can amend Guidelines but can not impose a tariff. However the Ministry seems to be crafting a proposal and a timeline on how the tariff should be applied from Jan 1, 2023. So whether it’s a general policy guideline or a specific directive is a question,” he added.
However, Dr. Ralapanawa observes that the PUCSL is likely to reject this proposal because there’s no mechanism for the PUCSL to approve this tariff hike even if the cabinet goes ahead. “After all if the tariff is increased, there will be further economic contraction that would lead to social unrest.”

What about power cuts?

He further observed that even with this proposed tariff hike, there would be power cuts since the CEB doesn’t have dollars to purchase coal shipments. “Usually there are around 36 coal shipments that arrive but due to the forex crisis only five shipments have arrived. So whether we will have an uninterrupted power supply is more to do with dollars and purchasing of coal than a rupee tariff increase. The SME sector too has said that they will continue operations with power cuts as they cannot afford another tariff hike.”
One of the solutions proposed by Dr. Ralapanawa is a proper demand assessment. “The CEB states that there’ll be a 1% increase in electricity demand between 2022-2023. But historical analyses have proven that when the GDP contracts, the demand for electricity also contracts. Therefore we cannot have an increased demand. He also said that there’s a policy decision that has to be taken by the state – that is, whether we will continue with power cuts or not.”

Cabinet decision postponed

In response to the proposed electricity tariff hike, the Ceylon Electricity Board’s United Trade Union Alliance announced that they will not disconnect the power supplies of people in the event that they are unable to pay the electricity bills. The Alliance Convener Ranjan Jayalal said that people will agitate once again if the proposed tariff hike is imposed. “The government doesn’t have the dollars to procure coal shipments. The coal power plant will shut down once again and they will say that it’s for maintenance purposes. People will assault us if we disconnect their power supplies and in that case, who will be responsible for our employees?” Jayalal questioned.
Last week, the Union threatened to launch an island wide hartal if the proposed tariff hike was imposed. On Monday (January 2) evening, subject Minister Kanchana Wijesekera announced that the cabinet decision has been postponed to Tuesday (January 10)  and that he has briefed the cabinet of ministers on the requirements, proposed tariff structure, energy forecast and finances.

Independence of PUCSL threatened

Addressing the Commission staff for the New Year on January 2, PUCSL Chairman Janaka Ratnayaka said that the political authority has taken certain decisions to dilute the independence of the Commission.

“This is a bad precedent because we are in an era where such independent commissions are important for the decision making process. Interfering with such commissions is not appropriate. The latest issue is with regards to the proposed electricity tariff hike. There’s a methodology mentioned in the CEB and PUCSL Acts. But there’s an attempt to increase the proposed electricity tariff hike based on a misinterpretation issued by the Attorney General. I have discussed this with other members of the Commission and we will not approve this tariff hike. This is because it is only four months since the previous tariff hike was imposed. At a time when the country is facing an economic crisis, is it appropriate to impose another tariff hike? What are the justifications for this tariff hike?” He questioned.

“The methodology submitted to the cabinet is quite unfair. This proposal is to increase the electricity tariff rate of around 500,000 consumers who mainly utilize between 0-30 units by about 1200%; on the other hand the CEB is trying to generate over Rs. 100 billion from consumers utilizing less than 120 units.
We are talking about unemployment, malnutrition etc., and in such a backdrop it is unfair to increase the tariff rate of middle class segments and consumers living below the poverty line with an intention to cover the losses incurred by the CEB while procuring coal and fuel. Therefore we are ready to reject the proposal if it is based on an unfair pricing structure,” Ratnayaka underscored.

Several attempts to contact CEB General Manager Rohan Seneviratne and subject minister Kanchana Wijesekara proved futile.