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By Uditha Jayasinghe
Increases in electricity prices always cause much debate and in the melee, much misinformation is freely bandied about in an effort to understand the necessity of this extra pain.
During the past two months many details have been strewn about to put context into the sharp increase and in this article the Daily FT attempts to point out three important elements of the price hikes with the aid of Verite Research to provide a fresh perspective on this latest weight on wallets.
Meter reading problems
In its submissions to the Public Utilities Commission of Sri Lanka or PUCSL, Verite Research points out that the new tariff structure not only adds more cost to the bill it also creates confusion with regard to meter reading practices.
The submissions point out that in the existing tariff structure the average cost increased smoothly with consumption. This is in line with a properly structured progressive pricing system.
The proposed tariff structure results in large jumps in average price at the nodal points of 30, 60, 90, 120, 180, 210 and 300.
Verite insists that this creates a significant practical problem. Electricity meters are often not checked on 30 day cycles, as most home owners can attest to, this can disadvantage users and create controversy
“Consider a user that consumes between 80 and 90 units a month. If the meter is checked even two days late, a reading that would have been under 90 had it been checked on the due date could be adjudged to be above 90. This would skyrocket the average price paid by the user from about Rs. 12.9 to about Rs. 24.4 (total cost divided by units) – almost doubling the bill. In the existing tariff structure this increase in average price would have been from about Rs. 8 to about Rs. 11 (total cost divided by units).This is an increase of around one-third only. This same analysis applies to the other nodal points as well.”
The report goes on to insist that this causes victimisation of consumers as most of them would not understand the complexity of the tariff scheme to argue their point and in the case of most people may not even be home when the meter reader does his monthly calculations.
Even if these oversights are noticed then a time consuming effort has to be made to bring these issues before the Ceylon Electricity Board (CEB). Obtaining redress would take up even more time and the cost of filing, assessing and reimbursing such complaints will add to the expenses of the CEB.
However, this does highlight the need for consumers to be more vigilant so that they can discuss the oversight with the meter reader before he pens the bill.
No incentive to cut consumption
One of the most important aspects of sustainable power usage is conservation. The low consumption households are unlikely to have the space to conserve power but the higher end users are general encouraged to switch off or use energy saving appliances to reduce their bills. Under the new tariff scheme Verite Research argues that the incentive to save power has been reduced.
“This desirable principle is violated in two ways by the existing tariff structure. For example under the existing tariff structure a consumer who reduced his consumption within a band from 150 to 130 units would make a saving of 32% of his payment. However, under the new tariff structure the same reduction would result in a saving of only 14% of his payment.”
While the higher total cost will create absolute incentives to save, economic consumption theory and research suggests that consumer behaviour is more sensitive to marginal benefits. Therefore it would seem that the existing structure is superior to the proposed structure in providing incentives to reduce consumption, the report adds
Define reasonable
The PUCSL believes that the power tariff should be increased to cover all “reasonable” costs incurred by the CEB. However what the PUCSL finds reasonable the public will find unreasonable. The PUCSL aims to reduce CEB expenditure by around Rs. 33 billion but this does little to stem the unbridled corruption within the institution. The fact that the CEB’s endless mismanagement is also included in the cost dished out to the consumers makes it extremely unfair.
Verite notes that their research suggests that even within South Asia generation and supply costs in Sri Lanka are amongst the highest. Given the small land area of the country, the relatively better infrastructure development and road access, the high relative costs must be explained.
“We submit therefore that the PUC should require the CEB to explain its high costs, relative to the region, and that the lack of an adequate explanation should be construed as the costs being ‘unreasonable.’”
The previous research has highlighted the mismanagement of hydro power and the poor implementation of the Norochcholai power plant as significant reasons for the power crisis, which in turn has forced purchases of power from private power plants at a high cost.
“These and other public sector mismanagement that has given rise to increasing the cost of power should be estimated and ruled as “unreasonable”. Using the cost of power in comparable but well-managed countries would be one method of estimating the unreasonable excess cost in Sri Lanka.”
Allowing tariffs to be based on costs of production, regardless of why costs are high will reduce incentives also for the CEB, to improve management and efficiency within the production, sourcing and delivery system. These are issues that have been emphasised time and again but are not adequately dealt with. Given these three points it is understandable that consumers feel that they have been short changed by the latest tariff system that pushes all responsibility on the masses.
Recommendations
Verite Research in their submissions also made two salient recommendations that would make the tariff more constructive.
(1) Maintain the current structure of applying higher rates only for the higher blocks of consumption rather than for all the units of consumption. This will solve both the practical problems as well as the incentive problems outlined.
Perhaps the most important point is the second recommendations where Verite calls for the CEB to be held accountable for its wastage. CEB calculations show that average charges from households is being increased from around Rs. 12 to above Rs. 20. This is a large increase, and yet could possibly be justified if warranted by the reasonable costs of provision.
However, the reasonable cost of provision cannot simply be the actual cost, when actual costs are significantly increased by inefficiency and mismanagement. Setting costs in this way also takes away incentives for the CEB to improve management and efficiency of its operation. Therefore the second recommendation is:
(2) Set a reasonable cost of provision by benchmarking against comparable well managed nations, and on international technical standards of efficiency and cost. Not on actual CEB costs, which are likely to inflated by inefficiency and mismanagement
It is clear from these points that the road to responsible electricity generation in Sri Lanka has a long way to go. Unless the CEB is made accountable for its expenses it will eschew its management responsibilities and piggyback on the public. Surmounting this massive hurdle remains the biggest challenge and inroads are unlikely to be made by the latest round of price increases.
