Electricity reforms and CEB restructure: Confusion, conjecture or calmness?

The reform process is heavily focused on restructuring the CEB at present but there’s much more to be done 

Electricity reform is an essential element of Sri Lanka’s development effort and economic revival. It has been an unfulfilled need (amongst many others) for 20 plus years that was ultimately forced on us by the IMF. The previous Government brought in a revised Electricity Act in haste, with minimal consultation. It was progressive, had its merits, with also many inconsistencies and errors which would have created future operational and legal nightmares. This had to be expected, considering the short time taken to draft and pass the Bill in Parliament. The writer’s experience in a developed country like Australia is that such legislation would take close to two years to draft and table in Parliament.

As most power utilities in the world have reformed and restructured since the nineties, one would expect learnings from those experiences might enable the reform process here to be shortened, provided core reform principles and country specific policy objectives are clearly embedded into the legislation. The efforts of the current lot, albeit without much fanfare and a comparatively invisible Minister, has to be appreciated, with respect to standing firm on strategy and timelines. 

As a person who has been involved in the current reform process by commenting and subsequent discussions, I have formed the view that the process is going well. This is in spite of the sudden spikes of criticism that emanate mostly from political adversaries, vested interests like the solar lobby, and pseudo experts of whom there are many. An economic pundit so to say, very recently opined about his ability to read the conscience of a transformed leftist mind, in the context of NPP Government reforms. 

Pragmatism is a key word associated with this Government and the same principle seems to be applied in the reform process. Restructuring a grandiose organisation like the CEB is a very sensitive exercise, particularly for a party like the NPP which has a history of entrenchment within the trade union movement. Those who understand the intricacies of business transformation and the related behavioural implications of this massive change will appreciate this challenge faced by the Government. The previous Government used bullyboy tactics, which was not the best way, but that was also an option, which the present Government is doing differently, with more consultation but unfortunately, less communication. The writer sees risk management playing a significant role in the reform process, which is certainly thought to be prudent at the expense of expediency.

Why are these reforms required and what do these reforms involve?

Primarily, to bring down the cost of electricity, as it is an essential input to many aspects of people’s lives and for businesses to operate at a low cost and be competitive particularly in export markets.

There are two stages in restructuring the CEB. The 1st stage involves the setting up of 100% State-owned holding companies for generation, transmission, distribution and system operations. Why are they doing this? My understanding is that the Government strategy is to reform all State Owned Enterprises (SOEs) using this model (Temasek model, initially used by Singapore, very successfully using holding companies). This strategy follows from Government Policy presented at the General Elections to reform SOEs.

The 2nd stage which will be done within two years of the completion of the 1st stage, involves the opening up of the distribution and generation companies to 100% investment by the private sector.

How do these restructuring stages work?

Say in Stage 1, distribution company DHC is set up as a fully Government owned Holding Company, it will have four companies under it, that will be made up of the four distribution divisions of the current CEB. In stage 2, those four companies will be open to private investment via stock exchange listing or competitive tender or a combination of these. Suppose there are no suitable investors, they will remain under the ownership of DHC.

A similar process is envisaged for generation, however, there is a difference. One company that will be set up under the Generation Holding Company (GHC) for current CEB owned hydropower generation assets, will remain under GHC control, which means those assets will remain 100% under state ownership. The other three companies for coal plant, other thermal plant and wind plant will be open for private investment in Stage 2. Moreover, in stage 1 any new generation plant setting up in SL, will be open to competition and private investment.

There has been some conjecture about some of the other financial interests of the CEB, namely LTLH (35% holding), SLEC (100% holding]) and LECO (55% holding). These are private companies registered under the Companies Act, that are functioning under a licence, as of now. LTLH and SLEH have licences from PUCSL (the Regulator) and SLSEA (Sustainable Energy Authority) to generate power and connect to the grid. LECO has a license from PUCSL to operate as a distributor. All three companies will need to enter into agreements with the NSO (Network System Operator), to generate or purchase electrical energy. NSO is a 100% Government owned body that will be responsible to operate the entire currently CEB owned power system. The ownership status of the NSO will not change.

The Transmission Holding Company (say THC), will be 100% Government owned in both Stages. How this all goes into play is that companies under GHC will have agreements (called power purchase agreements – PPA) with the NSO to sell the electrical energy that they generate. The companies under DHC will have PPA’s with the NSO to purchase that electrical energy. The generators and the distributors both connect onto the transmission system, so the THC will be paid a fee for providing the services of connecting and wheeling power via the Transmission System. The fees will be regulated by the PUCSL. The THC also provides many other services which are beyond the scope of this article.

CEB’s shareholdings in LTLH, SLEC and LECO will be transferred to THC under Stage 1. THC is the logical entity that needs to hold these shares as it does not engage in power generation or distribution. THC has no mandate to engage in those activities and will only hold these as a financial asset. Critics may have different opinions about this but I have not seen any justification why these financial assets should be attached to any of the other holding companies, GHC, DHC or NSO. Criticism that THC will deviate from its core business as a transmission service provider just because it holds these financial assets, is a shallow argument.

Pragmatism is a key word associated with this Government and the same principle seems to be applied in the reform process. Restructuring a grandiose organisation like the CEB is a very sensitive exercise, particularly for a party like the NPP which has a history of entrenchment within the trade union movement. Those who understand the intricacies of business transformation and the related behavioural implications of this massive change will appreciate this challenge faced by the Government

What is the progress of the restructure process?

From information available, the timelines for Stage 1 are progressing on schedule, to complete this year. Preparatory work within the CEB is going well with several working committees in operation together with external expertise from one of the Big Four International Consultancies. We have to be thankful to the World Bank, ADB, JICA, etc. for their funding and expertise.

The Electricity (Amendment) Bill has been challenged in the Supreme Court by CEB unions and some others with a verdict expected soon. The unions argue that full privatisation envisaged in Stage 2 is unconstitutional. If this stance is upheld by the courts, the Government may need to consider other legislative options including diluting the extent of privatisation.

What should be the Government’s stance from here on?

Sri Lanka is still a bankrupt country whether it’s official or not. It has been documented that 25% of the population is living below the poverty line and another 25% close to that line. Three elections have been held with a rock solid Government now in place and there is an overwhelming atmosphere of stability and hope, with favourable aspirations for the future, particularly amongst youth and the business community. 

Ironically, destabilisation forces within and outside the country, with vested interests and intent on impeding development efforts, are very active and vocal under the guise of availing their democratic rights for doing so. The writer is of the opinion that there should be limits to such actions, as the wastage of resources in terms of time, effort and money to the extent of inhibiting development is counterproductive and obstructs the intended destination of the country and its people.

Reforms in the SOE sector, tourism sector, and transport sector are all reportedly proceeding well but delays are inevitable due to the need to get the relevant legislation in place. Many people don’t seem to understand the importance of this aspect in nation building. Patience is a required virtue for these things to unfold successfully but it is paramount that the foundation has to be laid by this Government, after years of neglect in systematic planning.

The Government must be solid in its strategy and this applies to the energy industry too. The writer is of the view that the strategy is right but there are serious flaws in selecting the implementers. True, there are many obstacles with the public service, with its past culture and the time required for transformation, but the lack of will in the present Government to pay well and attract available country talent from the private sector or from overseas is seen as a serious impediment to implementation of strategies.

The reform process is heavily focused on restructuring the CEB at present but there’s much more to be done. Developing a smart grid with smart meters for a start, overhauling the tariff structure and addressing discriminatory pricing, creating a separate safety regulator and safety regulations, and reviewing the role and functions of the PUCSL also needs to commence without further delay. Is this asking too much? May be, for now, but it has to happen.

(The writer is an electrical engineer with over 25 years’ experience in Australian Electricity Networks as a Manager and a Principal Engineer. He also worked as a Safety Regulator in establishing and enforcing safety regulations and investigating electricity network incidents. He worked as an electrical engineer at CEB, in the first 10 years of his career. He could be contacted at [email protected].)