Electricity tariffs: Accounting, clawbacks, and meddling by IMF

No Government really took steps to fix the finance and tariff setting team weaknesses of CEB

CEB is a regulated monopoly where the consumer tariff is determined by the regulator, the Public Utilities Commission of Sri Lanka (PUCSL) as per the country’s law. The tariffs are based on a cost-reflective principle inclusive of return-on-assets, governed by a tariff methodology revised every five years. This mechanism is designed to avoid the utility from leveraging their monopoly position to overcharge consumers in search of profits. It also requires them to operate in an efficient manner, which has never happened. 

Introduced in 2013, the mechanism was never properly operationalised, due to political pressure exerted to the CEB by successive Governments to not file tariff requests. In three instances where tariff revisions were made, political interference was evident – 2014 tariff reduction (CEBEU and Treasury), 2023 February tariff increase (Ministry of Power), and 2023 October tariff increase (IMF, Treasury and the Ministry of Power). 

In the current tariff revision process, the shadow of IMF is looming large. IMF has already withheld the next tranche of the structural adjustment facility, placing prior actions on tariff for the next disbursement. 

CEB profits and cost reflective tariffs

Reading IMF statements, raises questions on what IMF really wants. IMF appears to be talking about three things, which are interrelated but different and not always aligned.

The structural benchmark of cost recovery pricing is established

Effective operation of Bulk Supply Transaction Account (BSTA), which is a cashflow management mechanism within the regulatory process, with automatic +- 10% pricing adjustment if this account balance goes above 15 Billion or goes below negative 15 Billion

CEB should not make losses on a forward looking basis

Cost recovery principles and clawbacks

Sri Lankan electricity tariffs ARE based on cost reflective principles, contrary to the statements by IMF Mission Chief, Evan Papageorgiou1 when PUCSL was allowed to make independent tariff determinations. 

Sri Lanka’s generation mix changes from month to month, based on rainfall and reservoir storage levels. While rainfall can be predicted with sufficient accuracy, CEB has regularly shown their weakness in understanding what modulates rainfall in the country and how this will affect the reservoir inflows. The variations of hydro generation make the monthly generation costs highly variable. Other elements that impact the forward projections include demand, exchange rate, interest rates, coal and oil prices. 

The tariff methodology requires CEB to project the costs and revenue for the next six months, and after scrutiny and corrections, approved by the PUCSL. These agreed values become allowed revenue and costs for CEB (and its divisions including transmission, generation and distribution). At the end of each period, the variations of projected values and actuals are compared – if CEB has a deficit, this is recovered in the next period and if CEB has an excess, this is returned to the consumer as a clawback.

Thus while each year there may be a variation, these anomalies are smoothened in the next cycles maintains a dynamic cost reflective equilibrium. If CEB improves their projection accuracy, the variances will reduce. 

The first full clawback applied to a tariff was in the January 2025 tariff determination, a sum of Rs. 51 billion.

Although IMF talks of cost reflectiveness, their actions do not demonstrate their commitment to the principle. While they were eager to protest the apparent shortfalls in 1Q 2025, we did not hear a peep from them when CEB was raking up significant excess revenue over costs in 4Q 2023 and 1Q 2024 due to excessive tariffs they instigated. Selective outrage does not point to a real commitment cost reflectiveness.

CEB accounting failures and mythical profits and losses that bother IMF

IMF concern has been the interim profit and loss statements issued by CEB, showing a loss of 18.5 billion for the 1Q 2025. They were not concerned about the Rs. 144 billion profit for the year 2024 (a 25% NP margin). So their real concern are the losses in CEB books, and not cost reflective tariffs. 

But the Rs. 144 billion profit for 2024 and Rs. 18.5 billion loss for 2025 are both myths, stemming out of incorrect accounting practices of the CEB.

CEB total revenue for the year 2024 was Rs. 547 billion. But in the tariff submission made by CEB on 16 December 2024 to PUCSL, they indicated a Rs. 41 billion clawback to be returned to the consumer. This shows that CEB knew at least Rs. 41 billion of the revenue in 2024 must be treated as advances from consumers rather than income for the year. In the tariff decision issued on 17 January 2025, PUCSL corrected the clawback amount to Rs. 51 billion. In addition, CEB should have known that there is a further 11 billion clawback for the second half of 2025, which they acknowledged in the tariff submission dated 16 May 2025.

Thus CEB had ample evidence of a Rs. 62 billion clawback in total, but still did not recognise this amount as a consumer advance, but booked as income for the services for 2024 in their accounts. This is accounting malpractice, that artificially inflates the 2024 profits (the mythical profits), that should be investigated by the Government as well as ACA of Sri Lanka with necessary punitive actions of the officials involved. I can only hope that auditor general will fix this error and restate the accounts as per accounting standards. The Government should seriously consider strengthening the finance division of CEB, and put finance professionals at the helm of CEB instead of engineering academics. 

This restatement will also ensure that 50% of the 2025 first half clawbacks (Rs 25.5B) will be recognised as income for 1Q 2025, reversing the mythical Rs 18.5 Billion loss into a respectable Rs 7 Billion profit. And with this, the most pressing concern of IMF will also disappear, and CEB accounting process will align with the tariff methodology as it should be. LECO already has the correct accounting practice in place. 

 The BSTA dilemma

The BSTA is a critical part of CEB operation and tariff methodology. This account is a balancing account – all customer payments come to this account, and all payments to generators, distribution and transmission divisions go from here. When properly operated, the balance of this account at the end of a period will become the clawback or takeback to the consumer. This decouples system operation finances from CEB’s internal finances. BSTA also has an auto tariff correction mechanism described earlier. 

Although PUCSL has been requesting CEB to set up this account from 2013, it was only done in 1 July 2023. Yet the date on which BSTA was created and its opening balance has now created another headache. 

CEB began the BSTA account on 1 July 2024 with a negative Rs. 15 billion starting balance without any rationale to do so. This has led to two competing figures maintained by CEB and PUCSL, creating a disagreement (also with the IMF) when the automatic tariff adjustment should kick in. 

The second problem of the starting balance is the fact that tariff methodology is designed to work from January to December. Thus if CEB was to setup the BSTA correctly, they should have calculated the BSTA balance on 30 June 2024 (assuming it was zero on 1 January 2024), and started the account with the same on 1 July 2024. This would have synchronised the BSTA with the tariff methodology, not leaving space for IMF or others to have competing interpretations on figures. 

A BSTA account that is out of phase with the tariff methodology cannot be sustained.

Polluting the discourse

We are bleeding purely due to self-inflicted wounds. It is unfortunate that the faculty of critical inquiry appears to have left the IMF team – but if CEB gives them misleading data, incorrect accounts and a faulty narrative, it becomes difficult to blame IMF too. 

The false narrative of CEB was led from the front by the ex-Chairman of CEB, Dr. Tilak Siyambalapitiya. He not only gave incorrect information on the tariff methodology and the status to IMF, but also to the highest echelons of the State. He had the Ministry mesmerised and, in his thrall, so no independent analysis came from them. The government only realised the error late. One can listen to Deputy Minister Anil Ranjith’s articulation of the tariff process after his return from Washington, that the Finance Ministry was no longer buying what CEB was trying to sell them. 

Some CEBEU members are also reported to be meeting a lady from IMF Sri Lanka office regularly, to feed this incorrect data and narrative, making things difficult to the Government.

The role played by the IMF

IMF’s actions in the sector has been confusing to say the least. What should concern IMF, and the public of Sri Lanka, is a robust and accurate process, coupled with sound governance. But IMF, through their incorrect labelling of tariff mechanism as lacking cost reflectivity, has now placed this as a prior action for releasing the next tranche. In reality, the process to ensure cost reflectiveness is in operation.

What they are doing is in fact holding the country hostage, and asking the Government to intervene into a well-established and operating tariff methodology, carried out by an independent commission. Asking a Government to violate a process based on the law of the land, and to undermine an independent commission, appears to be a very curious prior action to be set by an organisation like the IMF! With such a precedence, who knows what Governments may do when IMF is also not around – maybe ask the regulator to give unfunded subsidies like we have been doing from 2013 onwards? Maybe IMF officials like Sri Lanka, that they are working on a cunning plan (aka Baldrick) to be back in say another five years?

Lest we forget; this is not a first to IMF. In October 2023, IMF intervention resulted the government forcing a significant tariff increase, leading to many people being forced to disconnect bills due to inability to pay and demand contracting rapidly. This had caused serious hardships to the people and economy as a whole.

What we should be focusing on are better governance and the long term financial viability and sustainability of the sector. In this context, it is surprising that they hang on to this (and other) non-issue while ignoring the Government’s attempt to reverse the core components of the sector reform through the proposed amendments to the Electricity Act of 2024. The amendments reverse many key points, including;

Allowing finance ministry to influence tariff setting by PUCSL

Removing the least cost provisions of the dispatch

Removing provisions (or making it virtually impossible) for private sector capital to come into the successor companies of the CEB, keeping it tethered to the state through reversing many aspects of the unbundling

Taking such a micro-view and missing the larger transformation needed seems exactly the wrong thing to do. 

Why is the sector in this mess?

We must recognise the wrong choices made by the Government played a role creating this mess. No Government really took steps to fix the finance and tariff setting team weaknesses of CEB (although they were holding a balance sheet almost the size of MAS Holdings). I suppose we sent the wrong message to IMF in October 2023 too.

It is high time that Government stopped thinking that the roles in the Power Ministry should be held by engineers and academics. A sensible professional or a senior civil servant could have seen through this number mess, and resolved the issues. 

Let us hope that IMF will see the error in their ways, and address the concerns with sound reasoning and in a way that does not violate principles of good governance. In the few months he was at the helm, Dr. Siyambalapitiya set the stage to wreck the emergent renewable energy sector of the country. He and the team has set a trap to the Government that they are struggling to come out of. Let’s hope his legacy of destruction doesn’t include the IMF program as well. 

Footnote:

1https://www.imf.org/en/News/Articles/2025/04/30/tr-042925-press-briefing-sla-4th-rev-sri-lankas-reform-program-supported-by-eff-arrangement