Achieving sustainable cost efficiency in the electricity industry in South Asia
Wednesday, 26 June 2013 00:00
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Pakistan
To attract investment to the industry at the right time, USAID Power Distribution Program Financial Management Team Lead Abid Latif Lodhi opined that the starting point should be by getting the pricing of power consumption right.
The Pakistan power market has been regulated by an independent regulator since 1998, where the power sector in the county accounts for 41% from oil, 21% from gas, 35% from hydro and 3% from fuel sources.
Since the supply and demand of the electricity was not on the same level as during the ’90s, the lagging power supply that resulted in excessive shortage impacted the industrial and commercial consumers the most, eventually leading to losses.
Lodhi shared the heavy financial losses was also due to political interference, corruption in the management, limited capital resources, overstaffing, bureaucratic delays in handling routine matters in these public utilities, inappropriate cost investments, poor quality services, high system losses and poor collection of bills from the customer, all which negatively affected the financial health of the industry.
According to him, with the intention of creating a competitive power market in Pakistan, the Government decided to restructure and privatise the then existing thermal power generation, power transmission distribution functions and assets of existing public sector utilities.
“The Government wanted to create a fully autonomous regulatory authority where its aim was to improve financial, operational, and management systems of all tires of the industry,” he said.
Lodhi elaborated that the aim was to promote competition, and to eventually offer affordable electricity to consumers, commercial viability, and enhance business value of the assets block of each corporate entity.
Lodhi observed that in 1992, the Government approved the strategic plan for the privatisation of the Pakistan power sector and a regulatory body was created with the name ‘National Power Regulatory Authority (NEPRA).
Being the body that prepares tariff standards, and procedure rules, the main focus of the regulatory process was to determine the prudent cost for all the generation, transmission, and distribution licenses involved in delivering electric power to the end-use customer.
While the tariff setting process of NEPRA are of three kinds, which are, generation, transmission, and distribution tariff, to minimise the volatility in the consumer-end tariff, Lodhi noted that the authority determines revenue requirements annually, does quarterly adjustments, and monthly fuel adjustments.
India
Presenting the Indian power sector reforms, Government of India Department of Corporate Affairs Member of Informal Advisory Committee K. Narasimha Murthy shared that the Indian Electricity Act 1910 allowed production & distribution of power through the licenses granted by the State Governments, whereas in 1948 the creation of State Electricity Boards (SEB) was allowed for generation, transmission, and distribution.
The Central Electricity Authority (CEA) was later established to oversee planning & development of SEBs, and by 1975, the Central Government was allowed to setup and maintain power plants. While in 1991, private sector investments were opened up for power and generation, in 1998, transmission was also opened.
Murthy further stated that the regulatory was established for both inter and intra state matters.
While the Electricity Act 2003 repealed all previous Acts and brought a paradigm shift in Indian power sector, according to Murthy, SEBs got unbundled into generation, transmission and distribution corporations.
“The Availability Based Tariff (ABT) regime got activated and the Accelerated Power Development Reforms Program (APDRP) was launched in 2002 to upgrade the transmission and distribution systems,” observed Murthy while stating that in 2007 Electricity Act was further amended to make both the State & Central Regulators responsible for subsidy issues.
Speaking on the cost accounting records India, he said that cost accounting records rules are now made mandatory whereas initially the rules were prescribed for 47 industries and was in force till 2010. “Major reforms took place during 2011 and several orders were issued by the Government to reform the whole cost audits in India,” said Murthy.
He went on to say that common set of rules was introduced in 2011 and a separate set of cost accounting record rules was prescribes for six industries, which included electricity, telecommunications, pharmaceutical, fertiliser, sugar, and petroleum.
Highlighting on the impact of cost audit in the industry and society, Murthy said: “Cost audit report serves as an effective tool for improving corporate governance.”
He elaborated that the audit certifies financial and operational reports for shareholder purposes such as; ensuring reasonableness of transfer pricing followed between different business segments, transfer pricing of products between related party transactions, inventory valuation ensuring true and fairness, and help to identify if operational efficiencies versus global and industry benchmarks have been achieved.
“Value erosion takes place when products and processes contain wasteful spending, which results in uneconomic cost structure. Such products or processes can have negative effect on the net worth of the Shareholders,” asserted Murthy. “Under cost audit, product and segment wise profitability is worked out and uneconomic cost structure gets identified,” he added.
Sri Lanka
Expressing that the principles of long run marginal costs are usually adopted for the pricing of electricity, “it is seen that pricing of electricity is an effective technique of demand side management, especially in the long run,” said Ceylon Electricity Board Additional General Manager Corporate Strategy Bandula S. Tilakasena.
He stated that the modern approaches to electricity pricing recognise several considerations which need to be addressed.
Although it may not be mutually consistent, Tilakasena presented five considerations which are; provisions of minimum level of service to persons who are able to afford the full cost, costs must be allocated among consumers according to the burden they impose on the system with the presence of a reasonable degree of price stability by avoiding large price fluctuation, satisfaction of certain principles relating to fairness and equity, and efficient allocation of national economic resources.
Speaking on the tariff methodology published by the Public Utilities Commission of Sri Lanka (PUCSL), Tilakasena said that the tariff determination is based on Base Allowed Revenue for Transmission and Distribution Businesses. He explained that the costs of generation are passed through to the consumer and noted that any extraordinary increase due to indexation in excess of 15% of the requirement is adjustable.
With regard to the determination of actual costs and compensation, he stated that once the tariffs are determined on the basis of forecast, the transmission and distribution licensee periodically file once in six months the actual costs, energy dispatch, peak demand, and number of consumers.
“The differences between the resulting actual bulk supply tariffs are adjusted and compensated for distribution licensee,” he added.
On allowed charged, Tilakasena said that according to the Methodology of Charges defined by PUCSL, distribution licensee expect to recover the cost incurred for various service provided to their existing and prospective customers.
While observing that few charges have not been taken into the licensees’ revenue requirement for tariff determination purposes and do not contain a profit element, Tilakasena said that examples of such services are; provisions of new electricity supply, charges for connections and disconnection, testing of meter, and changing of account name and/or tariff category.
“Although a sound statutory and procedural foundation is available for costing and pricing of electricity in Sri Lanka, the end user tariff determination is skewed towards the social benefits such as unrealistic minimum level of service to persons who are unable to afford the full cost or driven by other economical and political requirements,” Tilakasena asserted.
He elaborated that although it needs to accommodate certain trade-offs between these conflicting forces, the licensees have been unduly burdened financially, depriving them of the statutory solutions which are available.
Meanwhile, Energy Sector Specialist Dr. Tilak Siyambalapitiya spoke on achieving sustainable cost efficiency in the electricity industry of Sri Lanka. Questioning if the industry is efficient, he stated that if sales to bulk customers, 44% of the market, cause a loss of less 1.5%, he opined that retail sales should be causing a loss exceeding 15%, where as engineering models say it should be 5%.
“Although the performance is good, there is substantial room for improvement in the industry,” Siyambalapitiya noted. While investments for loss improvements are included in the allowed distribution revenue, Siyambalapitiya once again questioned if the loss targets should be revised.
Shedding light on how the regulatory commission manages the system of costs, in terms of revenue correction mechanisms in bulk supply business, he stated that the changes are too rapid to wait for one year.
For the next six months, from July to December 2013, it would be through forecast generation cost based on storage, forecast inflows, fuel prices, and economic dispatch.
Furthermore he observed that the cost of supply is blind to; the income of the user, purpose of use, and appliance used.
“Electricity is the only commercial good in Sri Lanka where the price is intentionally distorted at the point of sale,” asserted, Siyambalapitiya.
