Debt-ridden CEB to be split into 15 companies

Cabinet approves sweeping reforms proposed by experts’ committee

TThe committee has refloated a longstanding proposal to establish new, independent companies to take over the businesses of generation, transmission, distribution, and sale of electricity

he Cabinet-Appointed Committee on Power Sector Reform has recommended the division of the debt-ridden Ceylon Electricity Board into 14 companies, with a fifteenth entity to take over any residual functions and activities.

The nine-member group has also said that to attract serious investors into the power and energy sector, the Government must “move away from practices such as accepting unsolicited proposals towards a procurement framework that is transparent, fair and competitive”.

“Projects that are procured through direct negotiations are viewed as high-risk projects due to the inherent political risks that come attached to such arrangements,” the report states. “Following a transparent and competitive process will also enable attracting developers with strong repute and experience, which is another key consideration for the long-term financial sustainability of the industry.”

The Cabinet approved the committee’s proposals this week. The Sunday Times obtained a copy of the report. It reveals that the CEB’s dues in foreign currency and rupees were around Rs 333.5bn in August this year--unpaid goods and services bills, outstanding loans, and unsettled dues for fuel and energy purchases.

The Government wants to restructure the CEB. The committee, which was appointed in August, has refloated a longstanding proposal to establish new, independent companies to take over the businesses of generation, transmission, distribution, and sale of electricity.

Thus, there will be an independent system operator, a transmission company and four separate companies to take over electricity distribution and sale. LECO is proposed to be continued without change in its corporate status.

There will be six independent companies to take over the Laxapana hydropower complex, Mahaweli hydropower complex, Samanalawewa and other hydropower plants, Norochcholai coal power plant, CEB-owned oil-fired thermal plants such as Kelanitissa and Sapugaskanda and the Mannar wind power plant.

Another two entities are suggested: one to act as the custodian trustee and to manage the CEB provident fund and the CEB pension fund of employees who choose to shift to these new companies; and another to take over any leftover functions and activities.

The report points to a dire lack of transparency in the CEB. Power sector expansion has hitherto been funded through CEB funds, loans from multilateral and bilateral sources (either concessionary or commercial) and direct Government grants, such as grants for rural electrification.

But the cost of capital funding for large-scale projects is “often opaque” and incorporates multiple terms, it says. Some are reflected on the CEB balance sheet and some in Treasury accounts. It would require a forensic audit to determine the actual cost of financing some power sector assets.

Reform has become urgent also because it is now “highly unlikely” that the Government will be able to continue giving the CEB loan guarantees, given the severe balance of payments, foreign currency issues and “the dismal state of the CEB’s balance sheet”.

The committee has called for a cost-reflective and transparent system of tariffs. But it specifies that a cost-reflective tariff “does not mean passing the costs, with inherent inefficiencies, bad planning and poor financial management to the electricity consumer”.

With regards to the CEB’s “legacy liabilities”, they will have to be dealt with “using innovative financial engineering” so that they don’t stand in the way of attracting investments and achieving financial sustainability.

“One of the strategies proposed is to ring-fence and separate the liabilities placing them in a suitable entity to be settled over a period,” the Committee proposes. A small part of the tariff could be dedicated, initially through a legal provision, to settle over time the debts deposited in such an entity.

“This mechanism should be recognised in the tariff methodology and reviewed in the subsequent years based on the financials of the entities,” the report states.

The repeal of the Ceylon Electricity Board Act of 1969 will allow the sector to be unbundled into generation, transmission, and distribution. New legislation--defining the structure, and functioning of the generation, transmission, distribution, and supply of electricity, system operations and an independent regulatory for solely the electricity industry--is recommended.

The implementation of the new Act will see the assets of the CEB, including its shares in entities such as LECO, Lanka Transformers Ltd and Lanka Coal Company, transferred to the Treasury which will then decide on the best way to monetise them. The proceeds will go towards investment in the electricity industry and easing the debt burden, the Committee envisages.

The implementation of the new Act will see the assets of the CEB, including its shares in entities such as LECO, Lanka Transformers Ltd and Lanka Coal Company, transferred to the Treasury