Sri Lanka’s state-run power utility is in financial trouble because politicians have made wrong decisions, a government minister said as the utility was issued a license by a newly set up regulator.

"The Ceylon Electricity Board is in trouble because decision that should have been made by engineers have been made by politicians," plan implementation minister P Dayaratne, himself a former energy minister, said.

"If not the CEB would have been a much more financially stable institution."

The minister was speaking after Sri Lanka’s CEB was issued a license by the Public Utilities Commission of Sri Lanka (PUCSL) under a new regulatory environment, reported LBO.

Officials said the law was passed through with the greatest difficulty despite opposition from a "certain political party" – a reference to the Marxist-nationalist Janatha Vimukthi Peramuna which is against power sector reform.

Interference

Sri Lanka’s politicians have interfered for years to drive the utility away from its long-term least cost generation plan which advocated a shift to coal after the island’s hydro potential ran out.

But partly egged on by environmentalist and religious lobbies, Sri Lanka’s politicians, including heads of state, have blocked coal plants and pushed the utility to expensive liquid thermal plants and ‘emergency procurements’.

"Had we gone for coal power earlier at the time that it was contemplated this situation would not have arisen," power minister John Seneviratne said.

"But now we have to face a situation where we have to generate 65 percent of our requirement from fuel. So the cost is high."

The latest in a series of controversial decisions is a combined cycle project in Kerawalapitiya, orginally a design build transfer project for CEB, which has attracted widespread criticisms for being expensive and which delivers less capacity than promised.

The CEB engineers have even refused to work on ‘unsolicited’ proposals that are pushed on the utility one after the other.

The CEB is now building a coal plant with Chinese help after public and political opposition blocked a coal project from Japan, a country with strict environmental regulations.

The Central Bank said the average CEB tariff was 13.22 rupees per unit, but its cost was 14.94 per unit. The cost of thermal generation was 19.17 rupees a unit.

After mis-managing the generation side, Sri Lanka’s politicians also resist tariff increases to score brownie points with power users.

Fragile

In 2008 the CEB had made an operating loss of 35 billion rupees, and owed 57 billion rupees to the Ceylon Petroleum Corporation and independent power producers.

"This fragile financial position of the CEB highlights the importance of quickly dealing with this problem, as otherwise the CEB may have to be bailed out by tax payers’ money," the Central Bank said.

In March 2008 a 30 percent fuel surcharge was added to recover costs. In May it was waived for religious users. In the most recent budget a 30 rupee discount was given to low user households.

An attempt to increase tariff last year was tempered by courts after some users opposed it.

The fuel surcharge was waived for some industries under an ‘economic stimulus’ package.

By giving subsidized power to export industries, the burden is passed to domestic citizens either through taxes on other goods or through inflation, if money is printed for the Treasury.

The CEB is also severely cash-strapped and is unable to repay its loans. Long-term loans were 64 billion rupees in 2008. The Central Bank says CEB’s long-term loans were directly paid by the Treasury last year.

In Sri Lanka only 83 percent of households have electricity. When the Treasury takes over CEB losses, rural households who are not even connected to CEB also bear the cost through taxes or inflation.