Birth of LECO

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This is the first in a four part series on Lanka Electricity Company (Pvt.) Ltd.  It’s based on a report titled ‘The Story of Lanka Electricity Company (Pvt) Limited (LECO)’ and released on ADB’s website on 18 July 2022. This the first part revolves round the Birth of LECO. Part two: ‘Justification for the Birth of LECO’, Part three: ‘Privatisation of LECO Stumped’ and the fourth and final part, ‘CEB Falls Behind LECO in Efficiency’.

By 1980 about 25 per cent of the country’s electricity distribution network was managed by local councils and the rest was the responsibility of the Ceylon Electricity Board (CEB), Asian Development Bank (ADB) in a recent publication said.

The report further said however, specific large customers within council areas were also served by CEB.

But the growing management crisis of distribution networks was apparent in the distribution losses (estimated) that stood at 25 per cent of electricity energy in 1970, which then grew to 28 per cent by 1980.

Sri Lanka’s population in 1970 was 12.5 million, but only a dismal eight per cent of households had electricity. Benefits of hydropower development since 1950 and the growing investments in the transmission network were not reaching the public at large.

Large hydroelectric power plants were developed at a brisk speed and by 1980 330 megawatts (MW) of hydropower were in operation. Another 660 MW of hydropower plants were under construction. In certain years, the country reported a surplus in generation and the Government was encouraging industrial customers to use more electricity from the grid.

 Only 12 per cent had electricity

But despite increased electricity generation, even by 1980, only 12 per cent of households had electricity. The transmission network development commenced in 1950, initially at 66 kilovolt (kV) and later at 132 kV and 220 kV. However, the country’s electricity networks needed new investments on two fronts—one to expand the transmission and distribution network to reach the widely dispersed households and small businesses and the other to upgrade the ageing distribution networks dating from the 1930s that were historically managed by municipal, urban, town and village councils.

Despite cheaper hydroelectricity arriving at their doorsteps since 1950, not everything was smooth or proper in these council-managed distribution networks. In 1980, Sri Lanka reported the national transmission and distribution losses in council-served areas and elsewhere, to be 20 per cent of net electricity generation. Major cities such as Kandy, Galle, Jaffna, Matara, Negombo, Moratuwa, and Kotte each had more than 5,000 customers connected in their respective council-managed distribution networks.

The capital Colombo was served first by a company, Boustead Brothers, thereafter by the Department of Government Electrical Undertakings, and since 1969, by its successor, CEB, the national utility.

Even before the national grid was established in 1950, certain councils (mostly municipalities) provided electricity supply to city dwellers using the councils’ own diesel generators. In some towns, electricity was provided for only a few hours in the evening.

When the national grid arrived in the 1950s, diesel generators were disconnected, and grid electricity was purchased by the councils to serve their customers throughout the day. However, most municipalities maintained the diesel generators for some time to be used for peak lopping, in emergencies and in times of power curtailments in the grid.

CEB’s sales composition was 50 per cent to industries, 25 per cent to councils and the balance to CEB’s own retail customers. CEB’s transmission and distribution losses were about 11 per cent, much lower than that in council networks. Customer tariffs of each council network were determined by the chief electrical inspector, a position established under the Electricity Act. As a result, customer tariffs across the councils were different and such determinations rarely followed a systematic approach to provide a reasonable revenue to councils to manage and develop their networks. Poor technical and financial management, inadequate tariffs, and confining their electricity business mainly to low-yielding retail customers caused councils to become cash-strapped.

The required investments to expand and upgrade their distribution networks never materialized. The quality of service was declining, and customers had to register themselves on a waiting list to obtain electricity connections to new dwellings. The distribution networks within the council required upgrading to provide additional connections. For most would-be customers, the network upgrade either materialized very late or never occurred.

The electricity supply was rapidly deteriorating. The supply voltage in some council-owned networks was as low as 110-volt during the evening peak period, against the standard distribution voltage of 230 volts. Some households and shops were believed to keep and use several 110-volt lamps during such voltage drops. These overloaded distribution lines wasted about 50% of its input energy. However, CEB was reluctant to accept President J.R. Jayewardene’s suggestion to take over the councils’ electricity distribution network because, among other reasons, inefficiency was widespread among officials and technicians in the councils.

A committee, appointed in 1983, analysed the situation and identified main objectives of the reorganization. Objectives: 1. Improvement of quality of electricity supply. 2. Reduction of technical and commercial losses. 3. Improvement of billing, revenue collection, and payment to CEB for bulk purchases. 4. Minimization of disparities in retail prices of electricity in different areas. 5. Improvement in courtesy to the public and attention to complaints and 6. Improvement of the quality of management and staff.

 To achieve the objectives, a committee in 1982 analysed six options for future ownership and management. Councils continue to handle their own electricity distribution systems (a “do nothing” scenario). Only a few councils distributed electricity with a satisfactory quality. On the national level, the quality of service was not acceptable.

Weak Management

The potential for the service to be improved within the existing arrangements was minimum, due to the weak management structure of councils. Therefore, this was not a suitable option to achieve the defined objectives. 2. A ‘one-day’ takeover by CEB or 3. A ‘staggered’ takeover by CEB.

 CEB, the bulk supplier to councils, was itself facing a crisis owing to the large-scale exodus of its qualified engineers and other technical staff. CEB had already undertaken a large (Rs five billion) capita development programme on its assets.

 Therefore, CEB taking over dilapidated council networks and thereby doubling its customer base was not an option to achieve the defined objectives. 4. Formation of an “Electricity Distribution Board” (EDB). The formation of a separate EDB offered several advantages. However, due to possible funding problems, difficulties in recruitment and retention of quality staff, and the possible delays associated with required new legislations were considered against this option. 5. Formation of an electricity distribution company (private sector). A private company would have the potential to improve activities of electricity distribution, collection of revenue, improvement of electricity supply quality, prompt attention and courteous response to public, recruitment of qualified staff, against any other option. However, a mindset of a private company to focus on higher profits and to lose the broader considerations of the Government and weak (or nonexistent) regulatory framework to effectively facilitate a private utility weighed against this option.

And, 6. Formation of an electricity distribution company (with CEB, Urban Development Authority (UDA) and council participation). A distribution-oriented company could focus its attention solely on problems associated with electricity distribution and customer care. This company would be able to attract quality staff and manage them efficiently, owing to the flexibility in a company environment. Improvements could be implemented without external interference or financial constraints. Minimising or eliminating disparities in retail prices across council networks would also be possible.

A company with the majority holdings of CEB, with the participation of UDA and councils, could propagate broader policies in electricity tariffs and through its shareholdings, would reflect the objectives of the Government.

 Birth of Lanka Electricity Company Company (Pvt.) Ltd. (LECO) :Considering all the facts, the committee recommended the formulation of a limited liability company, floated jointly by CEB, UDA, and the council’s participation to take over electricity distribution in council areas. The assessment of options was qualitative as no information or precedents were available in similar environments even in other countries.

The Government swiftly approved the committee’s recommendations. With the initial incorporation and establishment of LECO, the Government had to handpick the key persons to lead this unique effort to restructure and reform electricity distribution. Ownership of the New Company LECO’s articles of association allows a minimum of five and a maximum of seven directors. CEB was entitled to appoint five directors, of whom two would be ex officio: the Chairman/men and the General Manager of CEB. UDA was entitled to appoint two directors, one being the commissioner of local government. The first board of directors of the company reflected the importance the Government placed on the company. All members were highly experienced in their professions; four out of six directors had decades of electric utility experience.

LECO’s chief negotiator Shanthi Amaratunga, a chartered engineer, visited each of these councils and successfully managed the discussions, eventually leading to agreements. These networks were then taken over and later rehabilitated using funds allocated under two ADB-financed projects.

 Expansion

But the LECO expansion stopped after taking over 22 councils, even though it was meant to take over more, with 219 councils spread all over the country at the time. This abrupt stop in LECO expansion was mainly because of resistance from CEB. Thus, LECO’s expansion stalled beyond the ‘ADB funded Project II’ area.

Contrary to the belief at the time that the optimum distribution losses were about 10 per cent, a study conducted under the leadership of the system development manager on the direction of the general manager LECO, concluded that losses can be reduced to six per cent based on techno-economic evaluation. LECO moved ahead with the relevant investments to achieve this target. This initiative led to network losses being reduced to eight per cent by 1993 and further reduced to  six per centby 2002. By 2019, LECO had achieved a loss level of four per cent.

H.S. Subasinghe recalled, as the founder Chairman/men, President Jayewardene’s advice to him was to run LECO as a private enterprise. The senior staff of LECO at its initial stage were all ex-employees of CEB, but many with international utility experience. They were persistently working harder to achieve their goals. LECO was especially careful in hiring staff, to handpick the staff to run the company efficiently. Then Power and Energy Ministry Secretary K.K.Y.W. Perera recollected how LECO carefully managed to bring down its costs, while continuing to improve customer service. In the early days, when a customer complained, LECO’s response was to send a technician on a motorcycle with a sidecar that carried a helper and tools.

This was naturally a faster response which customers appreciated. If the problem could not be solved at that level, then a full maintenance team was called. On the other hand, CEB’s practice was to send a truckload of technicians, taking a longer time to attend to the complaints. LECO’s arrangement of technician-on-motorcycle was partly because LECO could not afford to buy many vehicles.

The pricing of electricity to LECO had always been a debatable issue. It was always a negotiated tariff and negotiations were painful for everybody. On one occasion, CEB increased the agreed tariffs, without even notifying LECO, leading to around Rs s500 million of additional cost annually.

 Only Perera had a scientific approach to price calculation. Many objected with various arguments. Perera requested his senior staff to prepare a professional calculation methodology for tariffs, and he even presented a paper at the Institution of Electrical Engineers on ‘Electricity pricing to infuse competition’.

 LECO then made a tariff submission based on the methodology given in the paper. Calculations by LECO and by Perera were ignored. CEB placed its own calculations and proceeded with approval despite resistance from LECO. There were many tariff methodologies, studies and calculations over the years. Perera thought the tariff methodology currently in practice, adopted as a result of the Electricity Act 2009, was by far the best, giving a predefined return to LECO on its assets, to earn adequately to finance the implementation of the approved investment plan. (Next Week: Justification for the Birth of LECO)

By Paneetha Ameresekere