LECO Privatisation Stumped

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This is the third in a four part series on Lanka Electricity Company (Pvt.) Ltd.  It is based on a report titled ‘The Story of Lanka Electricity Company (Pvt) Limited (LECO)’ and released on the ADB’s website on 18 July 2022. The first part, published previously revolved 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’.

In 1996, the Government planned to sell a majority stake of Lanka Electricity Company (Pvt.) Ltd (LECO) to a foreign company, an initiative of the then Ceylon Electricity Board (CEB) Chairman Dr. Leslie Herath, the Asian Development Bank (ADB) in a recent publication said.

The report titled ‘The Story of Lanka Electricity Company (Pvt) Limited(LECO)’ and released on ADB’s website on 18 July 2022 further said, his idea was to sell LECO to a foreign company, reportedly for a sum of Rs 3 billion (about US$55 million at the time).  CEB has a 51 per cent stake in LECO.

However, LECO management expressed its desire to sell LECO shares to the public, though many did not agree with that idea either. Amid all this, CEB engineers went on strike, protesting against the “selling off LECO.” The strike caused a national blackout that lasted for nearly two days. With the strike, the idea of ‘selling off LECO’ disappeared into just a memory. With electricity reforms high on the agenda in 2002, there were various proposals to restructure the entire electricity industry.

As in the case of most new institutions at the start, there were many challenges. LECO did not have proper vehicles to transport poles at that time. The poles were carried on rented bullock carts. After the takeover process, several distribution lines were vandalised, possibly by persons who did not like the LECO takeover. LECO gradually addressed such shortcomings and obstacles and emerged stronger to serve the customers.

LECO continued to hire staff during times when there was a moratorium on hiring for mainstream State-owned enterprises, and successfully defended such actions. At the same time, LECO never poached on CEB staff, but on the other hand, it allowed its own staff, mainly engineers, to join CEB if they so desired. K. K. Y. W. Perera, Chairman of the Committee on Electricity Distribution Reforms, responsible for the formation of LECO, spoke on the issues LECO faced initially to rehabilitate or replace the distribution network, which needed long periods of power interruptions. The dilapidated distribution network had to be replaced with new lines and transformers.

Power outages

Obviously, customers were unhappy over prolonged power outages, and complaints moved right up to the political hierarchy. At least on two occasions, LECO’s actions to interrupt electricity supply during the rehabilitation process were criticised in Parliament. On one occasion, LECO was criticised for disconnecting supplies from those using electricity illegally to serve festive illuminations. On the second occasion, the complaint was more general, that it was unnecessary for LECO to pull down the network and build a new one because Sri Lanka was poor and underdeveloped and, hence, does not need such “gold-plated” investments on networks, the protestors said. However, as service improvements were achieved due to rehabilitation with the correct strategy, such complaints gradually turned to compliments on LECO’s performance. K. K. Y. W. Perera continued on the complexities of taking over council networks in full. In some cases, LECO had difficulties in making its network geographically contiguous, because some of the geographical areas under a particular council had been already managed by CEB due to inability of the council to serve those areas. Therefore, the question was if the council network was transferred to LECO, should the CEB-managed section within the council territory be handed over to LECO too?

Most often that did not happen, and even today, there are a few local councils in which certain segments are served by LECO and others by CEB. This cohabitation, though undesired, has not caused any problems, other than perhaps 33 kV (CEB) and 11 kV (LECO) lines laid in the same area which could have been avoided if a single distributor had the total control. H.S. Subasinghe, the first Chairman of LECO added that the two institutions agreed to exchange their networks in two towns for reasons of technical convenience and to improve network reliability through better connectivity.

 LECO fulfilled the agreement, but CEB did not. Perera recalled, “The aim was to have independent distribution units to manage the industry, and five distribution units were proposed to be established to implement the reforms. LECO was to be either one unit or be shared across the five units. The plan was to form a company for each unit. In other words, the entire distribution system in Sri Lanka was to be restructured into five government-owned companies similar to LECO.”

 CEB agreed and proceeded with an internal reorganisation to match with the planned restructuring, by effectively creating four distribution units, with all the infrastructure and staff, creating many new managerial positions. The restructuring process was halted in 2004, until limited restructuring was legally established in 2010 with the new Electricity Act 2009. To date, LECO’s service area remains what it was at the commencement of reforms.

When Perera was appointed the General Manager in 1990, the rehabilitation projects were in full swing and they needed equity and project management staff, and LECO was experiencing financial difficulties. LECO had an outstanding balance of many millions of rupees to be paid to CEB, who provided supply in bulk to LECO. Those were very hard times for LECO, but within three months into his tenure, as a priority, LECO settled all the arrears to the bulk supplier, CEB.

Losses

LECO inherited the local council networks with high technical and commercial losses. Losses may have exceeded 30 per cent, but official records indicated 23 per cent in 1984. LECO persistently worked toward reducing all types of losses: technical and commercial, including metering errors, accounting errors, and theft. Whenever council networks were taken over, LECO overall losses increased. With well-planned network replacements supported with loans from ADB, LECO was able to progressively reduce distribution losses. LECO required 16 years to reduce distribution losses from 23 per cent to eight per cent and a further 20 years to reduce from eight per cent to four per cent. Key interventions for these achievements were installation of new metres to customers, construction of new 11 kV feeders and distribution lines, installation of new distribution transformers, and fixing meters to all distribution transformers. Furthermore, the use of aerial bundled conductors for low-voltage distribution eliminated electricity theft off the lines. Therefore, nontechnical losses of LECO by way of theft off the line are almost zero.

LECO purchased electricity at the bulk supply tariffs determined by CEB, the bulk power utility. However, CEB was also the main distributor with a higher market share, currently nine times that of LECO. The tariff for bulk sales to LECO was expressed in terms of retail energy sold with an allowance of 20% to account for energy losses in the LECO network at that time. Network losses were reduced gradually owing to meticulous planning, management, and monitoring of the network. However, LECO was compelled to sell electricity below cost to low users and expected to recover such internal subsidies from high users.

 It was impossible for LECO to generate surplus cash to meet its operational costs and debt repayment commitments. This was because the customer mix was biased toward lower blocks of consumption. The company had to purchase electricity from CEB, but sell at prices lower than CEB’s prices to its own customers. Interestingly, CEB itself determined the bulk supply tariff to LECO. Bulk supply tariff to LECO was determined after constant bargaining and disagreements with CEB. Without a proper electricity pricing methodology to allow cost recovery, LECO was suffering financial losses. CEB wanted LECO to charge its customers at a higher retail tariff and continue to purchase at a higher bulk supply tariff. However, the government insisted that the same retail tariffs be maintained for both CEB and LECO customers, based on its policy of establishing a uniform national customer tariff across the country. The Electricity Act No. 20 of 2009 provided the framework to establish a tariff methodology. With this introduction, all distributors in the country (CEB and LECO) receive electricity, in principle, at the same bulk supply tariff.

Profits

LECO has maintained remarkably good profits since 2011. LECO’s operational asset base is SLRs10 billion and the return on assets is limited to 2%. Therefore, the allowed profit from electricity distribution business is estimated to be limited to about SLR 250 million per year, by 2018.

LECO expects the upcoming investments to be compensated through the distribution allowed revenue. The distribution revenue currently stands at Rs 3.20/kWh and is estimated to increase below the inflation rate.

LECO Operations in 2020 comprised seven  branch offices, 23 customer service centers 2,546 distribution substations 1,887 bulk supply substations 1,034 km of 11 kV distribution lines 3,806 km of 400/230 V distribution lines 1,580 GWh sales to customers, 66 GWh purchased from rooftop solar PV 8,507 customers with rooftop solar PV 600 and 1,521 employees.

LECO’s articles of association allows the company to invest in other ventures and LECO has active investments in the following: (i) Ante LECO Metering Company (Pvt) Limited: 70% equity share (ii) West Coast Power (Pvt) Limited: an equity partner with a 18% stake (iii) LECO Projects (Pvt) Limited: a fully owned subsidiary Ante LECO Metering Company is the only energy meter manufacturing facility in Sri Lanka, established by LECO in a joint venture with Ante Meter Company of China.

Sri Lanka imported electricity meters until 2018. Now LECO manufactures the full requirement at its factory in Sri Lanka.

The company recently expanded the manufacturing facility to produce high-quality smart metres. Metres are tested and certified at KEMA laboratory, The Netherlands, with complete type testing according to standards International Electrotechnical Commission (IEC) 62052-11 and IEC 62053-21.

West Coast Power is an independent power producer, with a capacity of 300 MW and providing electricity to the national grid. The company is owned by several shareholders in which LECO owns an 18 per cent stake. LECO Projects provides a spectrum of services for LECO as well as for LECO clients ranging from electricity distribution projects to beyond-the meter services. Support to Accelerate Deployment of Rooftop Solar Power LECO commenced promoting rooftop solar photovoltaic (PV) connections since 2008. By the end of 2020, LECO reached 8,507 customers with 50 MW of connected solar PV capacity compared with CEB’s 20,341 customers with 275 MW of solar rooftop installations.

 To promote rooftop solar PV among household customers, LECO offered a financing package, a loan of Rs1.5 million, amounting to 75 per cent of the solar PV system supplier’s costs, repayable over seven years at an interest rate of 8 per cent per year, when commercial borrowing rates were 12 per cent. LECO has been participating in the ADB-financed Rooftop Solar Power Generation Project since 2018. The project aims to disburse D50 million through commercial banks to build about 60 MW of rooftop solar PV capacity at customer premises.

Upgrades for Improved Reliability Early assets of LECO in areas of councils taken over in stage 1 and rebuilt by 1987 have now come of age. Thirty-five years of service is a good time to review and replace assets, and to address problems caused by aging, the ever-changing built-environment, and customer expectations. Technology has advanced and distribution automation is the next logical improvement to serve customers better. LECO planned to progressively improve the reliability of supply, but the progress is not satisfactory. Key challenges are much of the distribution assets are over 30 years old, customer density has increased beyond the forecast levels, and space available to expand the distribution network is limited. In 2012, unplanned outage duration of the LECO network alone was 9.1 hours per customer, which had risen to 21.7 hours per customer in 2019. The increase had been persistent over 2016–2019. Outage duration owing to network upstream of LECO and planned outages have both slightly declined over the same period. Therefore, LECO has the challenge to progressively reduce the total outage duration to less than 10 hours per year per customer, as expected of a modern utility. Most unplanned outages are caused by human activity, animals, and weather-related events.

( Next Week: CEB Falls Behind LECO in Efficiency)

By Paneetha Ameresekere