Be careful of
By Viresh Fernando
Sri Lankan government considers its options in dealing with the
country’s increasing shortage of electrical power, it is essential
that all stakeholders engage in an open discussion of the experiences
of other jurisdictions, and be cautious of the advice that is proffered
keeping in mind that “free advice is only worth what you paid
In the United
States, Enron, the world’s largest energy company is now bankrupt,
following disclosure of malpractices including electricity price
manipulations. The State of California, where electricity power
supply was de-regulated, faced huge price increases and rotating
“brownouts” last summer. Nevada, the American state
that is synonymous with gambling, voted overwhelmingly (in November
2002) to not gamble when it comes to electricity privatization.
Water flows through the sluice gates
of Victoria dam
In the U.K.,
a significant over supply of power forced British Energy, the now
privately held former electricity monopoly of the British Government,
to sell power at well below the cost of production. It also invested
heavily in power generation systems in other countries including
purchasing nuclear generating capacity in Canada.
In early December
2002, the British Government confirmed that it was extending a government
loan of one billion pounds sterling to British Power so that the
company could at least temporarily fend off insolvency.
largest province Ontario, the quadrupling of electricity prices
just three months after privatization provoked howls of protest
from consumers, and even led to a open revolt by cabinet members,
who initiated public petitions against their own government!
This not only
forced the ideologically “free-market” oriented Conservative
Party to roll back prices to pre-privatization levels, but also
to bring in even more complex re-regulation of the market.
This about face
by the provincial government to the “energy price crisis”
left the business community feeling completely betrayed. It is now
all but certain that the government will face a backlash from voters
in the forthcoming election, because consumers feel that a tradition
of abundant energy and stable prices has been sacrificed at the
alter of “free-market” ideology.
In the only
other Canadian province (Alberta) that has attempted deregulation,
the government has only been able to continue with its plan by effectively
bribing consumers with huge subsides of electricity rates.
and political considerations
There are at least three interesting questions Sri Lanka
should consider in regard to energy deregulation and privatization.
Should the electric power market be unregulated, privatized or both?
Secondly, should a developing country try free-market solutions
to increase the availability of electric power, when even comparatively
wealthy economies are unable to pull it off?
Sri Lanka not be very cautious in taking advice from Canadians,
when Canadian experience with de-regulation and privatization of
electricity, as in the US, is not by any means a success given the
hasty recourse to effective price capping of electricity that has
taken place in the provinces and states where it was tried.
one can ponder whether any political party can withstand the enormous
risks that are inherent in energy privatization and non-regulation?
It is clear that some form of regulation is necessary in regard
to unique necessities of modern life such as electrical power, water,
telephone services, education and health care.
effectively means the reduction rather than the wholesale elimination
of governmental control of various aspects of the electricity market.
Privatization, on the other hand, means permitting non-governmental
entities to provide services that were previously, solely, undertaken
by the state.
companies such as Aggrekko to generate electricity and sell it to
the Ceylon Electricity Board, Sri Lanka very clearly has both “unregulated”
as well as “privatized” aspects of the electricity market.
The central issue that all Sri Lankans must now address is the type
and extent of regulation and privatization that is economically
necessary and politically justified. A secondary, but nonetheless
important issue, is to whom should the government turn for advice.
studies of “market failure”
The received wisdom is that for deregulation to be successful,
there has to be at least a small oversupply of power at the start
of the process. In Britain, however, there was so much over-capacity
that companies were forced to cut prices below operating costs forcing
them into virtual insolvency.
the opposition to the building of nuclear plants because of safety
concerns, and the opposition to coal fired plants because they would
exacerbate California’s famous smog problem that was affecting
the health of thousands of people, had led to a chronic shortage
of power produced within the state. This forced California to purchase
electric power from plants situated as far away as British Columbia,
Out of state
power is purchased on what is known as the “spot” market,
which even without price manipulation can result in prices up to
ten times the regular price. When rogue companies such as Enron
were able to capture and manipulate the market Californians found
themselves paying as much as twenty times the regular price for
electricity during peak consumption periods.
In 1995, Ontario
residents elected a neo-conservative government which ran on a simplistic
platform of less government spending, lower taxes and privatization.
In 1998, the government passed legislation to break up Ontario Hydro,
its vertically integrated electricity monopoly into three independent
The power generation
sector would own or lease the existing plants and build new plants.
As part of this aspect of privatization a government owned company
named Ontario Power Generation (OPG) now owns 70 per cent of the
generating capacity. It is required to downsize its power generation
ownership percentage to 40 per cent over the next four years. (Prior
to its insolvency, British Energy entered in to a twenty-year lease
to operate one of the nuclear plants).
All the transmission
and distribution was to be handled by a company named Hydro One
Inc., which would for the foreseeable future be owned by the provincial
government. The marketing and sale of power to households and businesses
was to be in the hands of local municipally owned entities called
local distribution companies, as well as privately held companies.
A fourth entity
called the Independent Electricity Market Operator (IMO) was created
to operate the high voltage transmission system and function as
a bourse, matching the demand for power by the resellers and the
power offered to the electricity grid by power produces.
The former monopoly’s
accumulated debt of approximately US$25 billion was passed on to
consumers by imposing a surcharge. Market based pricing of electricity
commenced in May 2002. Almost immediately, the problems associated
with a so-called “free-market” in power became apparent
to market insiders and to the government, but consumers remained
largely oblivious of the consequences.
hot summer and the resulting increase in demand for air conditioning
led to severe shortages of electricity. This forced the independent
market operator to purchase power from high cost power producers
within the province as well as from neighbouring provinces and from
the United States, pushing retail prices to over four times the
former regulated price. However, because of quarterly billing procedures,
consumers only became aware of the enormous price jumps only in
late October of this year.
When the Ontarians
saw the effects of privatization on their electricity bills, the
reaction was instantaneous and intense. Working people, senior citizens
(retired people), business owners, trade union groups, newspaper
editorials, opposition as well as government members of the provincial
legislature, and to every body’s surprise, even some members
of the cabinet of ministers, petitioned the provincial premier to
re-introduce price regulations.
public pressure, the government announced that energy prices would
be frozen at the pre-privatization levels going back to the initial
date of privatization in May 2002, and going forward till at least
the year 2006. Thus, the government abandoned significant privatization
of the retail power market for the foreseeable future.
retreat has at least two significant consequences. By keeping the
cost of power artificially low, it has taken away any incentive
consumers may have had for conserving electricity. Secondly, by
signalling that it would actively intervene in the market when it
was politically expedient to do so, the government created a major
disincentive for private sector players to invest in more capacity.
imperatives for Sri Lanka
Sri Lanka has a chronic shortage of electricity. Its current
thermal power sources are dependant on highly volatile price of
petroleum-based inputs. Despite promises to the contrary, the proposed
coal fired plant in Trincomalee will be a source of significant
pollution and could have negative effects not only on the health
of area residents, but perhaps more importantly for the government,
on the recently revived tourism industry. Most importantly, the
government is strapped for cash.
of supply of power is essential to the development of the country.
Sri Lanka is not in apposition to turn to neighbouring jurisdictions
to purchase power at times of peak demand. The challenge is to find
solutions that respond to all of these issues.
energy sources could compliment traditional forms of electricity
generation. The potential of solar power, proposed over twenty years
ago, has not been fully exploited. Bio-mass as a source of power
has received little practical attention in Sri Lanka. The use of
wind turbines is another complimentary source of power.
account for up to thirty per cent of energy in some Scandinavian
countries, and are also popular even in the energy abundant Canadian
province of Alberta. Several investors from Europe and North America
have expressed interest in investing in this method of electricity
generation for Sri Lanka, because of the two thousand mile coastline.
In the larger cities, up to ten megawatts of power could be generated
from municipal garbage in a non-polluting manner.
in dealing with the acute problem of the shortage of sanitary landfill
sites in urban areas, garbage to power incineration would also alleviate
the negative health and hygiene issues associated with the landfills.
With a past
of political and economic colonialism, Sri Lankans have to be cautious
with “experts” who tend to be driven by ideology with
little appreciation for local social, economic and political realties.
Sri Lanka can marshal adequate expertise locally, and from the ex-patriot
Sri Lankan communities abroad, and not fall prey to “expert
colonialism” in dealing with the energy crisis.
A source of
reliable and affordable power is a matter of national security and
should not be subject to pro western investment rules of the World
Trade Organization, the General Agreement on Trade and Tariffs and
the imminent signing of free trade agreements with the United States
as well as other countries.
Using its own
expertise Sri Lanka should approach the Asian Development Bank,
and the World Bank for the necessary long term capital loans for
the development of the energy sector. Part of the money ought to
be re-loaned to companies that have majority Sri Lankan ownership
to implement renewable and non-polluting power generation schemes
that are consistent with the Kyoto Accord. Some of the money ought
to be used to initially subsidize the price of power to control
the cost of living with subsidization to be phased out over a long
time. An ethical watchdog such as Transparency International could
be invited to perform annual audits on the proper utilization of
By making choices
that are imaginative and progressive Sri Lanka can become exemplary
as a developing country addressing its current power shortages and
is a Toronto based journalist, lawyer, economist and management
consultant. He was an advisor to a former member of the Canadian
Federal Cabinet, and has been involved in politics at the municipal,
provincial and federal levels. He can be contacted at firstname.lastname@example.org.