Ceylon Electricity Board Pays Billions To Private Power Suppliers Illegally While Ministers Sleep On The Job
For the Deputy General Manager Energy Purchases of the Ceylon Electricity Board, (CEB) it is an interdiction order for his efforts to follow procedure and minimise unnecessary expenses. For Aitken Spence, the parent company of Ace Power Embilipitya (Pvt.) it is a windfall that will boost its revenue in billions of rupees.
Deputy General Manager, Energy Purchases, Sujeewa Abeywickrama was interdicted on July 2, 2018. The charges against him ranged from not carrying out assigned duties, not following directions given by the General Manager, to conducting his personal business and being an accused in several court cases. Mr. Abeywickrama claims that the charge is not a criminal offence and that he is accused of is being the owner of a bus.
Whatever the reason for the court cases may be, and other accusations, his troubles at the CEB seems to have begun because he objected to making payments for the continued extension of privately owned power plants without the approval of the Public Utilities Commission of Sri Lanka (PUCSL), the Power sector Regulator.
On April 5th this year, the (CEB) signed a further extension to its Short Term Power Purchase Agreement of March 17, 2017, with Ace Power Embilipitya (Pvt.) an Independent Power Producer (IPP) owned by Aitken Spence PLC. The extension, according to the agreement will be in effect for a three year period, from the date signed, unless either party terminates the agreement, or the CEB acquires the plant.
It was in March 2016, that the Cabinet of Ministers first approved the purchase of three retired power plants owned by Independent Power Producers, one of which was Ace Power Embilipitiya. The approval came with the provision that the CEB’s negotiations with the IPP’s should take into account payments already made to the companies in the form of “Capacity Charge”, which would cover the capital investments the companies had already made. Capacity charges, according to sources Counterpoint spoke to, must be paid to the company owning the plant, even when it is not in use.
The other two power plants are Heladanvi Ltd. owned by Hemas Holdings and Ace Power Generation Matara (Pvt.) Ltd another company owned by Aitken Spence PLC.
When the Cabinet gave its nod at the end of March 2016 to obtain power from Ace Power Embilipitiya (Pvt.) Ltd. for a period of one year until the power plant is purchased, it was on the stipulation that the same terms and conditions the CEB and the company had agreed on originally in May 2003 should apply. The 2003 one, was a ten year agreement and the tariffs had been structured in a manner that the investments of the IPP’s would be recovered within that period itself. Informed sources told Counterpoint that the total investment made during the original agreement has been recovered by Ace Power Embilipitiya (Pvt.) Ltd. The Unit price had been agreed on to include all loans and interest and the CEB has paid approximately 10 Billion Rupees per annum to the IPP. This rate included Rupees 1 billion as cost of capital (i.e. loan and interest.).
Therefore, the renewed PPA’s the CEB entered into with these IPP’s should have a zero component of loan repayment. However, the agreements signed in 2016, 2017 and in April this year has included this component to the unit cost, resulting in a duplicate payment to Aitken Spence and it was on a short term emergency basis. With the 2018 agreement signed for a three year period, the CEB will be paying Ace Power Embilipitiya (Pvt) Ltd. approximately Rs. 36 billion rupees of which approximately 5.5 billion rupees will be duplicate payment for loan and interest informed sources revealed. According to section 11 of the newly signed PPA, “All the parameters used for computation of the payment at the expiry of the Term of Principal Agreement shall be used for the payment during the Term of this Agreement….”,
For Aitken Spence PLC, which had seen a drop in revenue in its power generation sector, the renewal of the PPA since 2016 meant a jump in its earnings. Its second quarter earnings for 2017 showed that its strategic investment segment enjoyed an increase of 175%, from Rs. 4.85 billion to Rs. 7.65 billion. Aitken Spence has stated that the increase in revenue is mainly on account of the resumption of activities at the Ace Power Embilipitiya, following the renewal of the Power Purchase Agreement (PPA) by the Ceylon Electricity Board(CEB).
Meanwhile the 2017 annual report of the Ministry of Finance states that while the CEB sold 13,249 GWh in 2017, which is a 464 GWh increase from 2016, its revenue has increased by only about 3% ( to Rs. 223,731 million) for the time periods mentioned. However, its operational costs had increased in 2017 to Rs. 272,962 million from Rs.231, 147 million the previous year, incurring a Rs. 49,231 million loss, which is a 240% increase from 2016. The report adds that “in the absence of implementing a cost reflective pricing mechanism, CEB had to manage its liquidity requirements through borrowing from state banks.’ The government too had to step in, ‘transferring Rs. 6 billion to cover their non-commercial obligations.”
With the CEB dragging its feet over purchasing the plants and facilitating IPP’s to make huge profits, cabinet gave a further extension of six months to the March 23, 3016 agreement with Ace Power Embilipitiya on January 10, 2017, for a supplementary PPA, to extend the March 23, 2016 agreement by another six months. A similar extension to the original agreement with Ace Power Generation Matara, (Pvt.) Ltd. signed in August 2000 was also granted on January 10. The extensions were with the expectation that the power plants would be purchased.
However, on January 31, 2017 cabinet had allowed a one year extension for the agreements with the provision that the power plants are purchased within six months. The cabinet had instructed that the observations of the Ministry of Finance calling for a payment method that is most beneficial to the CEB be identified in the purchase of the said plants.
The payment methodologies adopted indicate that the cost is fully paid for within the ten year period the plants were originally obtained.
The April 5, 2018 PPA with Ace Power Embilipitiya was signed following a letter from the Secretary, Ministry of Power and Renewable Energy to the CEB, stating that Cabinet Memorandum of March 15, 2018 had been approved granting an extension of the agreement for three years.
The tussle of the payment to Ace Embilipitiya began when the DGM Energy Purchases pointed out the irregularity of signing an agreement and requesting payments when the IPP had not obtained clearance from the Public Utilities Commission of Sri Lanka (PUCSL). The monthly invoice for the period April 6, 2018 to April 30, 2018 from Ace Power Embilipitiya (Pvt.) Ltd was approximately Rs. 840 million.
Set up in 2002, the PUCSL is tasked with policy formulation and regulation of water supply, electric power distribution, other public utilities and petroleum resources.
According to documents in our possession, on being informed in March this year that the Cabinet of Ministers had approved extensions for all three IPP’s, DGM Energy Purchases had, by letter dated March 29, 2018, requested Ace Power Embilipitiya (Pvt.) Ltd., Ace Power Generation Matara (Private) Ltd., and Asia Power (Pvt.) Ltd, to obtain the necessary license or at the least ‘no objection” letters from the PUCSL which would enable the CEB to enter into PPA’s with the said companies. PUCSL has not granted the approval due to non- compliance with section 43 of Sri Lanka Electrcity Act which requires that CEB follows competitive tender procedure in selecting power plants to purchase electricity. Counterpoint reliably learns that the Agreement with Ace Embilipitya has been entered into without following the tender procedure as per the Act.
In a letter from CEB Chairman to the PUCSL Chairman on April 5, 2018, he informs the latter of their need to go ahead with extending the PPA with Ace Power Embilipitya, ‘considering transmission constraints in the southern part of the grid and the anticipated power shortage of the future….”
Documents with Counterpoint show that as recently as June 25th, the DGM had informed the Additional General Manager (Transmissions) of the CEB of his inability to approve the invoice for April 6 to April 30, 2018 as the legal requirement for the Agreement had not been fulfilled, by obtaining approval from the PUCSL. The letter refers to the fact that to do so would be in violation of certain stipulations of the Electricity Act. His letter only earned him a handwritten note from the AGM Transmission, “Since the said power plant is in operation at the request of CEB, pl.(please) make sure to pay the due amount on time without embarrassing the CEB.”
In fact, on June 29th, Mr. Abeywickrama along with two other members of his unit, Chief Engineer A J De Z Wickramaratne and Electrical Engineer H W Amaradiwakara, had appealed to their Union, the CEBEU to intervene in the matter, fearing repercussions if payments were approved while clearance was yet to be obtained from the PUCSL.
Despite all that, he was interdicted on July 2, 2018.
Sub Section 43 (1) of the Electricity Act reads, “Subject to the provision of section 8 of this Act, no person shall proceed with the procuring or operating of any new generation plant or the expansion of the generation capacity of an existing plant, otherwise than in the manner authorized by the commission under this section. Sub section 6 (b) also states, “ a new generation plant or an expansion of the generating capacity of an of an existing generation plant is being developed in accordance with the Least Cost Long Term Generation Expansion Plan duly approved by the Commission by a person who had obtained the approval of the Cabinet of Ministers………………” and goes on to state that the “the transmission licensee shall be required to negotiate with the person concerned to satisfy itself, that such person is capable of developing the new generation plant or the expansion of the generating capacity of an existing generation plant, as the case may be, in compliance with the technical and economical parameters of the transmission licensee and is capable of selling electrical energy or electricity generating capacity at least cost, and forward its recommendations for approval to the Commission, along with the draft Power Purchase Agreement or the draft Standardized Power Purchase Agreement, as the case may be, describing the terms and conditions of such purchase.”
In further contravention of the Act, the PPA’s have been signed without calling for tenders informed sources said, thus excluding any other eligible and competitive bids.
As well, in question is the CEB’s tardiness in purchasing the necessary power plants as approved by Cabinet. While the IPP’s in question have already recovered their initial investments as per the original agreements, continuing this type of agreement results in the CEB having to pay the companies involved a capacity charge, whether or not the plant is used. However, if the plants are purchased, this cost will automatically be eliminated.
Interestingly, on a prior occasion, (April 2016), the PUCSL had written to the CEB denying their request to procure electricity on a short term basis. In that instance too, the IPP for which approval had been sought was Ace Power Embilipitiya (Pvt.) Ltd. Listing several reasons for withholding their approval the PUCSL which stated that section 43(4)(c )(ii) of the Sri Lanka Electricity Act has been violated, informed the CEB that’
- The requested emergency power plants are not provided for in the Least Cost Long Term Generation Expansion Plan.
- Approval of the Commission needs to be obtained prior to submitting such proposal to the Cabinet of Ministers for approval.
PUCSL also observed that the CEB’s report to the Cabinet Committee on Economic Management dated March 28, 2016 requested the procurement of 55MW of emergency electricity to ensure a total of 135MW. Meanwhile the CEB’s application for approval of a PPA date April 6, 2016, and submissions made to the PUCSL on April 5, 2016 and April 19, 2016 respectively requested a total of 155MW, making it 20MW more than what the CEB had justified to the Cabinet and the Cabinet Committee on Economic Management
Meanwhile, Dr. B MS Batagoda, Secretary, Ministry of Power and Renewable Energy, in a letter to the Chairman, CEB in June of 2017, urged the immediate calling of tenders for a number of solar or wind powered plants and barges, so that the 2015-2034 Long Term Generation Expansion plan would be on target. As many as 13 such plants are scheduled to be commissioned in 2019 and 2020. His letter, which asked the Chairman to familiarize all senior CEB staff on the urgency of the matter, pointed out that the Cabinet sub -committee on Economic Management had been informed by the PUCSL that progress of implementing the LTGEP was very slow.
However, it seems that CEB’s senior management is more interested in continuing with the extensions, ignoring the instructions of the Cabinet of Ministers and the Secretary of the Ministry and punishing a member of its staff for attempting to play by the rules.
The million or billion rupee question is, why?