Marie Tyl
The institutional and legal setups of the Lebanese power sector define the decision making mechanisms, and identify the role of different stakeholders from the national electric utility, Electricite du Liban (EDL), to the Council of Ministers. In their current form, such laws and regulations do not grant EDL the tools and capabilities that would enable it to operate at the required standards and deliver reliable 24/7 electricity. Nor do they entice the utility to optimize its performance. Most importantly, the current setup largely exposes the power sector to political influence and their short-sighted calculations, which leads to the inefficient management of human resources, among other adverse results.
Limited Powers and Exposure to Political Influence
EDL was created in 1964 when the Parliament passed a law that merged all existing electricity offices and agencies as the government strived to develop Lebanon’s power sector. The 1964 law defined the structure of EDL and granted it the status of a “public establishment”, that is an entity that is governed by a specific set of laws, having a different status than that of a corporation. This status takes away a substantial share of EDL’s decision making power required to efficiently run its assets. The law additionally grants a public establishment “financial and administrative independence” and even makes it mandatory for the establishment to have a Board of Directors, a critical piece in an organization’s governance that shields the executives from the influence of shareholders. Yet, the law puts a number of restrictions on the role of the Board of Directors, effectively reducing its power to the profit of the government.
For example, all decisions by the Board of Directors regarding the annual budget and annual report must be approved by the minister of Energy and Water Resources before they come into force. The budget and other several planned investments also require the approval of the Ministry of Finance – regardless of EDL’s resources and its ability to finance these investments.
Not only does this allow the government to retain influence over EDL, but also simple investment decisions or human resources policies, that would only require approval from a Board of Directors in corporations, must be vetted by the Council of Ministers, which slows down the process. The setup also fails to effectively shield EDL from potential meddling by politicians into its internal affairs.
In addition, EDL has no clear performance evaluation of its wide-ranging activities. The government’s approach to provide the utility with a “blank check” at the end of each year to close its deficit does not impose the right amount of fiscal discipline on EDL.
Inefficient Management of Human Resources
The management of human resources is emblematic of the power sector crisis, as it illustrates the consequences of the existing legal framework on delivering 24/7 electricity.
The current setup requires EDL to hire staff through mechanisms similar to those used to hire civil servants for the public administration. Applicants to vacant positions in the public administration are required to take an exam administered by a dedicated government body – the Civil Service Board – which sets the conditions to recruit staff. This considerably slows down the recruiting process.
The Council of Ministers also holds the power to decide on EDL’s human resources strategy and can withhold the recruitment of staff. In fact, the government took the decision to freeze the hiring of staff in 1988 causing the company to be understaffed . The current EDL organization chart requires a body of 5,027 employees to run the company; of these positions, more than 50% are currently vacant. And the situation could worsen as a large number of existing employees reach retirement considering that the average employee’s age at EDL is estimated to be well above 50 years old.
Furthermore, EDL has to deal with a large number of “political employees and unqualified workers” as they are referred to in the Ministry of Energy and Water June 2010 Policy Paper. These are also referred to as “phantom personnel” by analysts, that is an employee occupying a position (and getting paid) without fulfilling his or her job responsibilities. A potential long-term solution to the situation described has been tied to the broader agenda of the power sector reform. Some of EDL’s activities, mostly bill collection, were outsourced and contractors were called to fill existing positions in EDL as the government sought to avoid the recruitment of full-time employees. However, such a solution is only temporary and cannot be considered for the long-term. These contractors carry out the same work as employed civil servants, yet they face job insecurity, are paid lower wages, and put up with difficult work conditions – especially those assigned to bill collection. The dissatisfaction of contractors with this precarious situation was recently brought to the public in March 2012 as they went on a strike which directly affected the operations of the power sector.
Consequences on the utility’s financials
Another consequence of the existing framework is the deficit situation at EDL and the sub-optimal operation of assets. The tariff structure does not cover the electricity production costs and some 25% of the electricity delivered to customers is not even billed, which requires regular intervention from the Treasury to close the utility’s deficit. In addition, EDL incurs high costs from the large margins granted to concessions and inadequate fuel procurement policies.
1. Low electricity tariffs and inefficient subsidies
EDL’s balance sheet is clearly in deficit and the utility does not have sufficient revenues to cover its operations and maintenance activities, let alone support additional investments in the electricity infrastructure. EDL makes chronic losses amounting to billions which are ultimately paid by the government’s Treasury. The cause of this structural deficit is twofold: excessive costs mainly tied to large dependence on oil-based fuels and insufficient revenues.
Even though electricity tariffs were increased once in the mid-nineties in an effort to provide EDL with additional revenues, no other tariff adjustments were approved by the government since then. Any increases in the electricity bill could not be easily justified as electricity supply remained highly unreliable. Additionally, EDL has no power to revise the rate at which it sells electricity. As a result, current tariffs are still based on a price of crude oil of around 25 USD/barrel, while the Brent Crude barrel was exchanged at an average of 111 USD in 2011. In fact, tariffs decreased in real terms, as they were not even revised to account for inflation.
Therefore, current tariffs represent a substantial subsidy on electricity consumption in Lebanon. Subsidies could be required to ensure that EDL successfully meets its public service mission of ensuring all citizens can access a reliable source of electricity at reasonable prices. Subsidies can be used for example to support non profitable investments in remote areas or to guarantee the poorest households can access minimum volumes of electricity at affordable prices. However, all EDL customers get a subsidy under the current scheme, regardless of their level of income. Even worse, the inverted tariff block benefits the largest – and usually richest – consumers . EDL’s fee structure is progressive in appearance, meaning the price of a kWh of electricity billed keeps increasing as a customer consumes more electricity. However, since fixed costs have a large share in the final bill (annual subscription fee and taxes), it is in fact regressive: when total costs are factored in and divided by the electricity consumption, the cost per kWh decreases with consumption. In other words, the less you consume, the bigger the effective charge per kWh you pay. This structure also fails to incentivize largest consumers to limit their consumption.
2. Significant losses from low rate of bill collection
Theft of electricity is frequent in Lebanon, where illegal connections to the distribution lines first flourished during the civil war and still remain to this day. In addition to illegal connections, many consumers refuse to pay their bills. Both phenomena build up to 25% of the production that gets delivered for free. After technical losses during electricity transmission and distribution are factored in, 40% of EDL’s electricity production does not yield revenues to the utility.
Although some efforts were put in recently to reduce non-technical losses (a World Bank report notes a 3% decline between 2004 and 2005), investments in a modern and fully computerized billing system coupled with a reorganization of the tariff grid and effective enforcement of the law are needed to effectively tackle bill collection. Infrastructure modernization is also required to reduce technical losses.
3. Considerable margins to distribution concessions
Existing contracts with concessions are also another element inherited from previous government decisions. Although EDL maintains a monopoly on electricity generation, all electricity produced is not distributed by EDL; private concessions operate in Zahle, Bhamdoun, Jbeil, and Aley managing 82,000 subscribers – they purchase electricity from EDL and are in charge of the distribution process, meaning the delivery of electricity from transmission lines to end-users. These concessions provide a service level considered to be above EDL standards in the rest of the regions. However, the terms and conditions of purchases from EDL are particularly favorable: a special tariff of 5 US¢/kWh is applied to these concessions, which then collect bills from consumers with an average tariff of around 10 US¢/kWh. This grants them a comfortable margin of approximately 5 US¢ for every kWh they distribute – that is, three times what distribution margins are in benchmarked markets according to a World Bank report. The Bank’s report also points out that “it is unclear how this agreement is regulated and by whom” and puts the cost estimates of such favorable conditions at approximately USD 43.4 million every year.
4. Inadequate fuel procurement policies
Finally, fuel procurement decisions do not optimize the utility’s costs. EDL incurs large fuel costs which are driven by the large dependence on oil-based fuels.
A number of thermal plants that are currently fuelled with diesel were originally designed to run on natural gas and could be converted to natural gas which would reduce fuel costs. This change was planned several years ago, but natural gas supply was only secured in 2009. In 2003, an agreement was reached to import gas from Syria. The pipeline connecting the Beddawi plant to Syrian gas supply was built and completed in 2005. However, as gas surplus in Syria was not sufficient to support exports to Lebanon, the Syrian government eventually withdrew from the agreement. A separate contract was then passed with Egypt, and Lebanon received its first gas import from Egypt in 2009 via the Arab Pipeline. Lebanon is not actually connected to the Arab Gas pipeline; this agreement corresponds to a swap with Syria recovering the gas bought by Lebanon from Egypt and supplying Lebanon with an equivalent volume.
Steam turbines at the Zouk and Jieh plants run on Heavy Fuel Oil (HFO) which is sold on global markets at different levels of sulfur content. The Zouk and Jieh plants are run on the 1% HFO. which while more environmentally friendly, costs the government 5% more than procuring the 3.5% HFO.
The current state of the power sector is closely linked to the current institutional and legal framework which has governed operations and decision-making since the 1964 with few to negligible changes over decades. This framework does not grant EDL sufficient independence from the government and does not impose proper amount of incentives to drive operational excellence. Inscribing the incorporation of EDL in the government’s policy paper recognizes this fact. Incorporating EDL would be a key step towards introducing reforms in a direction that encourages better performance.
In 2002, the parliament passed an additional law as it prepared to restructure the power sector. The 2002 law set the principles for the unbundling of the power sector, meaning the separation of generation, transmission, and distribution activities. Such unbundling prepares for the introduction of competition in the different activities and facilitates the participation of the private sector in these activities. The law calls for the introduction of private sector participation over time to attract more financial resources to the power sector. It allows selling up to 40% of shares in the generation and distribution segments to the private sector.
However, the 2002 law is yet to be applied and the government has yet to define a clear roadmap for its implementation. In addition, the law remains vague on a number of points which could require amendments and further clarification.
A full solution would require changes to the legal framework that support the direction set by the June 2010 policy paper and ensure strong and independent institutions are in place to regulate, operate, and define policy for the power sector in the most efficient way.
Marie Tyl is a student at Sciences Po Paris and Universite Paris 6, currently completing a joint Bachelor degree in sciences and social sciences. Marie is on an exchange program at the American University of Beirut, and has recently joined Carboun as a Student Ambassador
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