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The Sector Law has chalked out a clear-cut road map for the electricity sector with the promise that things are never
Mayank Singh

Walking through the corridors of the electricity sector in Oman, one is surprised by the refre-shing new outlook at work. The language is corporate and thought processes crystal clear. Says Hamoud al-Busaidi, general manager, Rural Areas Electricity Company (RAEC), “Since we have a commercial mandate now, we are trying to do things better, and that too at a lower cost.” And he is not the only one doing a return on investment calculation these days. Thani al Khusaibi, general manager, Oman Electricity Transmission Company (OETC), echoes the sentiment. “The new environment has forced us to change our evaluation process, decision making and operating structure.” So, what is this new environment?

On May 1, 2005, the Ministry of National Economy transferred electricity and related water assets, liabilities and staff of the Ministry of Housing Electricity and Water to ten successor companies. The decision marked a significant milestone for the electricity sector in Oman. “The sector has moved from a self-regulated, ministerial model to a fully corporatised structure with a regulatory mechanism.” says John Cunneen, executive director and member, Authority for Electricity Regulation (AER).

The framework
It all began in December 1999 when the council of ministers acquiesced to a complete restructuring and privatisation of the sultanate’s electricity sector – the first step of a long journey. What followed was years of consultations, deliberations and evaluation of international best practices. A steering committee chaired by the secretary general of the Ministry of National Economy, overseeing the development of a law for the regulation and privatisation of the electricity sector in Oman, was constituted. What came out of this grinding process was the ‘Sector Law’.

Recalls Bob Whitelaw, CEO, Electricity Holding Company (EHC), “I was often asked about the time required to prepare and implement the Sector Law. I explained that the policy makers in Oman had not set a timetable but an objective and so the law will come into effect in perfect timing once we were ready.” The wait ended on August 1, 2004, when Royal Decree 78/2004 promulgated the Sector Law. The law allowed for a nine-month transition period from the old structure to the new. It identified EHC as the nodal agency for regulating the sector. Says Whitelaw, “The Sector Law is a groundbreaking law in Oman and indeed in the region. It is comprehensive in nature and does not depend on further ministerial decisions or project specific decrees to meet the overall reform objectives.”

A churning process
Apart from structural changes the Sector Law has been instrumental in bringing about a fundamental change in mindsets. With successor companies being accountable for their own balance sheets, CEOs and general managers have made important strides in understanding the cost structures of their respective businesses and in the context of the new price controls, implementing management controls to help manage costs and improve efficiency. Says Cunneen, “There is new realisation that things must change.” And the results are here for everyone to see.

AER’s initial estimate of the subsidy required by the Muscat, Majan and Mazoon distribution companies from May 1 to December 31, 2005 was RO66.3mn. The body was pleasantly surprised when the actual subsidy turned out to be RO58.7mn, lower by a substantial RO7.6mn. The savings resulted from the efficiencies introduced by the three distribution companies enabling them to recover better revenues on the kilowatt per hour (kWh) supplied than earlier. Customer revenues ended up being RO5mn higher than what was forecast. Emboldened by this performance, AER has trained its sights on bringing in further improvements by reducing technical and non-technical losses from the main interconnected system from the present 22 per cent to more acceptable levels.

Others too have been quick to follow. Says Busaidi, “We will use a corporate management structure to reduce our subsidies from the present 82 per cent to 50-60 per cent.” Realising its limitations in tackling breakdowns OETC has started outsourcing transmission maintenance to a number of external contractors. “This ensures that breakdowns get addressed locally and far more efficiently,” says Khusaibi.

Common concerns
Protection of customer interests has been an article of faith in the law. The sector has
started showing signs of nimble footedness these days.

When some Shura Council members from Salalah expressed concern about the inconvenience caused to customers by high disconnection and reconnection fees, AER looked into the matter. After consultations with licensed suppliers it found that the RO30 for disconnection and another RO30 for reconnection were indeed too high. Concluding that the fees did not reflect the actual cost, AER recommended that disconnection and reconnection fees for all types of metered accounts should be pegged at RO7.5. This was accepted by the council of ministers and the revised rates were made applicable to all parts of the sultanate. The quick response underlines the reflexes of the new regulatory mechanism.

Setting new benchmarks
Upgrading the technical, health and safety standards of the sector is one of the biggest challenges in the sultanate. And its importance can hardly be overstated. “International standard benchmarks establish a country’s credibility in the eyes of external institutions,” says Cunneen.

A new framework of technical regulation that includes industry codes, planning and operating standards have been brought in. Health and safety audit have been initiated for all power facilities, which have not been meeting their statutory requirements. AER has made it clear that non-compliance would bring in punitive action. While things have started moving, there is a realisation that there is still a long way to go. “Compliance standards are better but they are still not good enough,” says Cunneen.

Role Model Overall, the Sector Law has set a clear roadmap for the electricity sector in Oman. The government is to give up 100 per cent of its stake in generation. This is to be followed by privatising the ‘lines business’ (transmission), which will commence in 2006 followed shortly by distribution and supply. All companies except the EHC, Oman Power and Water Procurement Company and the RAEC will be privatised. Oman is the first country in the region in which the government will divest 100 per cent of its interest in all ope-rational activities of the electricity sector. It is also the first country, which will privatise transmission and distribution apart from generation facilities. Whitelaw sums up, “Oman is leading the way in electricity sector reforms in the region.” We could not agree more.