In the costing process, the complete generation transmission and distribution costs are accumulate to calculate the total cost of production.
The cost of capital and depreciation are also considered into this.
The implementation of these concepts through tariff needs the tariff setter to be concerned of the cost of electricity as well as the sectoral policies.
The tariff setting process is disintegrated in to three primary functions namely costing, pricing and tariffing.
In 1983 the Government of Sri Lanka (Go SL) formed Lanka Electricity Company (LECO) which is co–owned by the Sri Lanka Treasury, CEB, Urban Development Authority (UDA) and some local authorities after consideration of inefficiencies and difficulties faced by the local authorities and CEB.
By 1992, CEB completed acquisitions of rest of the electricity distribution schemes which were being carried out by local authorities.
According to the Annual Report of Central Bank of Sri Lanka, the economy of the country heavily depends upon the income generated by export oriented industries which amounts to US$ 10,559 million in 2011.
Few years back, most of the exports were in the form of supply of raw materials and very little value addition took place.
The sector was transferred to a separate department in 1926 and was later renamed as the Department of Government Electricity Undertaking (DGEU).
This demands a profit of a comparative figure to be allowed for the sector.
This should be sufficient not only to maintain a healthy system but also to attract funds for future expansions.
Due to this dependency, generation pattern was fluctuating according to the rain fall pattern, making a vulnerable and unreliable electricity supply throughout the country. Main role of the commission is to advise the Go SL on matters concerning Generation, Transmission, Distribution, Supply and Use of electricity in the country and to protect the interests and rights of consumers in relation to the supply of electricity.
With the social and economic developments and increasing electricity demand of the country and limited main hydro power sources, CEB had to diversify in to alternative energy sources such as fossil fuel (thermal). Transmission and distribution licensees can work out a tariff in accordance of a cost reflective methodology which will be allowed to publish only with the approval of the PUCSL.