Wed | Sep 20, 2017

NWC blames drought, economy, competition for $9.5B shortfall

Published:Wednesday | December 28, 2016 | 12:00 AMSteven Jackson
The Mona Reservoir in St Andrew.

The National Water Commission (NWC) has blamed severe drought, competition and a tough economy for it recording a revenue shortfall of

$9.5 billion in its 2015-2016 financial year. The utility had planned to generate $34.6 billion in revenues during the year but actually hit $25.1 billion. Over three years, this shortfall totalled $20.9 billion, according to the NWC mid-term determination notice published late last week by the Office of Utilities Regulation (OUR).

"The decline in water sales and sewerage usage was driven by the extreme drought conditions that prevailed over the last two years," stated the 68-page notice.

The NWC stated that the "crippling" drought of 2014 was further intensified during 2015. The OUR wants the NWC to develop a drought mitigation plan in future.

Turning to competition, the NWC said in the notice that competitors 'cherry-picked' nine major accounts in St Ann. It argued that the parish can produce water at a relatively low cost which allows competitors to presumably charge lower than the NWC tariff regime, which the utility applies evenly across the country.

"Small operators have been able to leverage the relatively lower cost of producing and distributing water in particular areas to attract some of the larger water users to be supplied by them. The NWC estimated the annual loss of revenue resulting from the loss of major water users to be $500 million," stated the notice.

The NWC provides water to more than 90 per cent of households across the island, but private sector participation occurs to improve the capacity. The Runaway Water Company, a subsidiary of the Urban Development Corporation, remains the largest known provider in the parish.

INACTIVE ACCOUNTS

At the same time, the NWC blamed the economic difficulties as contributing to the 15 per cent rise in inactive accounts, which grew roughly 100,000 to 115,000, according to the NWC data. Over three years, losses from inactive accounts hit $1.8 billion of which $554 million came in the 2015/16 financial year.

"The NWC explained that these disconnected customers became 'inactive', resulting in the NWC no longer being able to generate revenue from them. The NWC further posited that the challenging economic conditions have had an adverse effect on a number of Jamaicans, and many of these persons whose services were disconnected have found it difficult to settle their arrears," stated the OUR in its determination utilising data from the water provider.

In response, the OUR said that it views the issue of inactive accounts arising from a tough economy as reflective of a normal business cycle rather than a "systemic" risk unique to the NWC.

"The OUR has previously encouraged the NWC to revisit its temporarily disconnected accounts with a view to identifying if these customers have illegally connected to the system," added the utility regulator. "The NWC has levers at its disposal to formulate strategies to mitigate its impact on its revenue. It is expected that the upcoming audit of the commission's billing system will provide useful information that can be used by the commission to formulate strategies for the revision of its billing programme to capture all relevant users of its services."

In its mid-tariff review application, the NWC argued that drought, inactive users due to a sluggish economy and competition hampered its ability to meet the objectives outlined in its 2013 tariff. The OUR made a determination to increase the K-Factor from 14 per cent to 16 per cent in a bid to allow the NWC to pay its debt obligations. NWC wanted it increased to 20 per cent. Customers will see the impact on their bills in January.

"The operating profit margins over the last two and a half years indicate that the NWC's revenue has been sufficient to cover operating expenses. Notwithstanding, the commission has been simultaneously operating at a net loss for the past two and a half years," stated the OUR, adding that heavy depreciation and amortisation affected its bottomline.

steven.jackson@gleanerjm.com