Fri | Oct 20, 2017

Beating down JPS

Published:Thursday | January 15, 2015 | 12:00 AM

This newspaper has long made the case for lower energy cost as a critical stimulant for growth in the Jamaican economy.

A potential game-changer, we have called it.

In that regard, it would be expected that we would welcome the recent ruling by the Office of Utilities Regulation (OUR ) that will effectively lower electricity tariffs by the monopoly transmission and distribution company, Jamaica Public Service (JPS), by an average one per cent. Except that any such change must be sustainable, encourage investment in the electricity sector and not herald its collapse.

Like the Private Sector Organisation of Jamaica, we fear that the latter result is a possible outcome of the OUR's determination. In other words, consumers may have been served a mirage.

We, of course, respect the need for the effective regulation of monopolies and, therefore, the relevance of agencies like the OUR, which exist in several jurisdictions. Further, we do not make the claim that the OUR should have granted JPS's request for a 20 per cent hike in tariffs.

NEED TO REMAIN VIABLE

We believe, however, that the light and power company has to remain a viable business, enjoying a decent return on its equity, to be capable of investing in the plant and equipment to drive the efficiencies that the Jamaican power sector - and the economy, more broadly - so badly craves.

It is against that backdrop that the OUR's determination is curious.

In recent years, the JPS has been barely able to turn a profit. Its return on investment has been in the low single digits. Its investors have enjoyed no dividends. Its lenders worry about its ability to service its debts.

This is the company that the Jamaican Government is looking to for substantial investment in a new power plant and distribution system, which will require raising new debt.

But whereas five years ago the OUR held that the JPS was deserving of a return on equity (ROE) of 16 per cent, its latest determination slashed that by 3.75 percentage points, or over 23 per cent. At the same time, the OUR has approved contracts for electricity sales by independent power providers to the JPS that guarantee ROE to the former of 18 per cent.

CHALLENGING POSITION

Moreover, the OUR declined JPS's request for insulation against foreign-exchange losses, in circumstances where 80 per cent of its costs are in United States dollars; in a situation where nearly a fifth of its electricity output is stolen; and in circumstances where its customers, primarily the Jamaican Government and its agencies, tap it for unauthorised loans, in the form of overdue payments - US$64 million, or of seven times its profit and six per cent of its operating revenue in 2013.

Put another way, the Government's effete response to electricity thievery has forced JPS to offer social welfare to voting constituents while becoming something of a lender or creditor of last resort to the Government. One of the implications of the OUR's determination is that the light and power company should get tough against the benighted lot.

Or, perhaps the expectation is that, given the unviability into which JPS may be forced, the Government will itself fund the new power plant, or guarantee the loans to be raised by JPS for the venture. Then would come the conversation with the International Monetary Fund.