Sat | Dec 10, 2016

Review mechanism needed at OUR

Published:Sunday | January 18, 2015 | 12:00 AM

Utility regulators are hardly infallible, the certitude with which they invoke their determinations notwithstanding.

That is why jurisdictions, globally, are increasingly evolving mechanisms for stakeholders, other than via the last resort of the courts, to review their actions. Given current circumstances, it is a move that we propose for Jamaica's Office of Utilities Regulation (OUR).

This newspaper, as we stressed previously, fully appreciates the relevance of the OUR and similar regulators, especially in small markets with monopolistic and/or oligopolistic utility operators. Unregulated, the tendency of such firms is towards price gouging, underinvestment, the inefficient deployment of capital, and poor service to consumers. Such behaviour, clearly, is bad for economies, potentially stymieing growth and development.

But effective regulation need not mean strangulation, which, like the Private Sector Organisation of Jamaica, we fear could be the result of the recent electricity tariff determination by the OUR against the Jamaica Public Service Company (JPS), the light and power company. JPS is a monopoly on the distribution side of the business.

JPS applied for an average 20 per cent increase on the non-fuel portion of its electricity rates. The OUR, instead, cut the rate it set five years previously by one per cent, arriving at that position in curious fashion. It slashed JPS's expected return on investment by 3.75 percentage points, to 12.25 per cent, helped, in part, by textbook, academic application of a capital asset pricing model, rather than using a real-world test of especial relevance to Jamaican market conditions. Paradoxically, it was not long ago the OUR approved contracts for the sale of electricity by independent power producers to JPS that guaranteed the suppliers returns of 18 per cent.

LACK OF LAW AND ORDER

At the same time, the OUR rejected JPS's request for insulation against exchange risks, in a circumstance where 80 per cent of its costs are in foreign currency and the State's failure to maintain law and order effectively legitimises the theft, and forfeiting, of earnings from nearly a fifth of the electricity it produces, plus the Government's appropriation of around J$7 billion a year in unauthorised credit by way of payment arrears.

Another piece of contextual logic is seemingly absent from the OUR's determination.

In recent years, JPS has struggled to turn a profit. It is a notorious fact that its creditors have worried about its ability to meet its obligations. Yet, as a player in the Government's newly emerging energy strategy, it is expected to build a 190-megawatt power plant, a substantial portion of whose cost will be financed by debt.

An obvious question, in the context of the OUR's determination, is what will be the attitude of JPS's bankers?

All of this brings us back to the matter of review and appeal and what Jamaica might learn from other jurisdictions.

In Australia, for instance, the decisions of the Australian Energy Regulator (AER) can be appealed to the Australia Competition Tribunal, as a slew of power distributors in the state of Victoria did against a 2010 ruling by the AER, leading to a January 2012 ruling that was partly in their favour. More recently, the British Parliament amended the regulations to allow determinations by the Northern Ireland Authority for Utility Regulation to, similar to the rest of the UK, be challenged before the Competitions Marketing Authority.

Such administrative reviews help to ensure procedural fairness and prevent bias in decision-making. Critically, they are likely to drive consistency in the application of principles and methodology, to which the OUR is unlikely to object.