Sat | Dec 10, 2016

EDITORIAL - Use Petrojam dividend to pay JPS

Published:Monday | February 16, 2015 | 12:00 AM

As is its right, and as is reasonable and sensible in the context of a rules-based arrangement, the Jamaica Public Service Company (JPS), the light and power provider, has appealed the recent electricity tariff determination by the industry's watchdog, the Office of Utilities Regulation (OUR). As we have said previously, this newspaper believes JPS, the monopoly distributor of electricity, has credible causes for appeal.

JPS requested an average 20 per cent increase in its rates. The OUR, instead, held that the underlying tariffs be reduced by around one per cent, which, on the face of it, is good for consumers and the economy, more broadly. Indeed, we have long made the case that high electricity rates in Jamaica are a substantial hindrance to the competitiveness of Jamaican firms.

But expensive electricity is the result of two primary factors: the mostly old and inefficient power plants operated by JPS; and second, and more important, because these plants, as well as those operated by its independent power providers, burn expensive oil.

Changing this dynamic will require new investment and a pricing mechanism that allows for a return on investment that will bear the cost of the outlay, especially the debt portion, of that capital. JPS's licence, in fact, appreciates the need for a return on equity that affords the company funds "sufficient to provide for the requirements of consumers and acquire new investments at competitive costs".

There is a compelling case to be made that the asset-pricing model applied by the OUR in its rate determination, which allows JPS a return of 12.5%, doesn't fulfil this obligation, especially against the backdrop of other electricity pricing agreements sanctioned by the OUR that provide for return on equity of upwards of 18 per cent.

Further, the OUR rejected the JPS's argument that it is allowed compensation for foreign-exchange risks, associated mainly with the settlement of oil bills to the government-owned oil company, Petrojam, which is largely the result of a failure of the Government to pay its bills. The accumulated arrears top J$7 billion. In the face of the price ruling, and with the enforced supplier's credit to the Government, the JPS's capacity to finance a US$700-million gas-burning generating plant seems problematic.

Clearly, the foregoing are among the issues that will be before the appeal tribunal, which must act with urgency given the importance to the economy and the urgency with which Jamaica needs to settle the energy question.

market movements

In the meantime, however, there is a possible, short-term solution to the Government's debt to JPS and the foreign-exchange losses this forces on the company because it is not always able to meet its foreign-exchange debts before market movements exact a penalty.

Petrojam's last published accounts, for 2012, reported net profit of US$22.9 million, against US$25 million for the previous year. The company had retained earnings of US$95 million out of shareholders' equity of approximately US$143 million. Petrojam has continued to have positive results.

It would make sense, in the circumstance, if Petrojam declares a profit and the Government uses its 51 per cent to pay JPS, which would have the cash to meet its obligations to the oil refinery. Part of this could be managed as book transactions, without the need for the actual transfer of cash.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.