Zia Mian | Cross-subsidies and electricity bills
“Cross-subsidies are an underappreciated original sin of economic stagnation. To transfer money from A to B, it would usually be better to raise taxes on A and to provide vouchers or otherwise pay competitive suppliers on behalf of B.”
A residential electricity bill (Rate 10 Category) has a number of costs or line items. Let us explore some of the main line items:
- Current Usage: Electricity usage is calculated based on an actual meter reading or an estimated reading. It is a difference between the current reading and the previous bill’s final reading. This line item shows the volume of electricity that a customer has used during a billing period, usually a month.
- Current Period Charge (also known as non-fuel or energy charge): This is an all-inclusive non-fuel component of the bill. It, among others, includes system-generation costs, transmission and distribution network costs, system losses, and system efficiency coefficients, allowable return on equity, as well as the cost of debt.
In the case of Jamaica, under the Performance-based Rate Making (PBRM) mechanism, the regulator caps the revenue requirements of the Jamaica Public Service Company (JPS) for a five-year period. At present, this period runs from 2014 to 2019.
This cap is subject to annual reviews and adjustments for efficiency gains, consumer price index variations (both national and in the USA), and/or any other extraordinary changes in the cost structure.
- Customer or Connection Charge: This is a fixed monthly charge and does not vary with fluctuations in electricity usage. This charge is intended to cover the basic cost of the distribution and billing-related expenses, which include having an electrical distribution system in place, plus the cost of the meter, servicing and reading the meter, mailing the bills, and maintaining customer records.
Even when there is no electricity usage, the Customer Charge will appear on an electricity bill.
In the case of non-residential rate categories, there may appear a demand charge, which is also independent of consumption and relates to maximum demand by a non-residential customer.
- Fuel and IPP Charge: The Fuel and IPP Charge has two components:
- The cost of fuel used to generate electricity by the JPS, and
- The cost of the electricity purchased from Independent Power Producers (IPPs)
Fuel cost is by far the largest contributor to the electricity bill and may fluctuate widely from month to month. The variation depends on volatility of fuel prices and the type of generation units in service and their efficiency.
This charge is adjusted monthly and is not overseen by the regulator.
- Foreign Exchange Adjustment: This factor is adjusted monthly to account for fluctuations in the reference base-exchange rate that is set for a five-year period.
In addition, the bill also has a line item for the general consumption tax (GCT) that is applied to the taxable portion of the bill.
In a residential bill, the current or energy charge has two distinct rates. A lower rate (US¢7.53/kWh) that is applicable to the first 100kWh/month of usage and is considered as ‘lifeline tariff’.
Any consumption over 100kWh/month is billed at a higher rate (US¢17.54/kWh). This rate includes the cross-subsidy for the first 100kWh of consumption. The rate structure, therefore burdens the higher-volume customers with the cost of supplying electricity to the customers that only use up to 100kWh/month.
In 2017, the JPS billed 571,541 residential customers. Of these, the ones that used less than 100kWh of electricity per month averaged at 231,726 accounts.
The 100kWh/month-discounted price was applicable to all the Rate 10 Category customers. In other words, the first 100kWh/month for all residential customers are charged at the lifeline tariff rate.
In 2017, the total consumption that was subsidised was 528,985MWh.
The consumption above 100kWh/month in 2017 was estimated at 540,157MWh. The total 2017 Rate 10 Category usage that was billed by the JPS was at 1,069,541MWh.
In 2017, the consumption by the Rate 10 Category customers averaged at 156kWh/month.
The non-fuel or energy charge for the first 100kWh has been set at US¢7.53/kWh. The rate for consumption above 100kWh/month has been set at US¢17.54/kWh.
The reference base fuel rate, which fluctuates with the price of fuel on a monthly basis, is set at US¢14.94/kWh.
Depending on the level of consumption, our electricity unit charge varies, between US¢22.47/kWh and US¢32.48/kWh.
The consumers, with average consumption over 100kWh/month, bear the cost of supplying cheaper electricity to the lower-consumption customers (up to 100kWh/month).
If the cross-subsidy on the first 100kWh/month was to be removed, our non-fuel or energy rate would drop to US¢12.59/kWh for all residential consumption or to US¢27.53/kWh (including reference fuel charge).
THEFT A MAJOR CONTRIBUTOR
In the case of Jamaica, theft of electricity is considered a major contributor to the system losses. If not controlled, the continued theft will remain a financial drain on JPS resources.
The JPS has estimated that there are about 180,000 illegal connections in the island that account for 9.34 per cent of the non-technical system losses.
The electricity consumption by these illegal connections is estimated at about 407,722MWh/annum or about 189kWh/month per illegal connection. The JPS believes that this loss is a direct result of socio-economic conditions and is beyond its control (more later on this).
If we are to consider that this loss estimate is a direct result of socio-economic conditions, then its high level is not supported by data pertaining to Rate 10 Category customers.
Based on the analysis of billing and consumption patterns, the consumption level of 189kWh/month, that the JPS estimates, compares with the Rate 10 average consumption of 156kWh/month.
Unless this consumption is by very affluent ‘underprivileged’ customers, the JPS may need to revisit this estimate.
It is interesting to note that the average consumption of about 156kWh/month by all Rate 10 Category paying customers is about 17.4 per cent lower than the illegal consumption rate!
So far we have shown that system losses and heat rates are partially responsible for the high electricity prices in Jamaica.
We have also shown that an element of cross-subsidy to the Rate 10 Category customers distorts the electricity price.
We have highlighted that according to the JPS, 180,000 illegal connections add 9.34 per cent to the non-technical component of the system losses, the level of which is open to question.
In the next article, we will focus on the 180,000 customers and how losses pertaining to underprivileged consumers should be addressed. An out-of-the-box approach and a paradigm shift may help us to direct the JPS’ focus on loss factors that it believes are under its potential control.
- Zia Mian, a retired senior World Bank official and former Director General of the OUR, is an international consultant on energy and information technology. He writes on issues of national, regional and international interest. All information used in the analysis for this series is obtained from public records. Email feedback to firstname.lastname@example.org or email@example.com.