Rate reduction for electricity company may harm power sector
Shocked by the determination of the Office of Utilities Regulation (OUR) that light bills should be reduced, the Jamaica Public Service Company (JPS) is now scrambling to convince its investors and financiers to put up the requisite capital for the building of a new power plant.
At the same time, the powerful Private Sector Organisation of Jamaica (PSOJ) said it was extremely concerned about the implications of the ruling for the overall health of the electricity sector in Jamaica.
"The organisation believes that the treatment of JPS and its investors by the OUR, as a regulatory agency established by statute and whose actions represent Jamaica in the eyes of the international investment community, is likely to send the wrong signals as it relates to Jamaica's commitment to fair play in its dealings with foreign investors and its ability to provide a consistent and predictable legal and regulatory environment for their operations," the PSOJ said.
The JPS is to convert, by this year, the Bogue Power Station in Montego Bay, St James, to burn gas; and replace the existing 292-megawatt heavy fuel oil power plants at Old Harbour and Hunts Bay with a 190MW gas turbine plant, fuelled with liquefied natural gas.
The plant is to be commissioned by 2017, but Kelly Tomblin, CEO of JPS, said yesterday that not being granted a rate increase has the potential to do serious injury to the company's finances and that the JPS "now has a bigger challenge because our lenders expect that after the rate review, our financial position would have improved.
"We have to go back to the drawing board with our lenders and figure out how we build this power plant," Tomblin said.
Customers of the JPS will this month receive a nine per cent reduction in light bills as a result of falling energy prices, and energy experts have suggested that the building of a new power plant could lead to a reduction in prices by as much as 30 per cent.
VIABILITY AT RISK
An energy expert within the public sector yesterday said the development was of major concern, arguing that while it provides breathing space for consumers in the short term, the long-term sustainability of the light and power company is at risk.
"JPS is in a tight financial condition, and it is not a condition that is very attractive to investors," the expert said.
He argued that if the JPS was not in a position to satisfy investors that it is a financially robust company, the various power projects could be stalled.
"I am very concerned about the development and the idea that a rate reduction is a proper thing at this time ... . It is a worrying development, as it could harm the long-term development of the energy sector and may actually prove to be delaying factor in getting new generation capacity," the expert said.
Meanwhile, the PSOJ is less than happy with the turn of events.
"Of equal concern are the negative implications that the OUR's decisions may have for the country's ability to attract investment of over US$1.5 billion that is critical to efforts being made to implement new and more efficient generating capacity projects, which are intended to significantly reduce the cost of energy to ratepayers in the longer term," the PSOJ said.
The JPS had asked for an average increase of 21 per cent on total residential tariff; an average increase of 15 per cent on the tariff for Rate 20 customers with consumption below 7,500kWh; and an average reduction of 2.80 per cent of the tariff for commercial and industrial customers.
But the OUR determined that residential rates should be reduced by 1.9 per cent, Rate 20 bills should be cut by five per cent, and commercial and industrial customers should pay 1.1 per cent less.
The PSOJ pointed out that the OUR's ruling reduced the target date of return from 16 per cent allowed in the prior rate review to 12.25 per cent.
"This action is particularly curious given those economic developments since 2009 that have served to increase the risks of operating in Jamaica, as well as the several recent power purchase contracts endorsed by the OUR that target rates of return as high as 18 per cent," the PSOJ said.
The PSOJ has also pointed out that under the current determination by the OUR, in excess of US$30 million is being imposed on JPS, arising from the OUR's position that JPS should absorb the cost of fuel consumed and which the company is unable to recover because of the incidence of electricity theft in Jamaica.
"The PSOJ believes that the extent of electricity theft in the country is an issue of socio-economic conditions, as well as a failure of law enforcement that successive governments have allowed to persist, and that it is, therefore, unfair that the company be called upon to absorb such losses," the private-sector group said.
"Effectively, the regulator is saying to an investor that they must remain uncompetitive and absorb costs caused by the deficiencies of the State," it added.
In the meantime, Tomblin argued that the rate reduction may be positive for the consumers in the short term, but that may not be the case in the long term.
"I know our customers want reliability; they don't want poles falling down, they want reliability to improve, and that requires investment, and so that is what we are arguing about with the OUR," Tomblin said.
Asked whether she believes the JPS will have to shelve its plans to replace the plants, the CEO responded, "I hope not.
"We are working very hard with the lenders and the shareholders to find a way, even with this unfortunate rate case. But you don't know how strong you are until you are faced with circumstance. For JPS, strong is our only option, and we are looking under every corner, we are looking at every way to build this power plant, and we are going to continue to do this," Tomblin said.
"We told ESET (Energy Sector Enterprise Team) the same things, and ESET is a very rational group of people. They understand the challenges and we will continue to talk with the ESET," Tomblin added.
She said further that the company's chief financial officer is leading a review of the OUR's determination, and that the JPS's board has not yet met to discuss the matter.
"We are committed to replacing our generation right now with fuel prices on the decrease, but we don't expect it to last forever. We need to ride this wave and replace the generation. We now have a bigger challenge because our lenders expect that after the rate review, our financial position would improve," the JPS CEO said.
"It is intuitive to think that after five years, when you expect a rate increase and you get a decrease, that, in fact, challenges us to be able to pay our own bills," Tomblin said.