MSB/JPC/OUR Electricity SymposiumPanel 3: Governance/Policy Issues of Electricity

in Jamaica

Alrick CampbellProductivity Specialist

Research Unit Jamaica Productivity Centre

28 July 2011

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Outline of Presentation

1. Objectives of Presentation

2. Penalty/Reward Governance Framework

3. Impact of Selected Governance Issues on End-user Prices

4. Implications and Recommendations

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Objectives of Presentation

• Examine relevant aspects of penalty/reward governance framework provided under the 2001 Electricity Licence

• Explain how implementation or non-implementation of selected conditions of the Licence impact end-user electricity prices

• Make some recommendations that could reduce end-user electricity prices without amending the Licence

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Penalty/Reward Governance Framework

Electricity prices are determined by 3 broad components:

1. Non-fuel Base Rate (ABNF)

2. Performance-Based Rate-Making Mechanism (PBRM) - Annual adjustment to ABNF

3. Fuel Cost Pass-through Mechanism4

Impact of Selected Governance Issues on End-user Prices - Revenue Requirement

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Tariff Review Period 2004-2009 2009-2014

Components of Revenue Requirement (RR) JPS (J$'000) OUR (J$'000) JPS (J$'000) OUR (J$'000)

PPA Costs 3,666,489 3,002,542 5,740,899 6,011,059

Interest Income on short term debt 101,814 76,814 179,690 364,746

Interest Income on customer deposits 121,561 121,561 77,372 179,032

Sinking (self-insurance fund) 126,000 122,000 425,000 445,000

Operational Expenses 10,483,237 9,590,914 13,693,013 12,154,180

Depreciation 2,180,524 2,170,278

Depreciation& amortisation 4,219,529 3,631,289

Cost of Longterm debt 1,273,094 1,291,215 3,047,058 2,304,027

Return on Investment 5,044,381 4,199,029 6,935,378 3,825,101

Taxation 1,885,643 1,453,907 3,467,689 1,912,550

Revenue Requirement 19,712,704 17,533,047 37,638,847 31,045,755

Loss Reduction Fund 1,125,106

Adjusted Revenue Requirement 19,712,704 17,533,047 37,328,326 31,860,340

Impact of Selected Governance Issues on End-user Prices - ABNF

• Set at start of 5-year Tariff Period

• Respective Test Years – Audited Accounts of 2003 & 2008 respectively

• ABNF adjusted annually by dCPI

• dI = annual inflation & exchange rate adjustment

• X = electricity industry productivity offset to inflation

• Q = quality of service adjustment

• Z = adjustment for special reasons not captured by the other elements of the formula

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SalesElectrictyofKWh

quirementvenueABNF

ReRe2009

ZQXdIdCPI

Main Implications•Level of subjectivity relating to contents of the Revenue Requirement•Foreign exchange loss, private cost to JPS, social cost to the country•Shock to consumer bills in successive 5-year periods

Impact of Selected Governance Issues on End-user Prices - ABNF

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Energy J$/KWhRate Class Description 1-Jun-04 1-Aug-05 1-Jun-06 1-Jun-07 1-Jun-08 1-Jun-09 18-Jun-10R10 <100 4.549 4.751 5.063 5.249 5.747 6.19 6.41R10 >100 8.008 8.363 8.912 9.225 10.068 14.15 14.66R20 General Service 6.77 7.341 7.823 8.16 8.934 11.99 12.53

R40A 4.25 4.571 4.874 5.261 6.042 Phased Out

RT40(STD)Standard Low Voltage 1.728 1.859 1.982 2.152 2.411 3.42 3.57

RT40(TOU) Time of Use 1.728 1.859 1.982 2.152 2.411 3.42 3.57

RT50(STD)Standard Low Voltage 1.556 1.674 1.784 1.94 2.178 3.24 3.39

RT50(TOU) Time of Use 1.556 1.674 1.784 1.94 2.178 3.24 3.39RT60 Street Lights 8.161 8.777 9.359 9.687 10.597

14.83 15.5RT60 Traffic Lights 5.494 5.909 6.301 9.257 7.155

Average 4.38 4.6778 4.9864 5.5023 5.7721 7.56 7.8775Global Cap Average % Increase - 6.8% 6.6% 10.3% 4.9% 31.0% 4.2%

Measures 1-Jun-04 1-Aug-05 1-Jun-06 1-Jun-07 1-Jun-08 1-Jun-09 18-Jun-10dCPI N/A 7.72% 6.58% 4.04% 5.74%N/A 4.79%ABNF J$ 5.627 J$ 6.06 J$ 6.46 J$ 6.72 J$ 7.11 J$ 9.78 J$ 10.25

Unweighted Average % Increase - 7.7% 6.6% 4.0% 5.7% 37.6% 4.8%

Impact of Selected Governance Issues on End-user Prices - dI

• Formula:

– Δe = percentage change in the Base Exchange Rate

– iUS = US inflation rate (as defined in the Licence)

– ij = Jamaican inflation rate (as defined in the Licence)

– fUS = US factor = 0 .76 and fi = Local (Jamaica) factor = 0.24

• Main Implications

– dI formula may be flawed - inversely related to the weights applied to the US & Jamaican components of costs

– If JPS had retained the 60:40 in the 2009-2014 determination, dI & dCPI would be 6.67% instead of 4.79% at 76:24 in June 2010

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]*24.0*922.0*76.0*922.0*76.0*76.0[ jUSUS iieiedI

Impact of Selected Governance Issues on End-user Prices – X-factor

• X is the offset to inflation (annual real price increase or decrease) resulting from productivity changes in the electricity industry– Usually fixed for 5-year periods – JPS commands higher price increases if JPS’ TFP is lower relative

to sum of weighted TFP for Jamaica & US Economy– X was set at 0% in June, 2010 & June, 2011 & subsequent years

2.72%

• Main Implications– Credibility – accuracy of measure/how 2.72% determined– Inconsistency - Jamaica’s TFP & US TFP are calculated using two

different methodologies9

Impact of Selected Governance Issues on End-user Prices – Q-factor

• Note:• “Should the JPSCo fail to provide the supporting data, the OUR

would apply international benchmarks to inform the derivation of the Q-factor with effect from June 2005.” (OUR, 2004)

• Main Implications– Sub-optimal Monitoring and Enforcement Protocols– The Q-factor was set to zero for entire 2005-2009 period - sends

an ambiguous signal to the JPSCo– JPS benchmark year versus international benchmark

• Implementing Q-factor requirements under the Licence (international benchmark) would have saved consumers an estimated J$130M in 2009 & cumulatively J$440M from 2005-2009

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Impact of Selected Governance Issues on End-user Prices – Fuel cost pass-through

• Fuel & IPP charges are recovered directly from customers subject to adjustments for performance against HR and TDL targets

• OUR HR target of 10400 KJ/KWh for tariff period 05-09 was 27% higher than average IPP HR of 8172 KJ/KWh for 04-08 & consistently above actual HR performance

• Main Implications

– Possible to make a profit on fuel

– HR and TDL target is sub-optimal (Too high)

– Increasing TDL target from 15.8 to 19.5 then to 17.5 % sends ambiguous signal to JPSCo

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arg*

lossesetedt

lossesactual

rateheatactual

rateheatetedtCostFuelActualFCPT

Implications and Recommendations

• Establish objective measurements of RR, dI, X-factor, Q-factor using an established analytical framework

• Monitoring protocols & procedures for administering the rate cap regime & PBRM must be transparent and consistent – setting of appropriate HR & TDL targets

• Stringent enforcement of Licence– Condition 20 (1) - Economic Purchasing of Goods and Services

including fuel – Condition 20 (2) - The procurement of goods must be regularly

audited as provided for by the Licence– Condition 23 - Merit Order Dispatch

• Strategic electricity price or range – Improving policy coordination & implementation

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Thank You Very Much

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