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JPS could net $5b from new rates in first year
Camilo Thame Business co-ordinator thamec@jamaicaobserver.com
Wednesday, October 14, 2009
Jamaica Public Service Company's (JPS's) new energy rates will increase the light and power company's revenue by 38 per cent over 2008 levels while securing $4.9 billion return on investment (ROI) for the firm.
The Office of Utilities Regulation (OUR), however, has restricted JPS to spending $1.1 billion of the return on its loss reduction programmes.
The full determination on JPS tariff review for 2009 to 2014 was made public through the regulator's website on Monday.
JPS had hoped to increase its non-fuel revenue by as much as 60 per cent in an effort to secure $6.9 billion ROI for the first full year of operating through adjusted rates as high as 97 per cent above the previous rates.
In its tariff review submission, JPS claimed that it required $37.3 billion in non-fuel revenues for 2009, which would enable it to secure the desired ROI, but the OUR in its determination decided that the firm would need only $32.9 billion to achieve a lower ROI of $4.9 billion.
Thus, the regulator gave JPS permission to set energy rates as much as 29 per cent higher, with big commercial customers feeling the brunt of the increase.
The country's sole distributor of electricity could still attain the substantial returns despite the lower rate because the regulator decided that JPS would have significantly less expenses.
For instance, the OUR determined that JPS would incur $1.54 billion less operating expenses, $600 million less depreciation and because the regulator disallowed the utility company from modifying its debt-to-equity ratio by borrowing US$60 million ($4.8 billion) it would spend $700 million less on long-term interest.
Importantly, the rates set by the OUR will secure $3.8 billion in what was classified as return on investment and $1.1 billion for a loss reduction fund, totalling $4.9 billion more than needed to run the company and pay taxes.
The loss reduction fund is actually money that will beef up JPS's capital base even though it was not classified as return on investment.
JPS is restricted to using the money for loss-reduction projects but JPS could not avoid finding the capital to spend on those projects.
The utility company has been mandated to reduce system losses from 19.5 per cent in 2009/10 to 17.5 per cent by next June.
Lower system loss targets reduces the proportion of fuel cost that JPS passes on to customers, leaving the firm to absorb the cost.
In other words, if JPS's efficiency levels stay the same next June, the utility company will have to absorb approximately 2.3 per cent more of the fuel cost.
Otherwise, improving it could lead to better profits and ensure that JPS retains as much of the $4.9 billion returns it could get.
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