AFTER a few weeks of fun and games I think my column this week should address two of my favourite subjects. The Jamaica Public Service Company (JPSCo) and Finance Minister Dr. Omar Davies and another gem of a speech from him.
How far Dr. Davies has come as a politician. A few years ago he would have never stood up in Parliament and said we had growth but not present the gross domestic product (GDP) figures at the same time.
Bank of Jamaica governor Derick Latibeaudiere was lambasted for doing just that and he was only giving a quarterly assessment if I remember right. It's "premature" to give the growth figures we are now told. If you have them let's see them. And if you don't why forecast when you've been wrong so often in the past?
I for one will no longer have any confidence in STATIN-based work unless there is a major improvement in the running of the agency. When such serious questions are asked about the head of such a body and work he has personally carried out is so easily criticised you have to be worried, particularly as nothing much seems to have changed.
This has serious implications because STATIN produces the inflation numbers, employment figures and GDP figures among other things.
It was good to hear that we have hit many of our key targets. Although that is completely undermined because the most critical, a reduction of the fiscal deficit relies heavily on interest rates.
It's a bit like saying the patient is stable and doing well in the coma but we are not sure how much brain damage she suffered.
Outraged from Maggotty
Outraged from Maggotty rang me this week, along with a few other people, urging me to slam the Office of Utilities Regulation (OUR) for allowing the light and power company to increase residential customers rates by an average of 9.8 per cent.
Well, I'm not at that point yet but I do think the agency is far too friendly to the utilities in its demands for improvements in service.
And let us not forget that we are selling JPSCo. so a rate increase was always on the cards.
You see, JPSCo. has been cross-subsidising residential rates for years and business customers have paid higher than necessary rates as a result.
As we prepare to sell the business we need to realise that we are going to see another 15 to 20 per cent rise in residential electricity prices over the next two to three years, and that says nothing of the effect the 10 per cent a year depreciation in the currency annually or rising fuel prices will have. Why do I say that? Well the OUR is proposing that "rebalancing" takes place over a three-year period. And we should remember that JPSCo. wanted a 21 per cent increase.
Most importantly, the OUR has clearly said customers should bear the "real" economic cost of producing a service. It's been a consistent theme of director general Winston Hay, and it is in theory, tough to argue against such a position.
I don't think Ford will readily sell me a car that cost $10,000 to produce at $8,000 because they'll go bust pretty quickly if they do that too often.
Of course, JPSCo doesn't produce cars but power. And the OUR isn't being quite as forthright as it should be and certainly hasn't tackled two of JPSCo's biggest problems and thus costs.
Of the 3.2 million MWh of power produced in the year to the end of March, 2000, 537,224 MWh or almost 17 per cent of that power went in system losses or was unaccounted for, which is a huge amount and has grown consistently despite the company's best efforts to bring it down. As much as half of that loss may be unavoidable at present given the state and age of some of the power plant but the rest is due to infamous "red" light or inner city areas stealing power.
To be convincing, the OUR needs to tell me and many others why they haven't told JPSCo. to cut off more customers. Why should I subsidise a whole range of communities if there's no one willing to subsidise me? And an eight per cent gain would probably have done away for the need for an increase altogether.
I can hear all you saying, "cut off the ghetto....ya mad". But why not. We've tried everything else to get people stealing power to pay. If I don't pay my bill for a month or two, the lights will go out faster than you can say punch drunk boxer.
Contracts
Then there is the thorny question of those private power purchasing contracts, which the Government struck back in the day. I didn't ask for power to be bought at a guaranteed rate for a lot more than JPSCo. can produce it at. We are now paying the price of purchasing power at an inflated rate, which cost us $2.4 billion in the year to the end of March 2000.
So, it's hard to say exactly what the "real" economic cost of electricity is in this country when two of the most critical components, extra capacity and cheap power to the poor are Government policy and non-negotiable.
Even putting that aside it's hard to see how we could be trying the old return on equity trick again.
The OUR has said it reckons JPSCo. should get a 14.85 per cent return on equity. I sketched out this graphic to give you a feel of some of the things that go into influencing return on capital employed.
I haven't quite worked out why 14.85 per cent and I'm not sure whether this is better or worse than average for a cash-starved, publicly-owned, dated power producer.
It seems to me that JPSCo has revalued and thus slashed its fixed assets. It really doesn't have access to much spare working capital so it's already cut that to a bare minimum and it's been trying for years to slash costs. That means it had little or no room left for manoeuvre, other than to raise prices or increase volume.
As the economy is in the doldrums, demand for power is growing steadily but not spectacularly in the way it would need to avoid a price increase.
The upshot of all this is that price rises are inevitable. When the price reaches high enough the new purchaser of JPSCo., will use its access to cheap funds to replace the company's ageing equipment and make a ridiculous killing at our expense.
But that's business for you isn't it, particularly local business. If you want to see just how not to privatise a power business see California. They've been having major power cuts recently although many of the power companies there have made record profits in recent years.
I must end with a note of apology. I bumped into Information Minister Maxine Henry-Wilson on Friday and got an interesting response. In hindsight I agree my reference to her consummate skill in employing the English language was crass and I apologise. As for my female readers, I apologise for naming a largely male team Cabinet but I am a true believer in the fact that the power is not really held by those on the throne, it is merely an illusion, but it is vested in those that supposedly administer the wishes of the monarch.
