Jun 2010 Financial News

More opposition to JPS rate increase. Businesses say any hike in electricity costs will hurt them.

Jun 09, 2010

BUSINESS operators have joined the chorus of voices appealing to the Office of Utilities Regulation (OUR) to consider the welfare of customers of the Jamaica Public Service Company (JPS) in making their decision about a potential increase in electricity rates at this time.

On Monday, the Observer found little support from the business community for the annual inflation adjustment to non-fuel rates applied for by the JPS, which has attracted anger among householders and the tourism sector.

Erwin Burton, CEO of GraceKennedy's GK Foods division, said that a hike in the cost of energy will erode his company's ability to compete within the Caribbean.

"Any increase in the rate is going to affect our competitiveness. It is going to increase the cost of production. One of our biggest competitors is Trinidad and Tobago and the cost of electricity in Trinidad may be just 25 per cent of what it is in Jamaica. It means that our goods will continue to be less competitive," Burton said.

"An increase in the cost of any input will have a negative effect on our competitiveness and energy is a significant input," he added.

According to a report by the Caribbean Association on Electric Utilities (CARILEC) on electricity charges within the region the cost of electricity per 100,000 kWh for industrial customers in Trinidad is US$3,370.08 ($293,196.96). In Jamaica it costs US$26,187.14 ($2.3 million) for the same amount of electricity for industrial customers.

John Mahfood, CEO Jamaican Teas Limited (formerly Tetley Tea Limited), said the prohibitive energy costs are driving away potential investors from manufacturing.

"I think that operating a manufacturing business is pretty difficult in Jamaica because of some of the problems that we face," said Mahfood. "One of them is that we have the highest cost of electricity in this hemisphere compared to what it is in the US and one of our major competitors which is Trinidad."

He said coupled with the very high cost of security and bank lending rates, increases in the cost of energy also cause a strain on businesses. To make matters worse, Mahfood believes that this is due primarily to inefficiencies within the organisations which then try to compensate with high rates.

"What the OUR should be doing is trying to insist that the JPS finds a way to improve its efficiency rather than pass on the increase in inflation to the consumer," said Mahfood.

The December 2009 CARILEC tariff report indicates that among the 18 countries listed, electricity rates converge around US$24 to US$36 per 100kWh per month for domestic customers and US$22,757 to $39,892 per 100,000 kWh per month for industrial customers. Jamaica's rate at US$28.81 for domestic customers and US$26,187.14 is within this range. However, of the 18 countries listed, Jamaica's utility company has the largest customer base of 584,218 customers as at the end of December.

In fact, countries such as Antigua, St Vincent and Dominica, which have slightly higher rates -- US$35.70, US$28.68, and US$34.40 for domestic use, and US$745, US$682, and US$875.67, for commercial use (2,000 kWh per month) -- have far fewer customers than the JPS. Antigua's APUA, St Vincent's VINLEC and Dominica's DOMLEC have 32,067; 39,531; and 30,549 customers respectively, which brings into question the issue of the productive efficiency of the JPS.

The Observer tried to verify from the company whether it could not benefit from the economies of scale that would allow it to lower its cost relative to these other companies. However, the company did not respond to a request for comment on the issue.

Mahfood said he understood the issue of inflation affecting profitability but disagreed with the 'principle' for the increase. "It is not a cost that you can pass on to the consumer when the economy is performing so poorly and the spending power is so weak," he said. "We can't put up our prices because inflation increased, why should this institution be allowed to do that?" he asked.

Carrie McKie, sole proprietor of Dencari Salon and Spa, bemoaned the fact that even though the number of customers have declined since the recession and with it the use of electrical appliances in her salon, her electricity bill has increased more than four times the usual amount since the 10 per cent General Consumption Tax was added in March this year.

"My light bill has jumped. It is constantly going up. It is too much," she said. "It already increased by 10 per cent because of the tax, so how much more they going to bring it up to?

"This is just too much. Everybody is crying because from the market go down people not doing their hair as much now. To face the bill at the end of the month when you are not making any money is too much," she said.

McKie called on the OUR to consider the micro and small businesses that are already struggling when making their decision on the increase.

GraceKennedy's Burton added that while some businesses would be able to absorb the cost of the increase, it would put more pressure on the viability of others. "If the cost of electricity is increased somebody will have to pick up that cost," he said.

He, however, added that the OUR must perform a delicate balancing act to resolve the issue. "The JPS has a contract with the Government for a guaranteed return. I don't think the OUR would want to renege on that contract," said Burton. "There is a time when hopefully it will come up for review when we could change that. However, the OUR has to act in the best interest of Jamaica and the best interest of industry. I believe it has to be a negotiated settlement between the OUR and the JPS."

The business operators have already made attempts to reduce energy consumption, but say these efforts cannot counter the real problem, which is the inherently high cost of electricity.

"We are constantly looking at how to reduce or overall cost and energy is one of our major costs in terms of our HiLo stores, manufacturing and cold storage facility," said Burton. "Our new distribution centre has also put in LED (light-emitting diode) lights which should last about 15 years and are extremely efficient, six times more efficient than regular bulbs."

McKie said her operations have changed as well. "I don't have any AC, I hardly use the dryer because I mostly do locks and I have one computer which I use less than half of the day," she said.

Mahfood said he has implemented a number of recommendations garnered from an energy audit done on his company to reduce the level of energy consumption.

"I think we have done as much as we can do, but when the rate itself is double the rate of countries that you are competing with you cannot really do anything to compensate for that," noted Mahfood.


Source:
ALICIA ROACHE Observer staff reporter
roachea@jamaicaobserver.com
Jamaica Observer
Wednesday June 09, 2010

http://www.jamaicaobserver.com/news/More-opposition-to-JPS-rate-increase_7686789