Affordable and reliable power
Editorial
Stabroek News
March 3, 2003
What the ordinary consumer of electricity and the business community want is simply affordable and reliable power. It is fair to say that this desire has gone unrequited for around three decades ever since the energy crisis of the 70s and the progressive deterioration of the management of the electricity sector and its infrastructure.
Today the present crisis in the electricity sector threatens to squeeze both the ordinary consumer and the business community. It is the government’s responsibility to craft an equitable agreement with its 50% partner in Guyana Power and Light (GPL), AC Power, but that doesn’t mean that other stakeholders should not avail themselves of the opportunity to participate in the deliberations and suggest solutions.
At the core of the crisis is GPL’s contention that it is not earning enough to keep operations going much less give its shareholders a return on their investment. It says it must begin collecting higher tariffs which have since been put on hold by court action. Another key issue for AC Power is the circumscribing of the ability of the Public Utilities Commission’s (PUC) to assess penalties against it. One such penalty equivalent to $1.3B has been appealed in the High Court and based on the company’s present financial disposition it is in no position to pay it. The penalty relates to efficiency targets which should have been met by GPL.
The problems which have now arisen at GPL were apparently not foreseen in the negotiations between the government and the principals of AC Power - the Commonwealth Development Corporation and ESBI - in tough rounds of discussions in 1999. The overseas investors are therefore just as culpable for not adequately pursuing their interests during a period when the government was very keen on striking a deal after a Canadian investor had walked away.
For its part, the government inexplicably acquiesced to an extravagant annual management fee of US$3.6M for ESBI managers, who it is now accepted by all sundry have been unable to meet performance benchmarks, hence the PUC penalty. The management fee is an enormous drain on GPL’s finances.
It is now being argued by the investors that the power sector’s problems are more complex and critical aspects of the infrastructure more degraded than was thought at the time of the deal - evidence of either poor due diligence or misplaced optimism on their part. The dilemma has been further compounded by GPL’s inability to raise funds internationally for the repair of the transmission and distribution system as lenders are uncertain of its ability to repay under its current financial regime.
So now there must be hard bargaining. The government is under pressure to curtail the ability of the PUC to penalise GPL and to agree to a restructured tariff mechanism which would see the utility company earning the real cost of supplying electricity - taking account of significantly more expensive fuel - rather than always trying to catch up. AC Power is prepared to lower the agreed management fees and ESBI will depart.
However it ends, the government must be acutely aware that a revised deal must in no way jeopardise the ability of the average consumer to pay for electricity neither can it endanger the survival of many businesses which are barely making ends meet because of higher electricity costs, among other things, and which dilemma is now forcing many to consider self-generation.
Like any other investor, AC Power must be able to earn a decent return on its investment but not at the risk of annual tariff increases that outstrip the average increase in earnings of the salaried worker or the slim profit margins (if any at all) of the besieged private sector.
It remains a sore point that the government ever saw it fit to agree to a management fee. Investors taking stakes, especially in fully state-owned enterprises, would be expected as part of the original deal to supply management expertise in anticipation of the realisation of their agreed rate of return.
Further miniaturisation of the PUC’s powers will dangerously reduce the accountability of a crucial utility company to the public. Where the overseas investors control the GPL board, as they do now, this would be especially disconcerting. The PUC is already excluded from the rate setting mechanism. All it now does is to ascertain whether the variables plugged into the rate equation are accurately derived. The PUC must have the ability to levy penalties commensurate with the investor’s failure to live up to performance benchmarks that it itself agreed to in the 1999 deal. Anything else is simply a giveaway and reduces the incentive for the company to lower commercial theft and improve the efficiency of its transmission and distribution system.
Any new deal must set out fair targets with appropriate penalties where the company falls short. This is one among many responsibilities of the government in this process of negotiation.
Hand in glove with these talks should be a recognition by both sides that the future of electricity generation should not be hitched only to fossil fuels-fed generators but that a combination of alternative energy sources should be looked at. The volatility of oil prices in the wake of the looming war in the Gulf and the convulsions in the strike-hit Venezuelan oil industry spell misery for vulnerable economies like Guyana’s. The mix of energy sources and the parameters for introducing these into the electricity grid should be worked into a new deal in light of the concerns that have recently been voiced by prospective hydropower investors.
