GPL tariff mechanism may be obsolete
Stabroek News
April 2, 2003
With the collapse of the privatisation deal for the power company the question now arises as to whether the rate-setting mechanism which guaranteed the overseas investor a return on assets is still effective.
That mechanism, guaranteed the firm an allowable rate of return of 18% on US$70m in 2002 and yielded a deficit of $2.6B to be covered with rate increases of 13.9% and 16.6% for domestic and business customers. This was based on the calculation using the weighted average cost of capital formula and applying a guaranteed rate of return of 23%.
However, the privatisation agreements are to be terminated from the end of this month and the ownership and operation of the utility revert to the government in the interim until a new investor is found.
The government on Monday signalled its intention of implementing the higher tariffs as announced and which are now blocked by a court order.
But informed sources point out that the rate-setting mechanism is enshrined in the second schedule of the licences granted to the Guyana Power and Light (GPL) under private management as well as the management contract. Once these are terminated, the tariff mechanism cannot be effective and rate setting would be under the jurisdiction of the Public Utilities Commission (PUC) under section 32 (1) of the PUC Act which says rates must be just and reasonable.
Section 32 (2) of that Act provides for an agreement with the government and a public utility and the government and a private investor and deals with the issuance of a licence.
It has also been pointed out that even if the formula is retained as a method of fixing rates for the utility, there is no pressure for a return on equity as in the case of a foreign investor and in the interim, all the government would need to recover would be sums to repay GPL’s US$10M debt. However, the sources pointed out that there would be a US$2.1M savings in the new management structure as the US$3.6M management contract would be terminated and individual managers would be hired. This, the sources said, would negate the need for a sizeable increase in rates to meet necessary expenditure to keep the operations afloat.
The power company, under the management contract, was required to submit a final return certificate to the PUC by April 28 on the rate increases required for the year.
It is not clear whether this would still be a requirement under state ownership and if so, whether the deadline would be met.
