JPS: Government must serve notice of termination

The first draft of this article was scripted months before Beryl’s arrival and therefore should not be read as a reaction to the performance of the Jamaica Public Service (JPS) in its wake. However, Beryl has substantiated the argument for the termination of the existing licence and the charting of a new path.

LICENCE RENEWAL 2027

The current licence with JPS ends on July 8, 2027. The Government has the right to acquire the business at that time, but it must serve notice of its intention at least two years before the expiration date. Failing such notice, the licence will continue with the same terms and conditions for another 10 years.

It would be an error of colossal proportions if the Government failed to give such notice by July 7, 2025. If JPS were, by default, to remain as the sole service provider, they would effectively be given a blank sheet of paper to write the country’s energy policy for the next 20 years.

ELECTRICITY SUPPLY MODULES

To appreciate the strategies at play, it is essential to understand the business. Electricity supply consists of three modules: generation, transmission and distribution. Prior to privatisation, the main challenges were in generation – unserviceable and outdated equipment. Transmission and distribution were far less problematic. JPS has engaged independent power providers which has largely resolved the generation issues. Distribution, and to a lesser extent, transmission, have had cursory attention during the period.

FAILURE OF NESOL

The National Energy Solutions (NESol), formerly known as the Rural Electrification Programme, is entrenched in the current licence agreement with responsibility to stimulate expansion in the distribution network. It is also tasked with providing alternative solutions which would largely involve solar systems.

The entity has fallen into disgrace. The engagement of unqualified personnel, lack of leadership, and high-level corruption have rendered the entity ineffective and useless. NESol’s responsibilities are now assumed by the energy ministry.

The role of NESol is almost as important as that of the Office of Utilities Regulation (OUR). It ought not to be directed by a ministry on a day-to-day basis. It must be organised to deal with the technical complexities that will hold JPS to account.

JPS STRATEGY

JPS has recorded a return on investment of 9-10 per cent over the past 12 years. That return is considered very good in the context that most of the market risks are minimised by the licence. Over the same period the Dow Jones return was 9.6 per cent.

JPS should be given more than a passing grade in restoring some degree of normalcy to electricity supply since privatisation in 2001. In 2016, they produced 78 per cent of the electricity requirements, leveraging its expertise and knowledge of the technology.

Last year, the company produced only 25 per cent while purchasing 75 per cent from independent suppliers. If this trend continues, JPS’s role could be reduced to that of an ‘electricity broker’, eliminating the need for their known expertise in electricity generation.

As it relates to distribution, JPS has no incentive to having a ‘better’ light pole. It is a case of fixing it when it breaks. There is obviously a misalignment between JPS’s strategy and that of the Government whose desire is to have a serviceable distribution system that will not fall apart in instances of less than severe weather conditions.

THE ACQUISITION PRICE

According to Condition 27 (Acquisition of Service), the business is to be valued as a going concern. At the end of 2023, the book value was US$600 million and profit after tax was US$68 million. Considering the market risk, this business could attract a price earnings ratio of 10 for a computed value of US$680 million.

Of course, JPS will want the best price possible, and the extent to which it can improve profits over the next three years, it will.

In 2019, profit was US$23 million. This computes as an annualised increase of 24.1 per cent over the five-year period (2019-2023). If this profit growth continues to 2027, it would increase the purchasing price significantly while the book value remains flat.

Worthy of note is that a subsidiary of JPS, South Jamaica Power Company Limited, paid dividend of US$15.1 million in 2023. Considering that the subsidiary’s profit for that year was only US$6.9 million, that payout must have been accumulated over time, possibly three years. This is inconsistent with the parent company’s own dividend policy. Dividend policy has a way of shaping valuation, and one needs to be cognisant of the impact of simply moving funds around.

This business should not be priced on a going concern basis, given the fact that exclusivity would no longer be in place as per Condition 2, subsection 4(b) at the expiration date.

TERMS OF NEW ENGAGEMENT

The Government should take the following into consideration:

• They should serve notice under Condition 3 and set in process the acquisition of JPS with intent to resell. This is the only way to ensure a clean agreement that aligns with the overall energy policy going forward with the new investors.

• The next licensee should focus clinically on improving distribution and transmission of electricity and less on generation.

• NESol should be reorganised in a manner that it can demand compliance by the new licensee with the overall energy policy. It must be staffed by competent personnel. Taking a knife to a gunfight has a predictable outcome.

• They should aggressively support and encourage the use of renewable energy as one of the means of reducing the load on the distribution system.

• They should continue as a minority owner but must assess what level of ownership best serves the public’s interest.

Kenton Palmer is an engineer, with degrees in finance and law, and has, over the years, contributed op-ed articles to The Gleaner. Email feedback to columns@gleanerjm.com