Implications of the Sykes ruling

This is a submission by the University of the West Indies Energy Think Tank.

The recent ruling in the Jamaican Supreme Court, by Justice Bryan Sykes, that the exclusive licence granted to the Jamaica Public Service Company (JPS) by the minister of mining and energy in 2001 is invalid is being hailed in many quarters as a landmark event.

No doubt, this ruling will set in motion a whole cycle of appeals and counter-appeals. But it is clear that when the issue is finally resolved, it is likely to have far-reaching implications for the electricity sector in Jamaica. As such, it gives occasion at this point to consider some of the potential and practical effects of the ruling.

The euphoria of breaking the stranglehold of JPS's monopoly should be tempered by the fact that while rejecting its exclusivity, Justice Sykes was careful to underscore the legitimacy of the current JPS licence, which allows the company to operate an islandwide electricity generation, distribution and retailing system.

The ruling asserts:

"... The court concludes that the minister has the lawful authority to grant a licence to one operator to provide electricity, whether generation, distribution and retailing, for the whole island. The licence granted to JPS is, therefore, valid."

It further states:

"... However, the minister does not have the power to grant a licence on terms which prevent other applicants from having their applications being considered genuinely ... [or] ... bar the possibility of any other person entering the market for transmission of electricity. The term of JPS's licence granting it exclusive right to transmit electricity is not valid."

So, according to the Supreme Court, it is not that the JPS licence is invalid, but rather the term excluding other potential players from supplying electricity to consumers is ill-founded. In this regard, at least in the short term, nobody should expect the issuing of licences to new transmission and distribution companies to supply electricity to end-users in competition with JPS since this interpretation will most surely be challenged.

However, if Justice Sykes' ruling is confirmed by a higher judicial authority, the ruling opens the door for a number of possible competitive market configurations that could radically change the Jamaican electricity industry, including the following scenarios.

INDUSTRIAL ZONES

Even before the ruling, several of JPSs biggest customers have been exploring ways to escape the 40 US cents per kWh electricity bill (JPS says the August rate will be 32 US cents per kWh). It is in this regard that groups of industrial companies in proximity to each other could pool together to establish combined heat and power (CHP) plants that would allow them to use heat and electricity for their production process and air-conditioning needs at efficiency levels far superior to anything that JPS could achieve with its existing fleet of plants.

Areas such as the Kingston Wharves, the Caymanas Economic Zone or the Vernamfield Logistics Centre present a compelling proposition for the electricity sector to transition from being a drag on industrial expansion to becoming a catalyst for economic growth.

This ruling could make it possible for an independent power producer (IPP) to set up a generating plant within an industrial zone and supply electricity and thermal energy (heat and cooling) at an attractive price to a number of large consumers without encountering the high level of system losses now experienced by JPS. The low-priced electricity within these industrial zones has the potential to attract investments, generate new industries, and create new sustainable jobs.

CO-LOCATED POWER PLANTS

Even outside the collective arrangement necessary for the existence of the competitive supply of electricity in an industrial zone, a large consumer of electricity with no interest in operating a power-generation facility could invest in, and set up, such a facility. This new power-generation facility could be co-located with the existing power generating facilities of an IPP, then be turned over to the IPP under a management contract to operate the facility for a fee to meet the customer's electricity requirements.

BILATERAL AGREEMENTS

Already an amendment to JPS' licences in 2011 includes electricity wheeling. This means that a self-generator will soon be allowed to pay a fee to JPS for the service of moving power from one location to another on the company's grid. However, because of the exclusivity of JPS's licences, a self-generator can only wheel electricity to other entities owned by the same individual or company, thus limiting the economic and investment incentives for such an arrangement.

What the removal of the exclusivity would do is to open the door to other entities not just to wheel electricity to their own facilities, but to supply electricity to any other entity or household, provided they receive the appropriate regulatory approvals and permits. The ruling, therefore, has the potential of spawning bilateral agreements between companies for the sale of electricity.

JPS RESPONSE

On the part of JPS, the immediate, visible response to the ruling has been twofold. First, predictably, to appeal the Supreme Court's decision. Second, signal its intent to push ahead with the investment in the 360MW liquefied natural gas-fired plant, regardless of the ruling. Clearly, if the new plant lives up to the promise of reducing electricity prices by 30 to 40 per cent, it could stem the migration of customers from the grid.

However, electricity investments, by nature, are long term, capital intensive and highly industry specific. In this respect, investors in the sector almost always seek to minimise the high risk involved through long-term contracts, licences spanning multiple decades and the exclusivity of monopoly status.

The removal of terms associated with the security of an investment inevitably results in a higher risk profile that will either cause investors to shy away or demand a higher return on capital. Notwithstanding JPS's stated intent to continue with the new 360MW plant, the ruling may adversely impact the cost of debt capital for the US$614-million investment that is required.

In addition, there appears to be an increasing risk in respect of the new plant, caused not so much by the possible premature failure of the worn-out Old Harbour plants, but by the possibility that the infrastructure cost associated with the introduction of LNG may drive the cost of electricity up to the point where it is not much different from the current cost of electricity based on heavy fuel oil.

Furthermore, JPS might not just lose existing customers, but potential customers may opt not buy electricity from the company. It is not difficult to envisage that developers of new residential and industrial complexes, who must install new electricity facilities in any case, may in the future explore competitive options for sourcing electricity supply from IPPs that are without contractual restrictions to sell exclusively to JPS. Alternatively, they could invest in their own self-generating facility based on modern distributed generation technologies.

JPS, therefore, faces a dilemma. A good part of the dissatisfaction it endures today is associated with the high price of electricity. Now, if the Supreme Court ruling is confirmed, there is the increased likelihood of the loss of industrial customers and higher risk which, all other things remaining equal, may lead to higher electricity prices for those customers that remain on the grid.

Such an outcome would be unsatisfactory for most, if not all, stakeholders in the industry. Therefore, even before any further confirmation of the decision, it becomes imperative that deliberate and rational discussions and negotiations among the Government, the regulators and the JPS lead towards the introduction of the appropriate regulatory mechanisms that could enable a measured transition to a more competitive, market-efficient, and controlled-access electricity grid.

Indeed, Justice Sykes' ruling, in the context of the high electricity price environment, appears to be a tipping point for the electricity industry in Jamaica.

The minister of energy, Phillip Paulwell, might well see the ruling to be in line with his own vision for the sector. However, the minister's reputation as a shrewd negotiator will be severely tested as the dialogue deepens, and negotiations with JPS towards a more liberal electricity sector get on the way.

We can only hope that all parties and stakeholders involved continue to recognise and pay due urgency to the critical importance of a stable, secure and cost-effective supply of electricity to our collective futures.

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