What's wrong with the 381MW plant?

Donovan Dowie, Guest Columnist

It is reasonable that the Government must have a role in the crucial issue of energy. That role is very simple: open energy generation to competition with a minimum energy output capacity (say, 175 megawatts) and let all producers deliver to a centrally independent distribution grid. Power purchase would be determined and prioritised by the cheapest supply.

At forty US cents per kilowatt-hour, it is absurd that any regulator should be entertaining increases in electricity rates. The Office of Utilities Regulation (OUR) electricity rate determination framework was incorrectly conceived from the outset. The OUR must now begin to revisit it through consultation with the utilities and the public, and then it should revise the framework.

Also, take the role of the OUR in this matter. Given that the OUR will be the regulator in the future, it should not have anything to do with the process of selecting bidders ... . Full stop. It may have eluded most persons that the assumed intervention of the minister, the pressure from the PSOJ, along with clear conflict of persons in that organisation, and finally the reluctance of the OUR to grant extensions to its 'preferred bidders' all suggest that something must be wrong with the process. Indeed, something was wrong from the outset.

First, the OUR should not be in the process of selecting bidders. That should have been the role of a committee such as the one announced in Parliament. The OUR has the responsibility to determine the fairness and balance of rate applications brought to it by companies. In this regard, the current bidders cannot be judged on their future capacity to deliver the presumed rates they proffer in their bids as they 1) have no idea of what the future price for their fuel will be, and 2) have no idea of what their final agreement with the Jamaica Public Service Company will be either.

The OUR insists that it is responsible for utility providers getting a "fair" return on their investment. Consequently, the OUR should not be in the current process, as it would have already assessed from now that the preferred bidder has the ability to deliver the rates it projected. Therefore, if the bidder is unable to deliver the rates in the future, it follows that the OUR cannot extricate itself from the outcome, as it was part of the process of selecting the bidder in the first place.

The core of the country's energy future, if it is to experience progressively cheaper real unit electricity costs, is not to have a 381-megawatt plant, but instead have several competing providers selling to a cost minimising independent distribution grid. If 20 years ago we had exposed the JPS to several competing providers and created a central distributor of electricity, Jamaica's current base unit price for electricity could have been less than half.

So what is wrong with the 381MW plant? The simple answer is the 381MW plant! If the bidders all can deliver a 381MW plant, then they will be able to deliver one half that size.

LOGIC DEFIED

There is no inherent logic why the country shouldn't have three (or more) competing entities qualifying on the basis that they deliver a minimum capacity at a projected guaranteed minimum price band to the distribution grid. The argument that the larger plant provides more economy gains is weakened by the significant concessions which Government is providing to the successful bidder. This distorts any real analysis to compare the inherent benefits from the different-size plants vs greater competition.

All the 381MW plant does is expose the country to less risk diversity and greater monopoly-type supply. Yet we should at least examine the benefits from more competition. After all, there does not seem to be many champions in the Government or private sector for it.

Some of the benefits from competition would be: the companies that are up and operational faster would have an advantage and the country would see cheaper energy sooner than later. Also, since the licence is for a minimum capacity, the company that responds slowest may wind up out in the cold. In addition, for the competitive model to be effective, the regulator will have to gradually reduce base purchase price to the consumer, thus forcing the companies to be more efficient.

Most important, the Government must begin to set the basis for independent power distribution by insisting that JPS split into two entities: a power provider and power purchaser. This would not be anything novel, as this is what obtains in several countries and what was necessary after the telecommunication sector was liberalised.

A logical outcome of the proposed competitive model is that Government would have to relinquish its interest in the JPS. Advisably, the Government could take any of three routes. It could transfer all its interest into the power-purchasing entity that would be put up for public placement. Purchase the power-purchasing entity with the value of its interest and any shortfall financed through sales to pension or other long-term investment companies (e.g., building societies and insurance companies). Lastly, the power providers owning a percentage of the power-purchasing entity and the Government's interest should be sold to the public.

Rather than being distracted with a 381MW plant, the Government and country should be preoccupied with establishing structures and mechanisms to free the economy of monopolies and oligopolies. It should be charting ways to drive more competition in the energy sector and the banking sector. Oh, yes, the banking sector - but that is for another discussion.

Donovan Dowie is an economist and chairman of Hyperion Energy Fund. Email feedback to columns@gleanerjm.com and donovandowie@yahoo.com.