Review of performance of privatised Caribbean utilities

1
Review of performance of privatised Caribbean
utilities

• Presentation to UWICED/SIDS Unit Experts Meeting
  on Capacity Building and Development of SIDS
  Energy Sources
• Niue 8 11 July, 2003
• Basil Sutherland Independent Consultant

2

• Current policy framework a brief review of
  industry structure, energy policy and utility
  regulatory history in the Caribbean
• How effective have these policies been? Have
  developments yielded the expected benefits?
• What lessons have been learned?
• What new arrangements are needed to ensure better
  performance, particularly in the area of using
  new and renewable energy?

3
(No Transcript)
4
Industry structure and current regulatory
practice in the region

• The structure of the industry and the regulatory
  arrangements generally characterised by
• The existence of vertical monopolies
• The existence of 20-50 year exclusive licences
• regulatory procedures which, with only few
  exceptions, are not open to public scrutiny
• Very few tariffs are incentive based
• Most utilities have cost-plus tariffs which
  guarantee a rate of return on capital

5

• Virtually all tariffs have fuel cost recovery
  clauses but only very few of these also have
• heat rate targets
• targets for transmission losses
• benchmarks are not widely used
• Although some have voluntary customer service
  standards, very few have such standards imposed
  in their licenses

6
Liberalisation Privatisation

• Key energy policy initiative pursued most widely
  by Caribbean governments in recent years has been
  the privatisation of formerly state-owned
  electric utilities
• Privatisation is motivated by
• budgetary pressures
• desire to attract private capital
• need to improve efficiencies

7
Issues relating to Liberalisation Privatisation

• Privatisation and liberalisation have raised
  several questions
• ability to address security of supply in the most
  economical manner,
• extend accessibility to energy services,
• and to promote sustainable development
• Questions also arise as to degree of control
  governments have over privatised utility

8

• Often, current sector arrangements do not reflect
  the fact that the objectives of national economic
  policy are often wider than the interests of the
  power sector
• Policy should not stop at ensuring the viability
  of electricity generation and distribution in a
  country
• Viable electric utility only important within
  context of overall economic development

9
Antecedents - How did we get to this position?

• At one time electric utility industry
  characterised by dozens of disparate and small
  generating facilities scattered around each
  country
• Sometimes these were privately owned but more
  often they were government-owned facilities
• To allow for orderly expansion of facilities, as
  well as the opportunity to reduce operating
  costs, governments intervened to create unified
  and centrally managed electric utilities

10

• Several jurisdictions at one time had Public
  Utility Commissions and legislation and other
  judicial or quasi-judicial processes governing
  the approval of requests for changes in
  electricity tariffs
• Processes usually involved complicated public
  hearings
• Dominica, St. Lucia and Jamaica

11
Difficulties with earlier arrangements

• Firstly, regulators in those days were often
  untrained in regulatory matters and had little or
  no background in the sector
• Secondly, utility commissioners probably
  misunderstood their mandate and often saw
  themselves solely as defenders of consumer
  interests and paid little attention to
  reasonable requirements of investors
• Thirdly, and perhaps because of the first two
  reasons, the process turned out to be exceedingly
  time consuming resulting in considerable
  regulatory lag

12

• Hearings were often contentious
• The result was that tariffs were held at levels
  significantly below the marginal cost of supply
• There was significant under-investment in the
  power sector leading to capacity shortages
• private investors were unwilling to invest if
  returns could not be assured
• even governments themselves were loathe to invest
  capital in enterprises which did not provide
  positive returns
• because subsidies were often needed, utilities
  operated on hand-to-mouth basis and supply became
  unreliable and efficiencies deteriorated

13
- and some solutions ...

• In an effort to mobilise fresh private capital
  for the sector, governments moved to simplify
  regulatory arrangements
• Repealed or allowed public utility commission
  legislation to fall into disuse
• Granted exclusive licences which provide
  guaranteed rates of return on capital employed

14
- Yielding largely positive results ...

• Increased investments resulted usually
  accompanied by increased rates and most
  jurisdictions with private involvement in sector
  no longer suffer from significant shortages of
  capital
• Over time, forgetting the earlier period,
  governments and customers have now become
  dissatisfied with arrangements
• Perception now is that there is insufficient
  transparency in utility operations
• Driven largely by developments outside the
  region, perception is also that competition will
  improve service and lower prices

15
Where and how could such competition take place?

• Transaction costs are not insignificant
• estimated that the first IPP venture in Jamaica
  incurred costs amounting to well over US2.5
  million for legal fees alone
• The conclusion appears to be that the scope for
  meaningful competition at the core level of
  supply is very limited
• competition however possible in cases where
  generation for own use permitted using grid for
  back-up
• more competition in procurement and the
  competitive outsourcing of certain non-core
  functions possible

16
Conclusions regarding competition

• Market liberalisation therefore limited in scope
  in Caribbean introduction of supply level
  competition at the core cannot be used as a
  reliable tool to minimise costs
• Where competition is not possible or practical,
  governments must ensure that regulation be
  implemented to
• protect consumers by attempting to use it to
  approximate market value of service
• protect utilities by allowing them to anticipate
  a sustainable return on investment
• determine standby connection tariffs,
  transmission open access etc. for self generators

17
Regulatory issues and options

• If utilities do not succeed, everyone loses
  consumers, investors and government
• Utility will need to be regarded as a
  public/private partnership rather than a purely
  private enterprise even if it is privately owned

18
Context and purpose of the Case Studies

• Many privately owned utilities believe
• they should service their clients by focusing on
  efficiency, including cost-effective
  technologies and
• making electricity available to the poor and
  rural areas is mainly an issue for social policy

19

• several utilities have established non-optimal
  planning criteria for the retirement and
  expansion of generation capacity
• Very few include economic as opposed to purely
  financial criteria in their planning
• the absence of heat rate and technical line loss
  targets in the tariffs in several countries means
  that inefficiencies in the use of fuel are simply
  passed on to the consumer via fuel surcharges

20

• Because of absence of environmental analysis and
  legislation which captures environmental
  externalities and allocates costs to the utility
  sector and consumers of electricity,
  environmental consequences are rarely factored
  into the analysis of privatization costs and
  benefits

21
Policy reforms needed

• Generally, the answer to several of the above
  questions, is that there is a need for
  policymakers to introduce effective, strong and
  transparent regulatory frameworks while avoiding
  detailed interventions by government in the
  sector
• This regulatory framework should be independent
  and set clear guidelines as to what utilities are
  supposed to do, and what incentives they will be
  allowed for the pursuit of social objectives

22
Privatisation objectives

• The purpose of the case-study evaluations is to
  determine the extent to which each of the
  privatisation objectives have been achieved where
  previously stated, but more importantly, to
  determine
• whether the respective government has been
  relieved of the financial burden of meeting the
  financial needs of expanding the sector
• the extent to which the service coverage and
  quality of service objectives set during
  privatisation negotiations have been achieved

23

• the extent to which reliability of service has
  been improved
• the extent to which governments have received
  optimum returns to national budgets from
  privatisation/divestment of what is a significant
  national asset
• whether the objective of securing the lowest
  possible prices for electricity has been met

24

• the extent to which the privatisation within the
  context of the existing regulatory arrangements
  and sector policy framework has encouraged or
  discouraged the use of renewable energy for the
  production of electricity
• how the regulatory environment has facilitated of
  hindered the process of privatisation

25
Outcomes

• While certain positive effects have resulted from
  the privatisation of electric utilities also
  several unexpected and unintended consequences
• It is clear that several of the original
  objectives of the privatisations were not
  achieved in the arrangements eventually entered
  into. For example

26

• In several cases governments did not satisfy the
  objective of receiving the maximum returns from
  the divestment
• Most privatisations have so far failed to achieve
  a lowering of the real price of electricity
• So far also, the levels of line losses have not
  been reduced significantly, and generally,
  privatised utilities do not show lower losses
  than government owned bodies

27

• It would appear that the only significant benefit
  which has accrued from privatisation is that of
  relieving governments of the financial burden of
  expanding the sector
• and even this has not been achieved in the case
  of Dominica
• privatised utilities have shown little regard for
  governments desire to encourage renewable energy
  development

28

• On the other hand, the programme to attract
  private power by way of independent power
  projects has been largely successful in Jamaica
• the lowest cost producer on the system in Jamaica
  is now one of the IPPs.

29
Lessons learned conclusions

• The main conclusion that can be drawn from this
  review is that the chances of success in
  privatisation of the power sector are more
  assured when
• the policy framework, including the regulatory
  regime, is consistent with Governments
  expectations for the sector
• Any new regulatory regime is set up ahead of the
  privatisation and has had sufficient time to
  demonstrate regulatory independence over a
  reasonable period of time

30
Some preconditions for success in developing
renewable energy

• To assist utilities and their customers to
  achieve efficient energy conversion and end-use,
  and encourage renewable energy development,
  governments and regulators should ensure that
• electricity rates reflect the true cost of power
• tariffs are incentive-based and are not cost plus
• Over the long-run, the policy framework should
  also take account of environmental externalities

31

• to encourage the development of renewable energy
  projects, governments and regulators could also
  consider allowing electric utilities a margin of
  preference of up to 15 external benefit for
  power it generated itself or purchased from
  Independent Power Producers
• the utility would pay up to a 15 premium for
  electricity generated from renewable sources
  compared to the average price paid for fossil
  fuel generated electricity and be allowed to
  recover these costs in the tariff
• this would ensure that renewable sources of
  energy become a part of the electricity
  generation mix this margin could be reduced on
  a phased basis

32
How can utilities contribute to achieving
governments objectives for developing renewable
energy?

• Utilities can assist in achieving objectives of
  energy conservation policies and other policies
  to reduce GHG emissions in several ways
• reduce technical losses to economically optimum
  levels
• improve fuel efficiency of prime movers
• set up demand side management programmes
• give support to development of economically
  feasible renewable energy projects
• Build capacity among their staff to understand
  the potential long-term benefits of renewable
  energy use