CUC needed new generator

Grand Cayman might have faced electricity failures in 2007 had Caribbean Utilities Company not been allowed by the Government to order another generator last month, Minister of Works Arden McLean said in the Legislative Assembly Friday.

Mr. McLean made the remarks in response to a question posed by Leader of the Opposition McKeeva Bush, who was querying a three-page statement made by the minister in response to a paid advertorial titled ‘CUC gets its way’ from Mr. Bush that appeared in Cayman Net News on 2 June 2006.

‘The country could have been experiencing black-outs by 2007,’ he said in response to the question of what could have happened had CUC been made to wait until it had a new licence agreement before purchasing additional generating capacity.

In February of this year, CUC’s president and CEO Richard Hew also said the company could face electricity shortages in 2007 based on demand growth projections.

Mr. McLean took issue with many points made in Mr. Bush’s advertorial.

‘The advertorial reflects a poor knowledge and understanding of its subject, or alternatively, a desire to mislead the public, or both,’ Mr. McLean said.

In the advertorial, Mr. Bush said CUC’s recent announcement that it was purchasing a new 16- megawatt generator for approximately $18.4 million sabotaged a previous agreement to open up the electricity market to competition. He also said it meant higher costs for CUC consumers.

CUC is in negotiations to renew its licence with the Government negotiating team. Its exclusive licence, which expires in 2011, allows CUC to charge rates based on a 15 per cent return on investment. However, the licence renewal will be on a non-exclusive basis and will base electricity rates on performance factors.

Mr. Bush maintained the Government should not have allowed CUC to purchase new generating capacity without opening up the bid to competitors.

‘When the UDP Government had brought CUC to the table to negotiate opening up the sector to competition, the company had agreed that through receipt of 15 per cent return on investment in previous years, all the generating and distribution equipment in which it had invested was paid for, and the structure providing for that guaranteed return on investment had run its course,’ Mr. Bush stated in the advertorial.

As a result of the generator purchase, Mr. Bush maintained CUC would be able to receive a 15 per cent return on its investment.

Mr. McLean refuted the claim.

‘It appears the Leader of the Opposition does not understand that CUC would no longer be entitled to a return on asset base under any new licence,’ he said. ‘Instead, CUC’s rates would be performance based. However, CUC must be entitled to cover its cost of service in the rates charged.’

Mr. Bush said the absence of a competitive bidding process meant the Government did not know if CUC had bought the best piece of equipment that could be bought for the price it paid.

‘For all we know, CUC could have simply selected that plant because of its own preference, knowing very well that regardless of cost, consumers on Grand Cayman will re-pay that money through their bills each month while it makes a handsome profit,’ he stated in the advertorial.

Mr. Bush also said that by purchasing the 16 MW generator, there will not be enough leftover additional electricity demand to make it feasible for new companies to enter the Grand Cayman market.

‘When [CUC] goes outside the bidding process and acquires this equipment with a 20-year lifespan and increases its ability to produce power, the remaining electricity generating capacity needed over that period will be so low that it may make no sense for an investor to submit bids…’ Mr. Bush stated.

In his response, Mr. McLean said a combination of generator retirements and forecasted growth loads will allow a number of similar or greater increments in generation capacity over the next 20 years.

Mr. Bush and Mr. McLean also debated over which government did more in saving Grand Cayman consumers money on their electric bills.

The UDP Government was able to get CUC to roll back a rate increase it implemented on 1 August 2003. CUC deferred another rate increase in May 2004 while licence negotiations were ongoing.

In June 2004, the Government and CUC signed a Heads of Agreement to renew its licence through 2024, however Hurricane Ivan hit in September 2004 before the formal agreement could be signed.

The non-binding Heads of Agreement expired, and no new negotiations took place through the time of the election of a new government in May 2005.

About the same – as it does every year – CUC announced its unaudited yearly financial results which indicated, when taking into effect Hurricane Ivan losses, it was entitled to a 9.5 per cent rate increase on 1 August 2005, based on its current licence agreement.

After negotiations with the Government, CUC instead agreed to implement a temporary 4.7 per cent rate surcharge in order to recover hurricane losses.

‘The surcharge will terminate in August 2008 or earlier if increases in electricity sales exceed the budget and the surcharge is collected faster,’ Mr. McLean said in his statement Friday.

Mr. McLean pointed out that CUC also agreed to freeze its rates while the surcharge is in effect, meaning it could not recover the cost of the new generator now in any case.

In addition, CUC has had to defer an additional two per cent rate increase it is entitled to on 1 August 2006 under its current licence agreement.

Mr. McLean said the negotiations that led CUC to defer its 9.5 per cent rate hike and instead agree to implement a temporary 4.7 per cent surcharge amount to far more than the $500,000 in Hurricane Ivan recovery costs CUC would have absorbed under the Heads of Agreement signed by the UDP government.

Mr. Bush responded by saying the People’s Progressive Movement government had not gotten CUC to rollback their prices like the UDP government had, despite the rising costs of living.

Another point of contention concerned CUC’s rising fuel costs, which it passes directly on to its customers, as allowed in its licence agreement.

Mr. Bush questioned in his advertorial whether CUC should continue to do so with the cost of living so high.

‘Bearing in mind the large amount of guaranteed income CUC has received through payment by the people, is it too much to ask that this company bear some of these costs instead of passing it on [to] the people whose patronage over the years made it a successful enterprise?’

In his response, Mr. McLean noted that the Heads of Agreement signed by the UDP government also allowed CUC to pass through all fuel costs.

‘The Leader of the Opposition either did not at the time appreciate that fuel prices could increase, or his remarks are intended to deliberately withhold the facts of the Heads of Agreement that his Government negotiated… and create unrealistic expectations.’

Although Mr. McLean said he did not know when the negotiations between CUC and the Government will come to a conclusion, he said he was sure they would end before 2008, when CUC’s surcharge and the rate freeze would end.

Mr. McLean had indicated last month in Finance Committee during the consideration of the budget that the negotiations were progressing well and that he expected them to end ‘in a very short time’.

However, even though he echoed the statement that the negotiations were progressing well on Friday, Mr. McLean was not as optimistic the negotiations would be completed soon.

‘I am under no allusions they these negations will be concluded in any short time,’ he said. ‘It could happen at any time.’

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