Ministry, government on CUC

The Ministry of Communications, Works and Infrastructure and the Government of the Cayman Islands wishes to respond to the petition being circulated titled Caribbean Utilities Company, Ltd. Customers Demand Fair Prices.

The petition makes certain assumptions/assertions, which if left unanswered, could mislead the public to believe that the licence negotiations recently concluded between the Cayman Islands Government and Caribbean Utilities Company Ltd. were not conducted in the best interests of the consumer.

In December 2007, CIG and CUC announced that agreement had been reached on the terms of the new CUC licence and as a result the average residential consumer received a net reduction in his electricity bill in January, 2008 of about 15 per cent after taking into account the base rate reductions, the removal of the Hurricane Cost Recovery Surcharge, the fuel duty rebate and the addition of the regulatory fees and increased licence fees.

Had the HCRS been continued until paid in full (August 2008) consumers’ bills would be higher than they are presently. The cancellation of the HCRS, reduced CUC’s revenues and effected savings to the consumer of some $2.2 million. Indeed we are all fortunate that the licence negotiations were concluded before prices reached this level.

During the negotiations in late 2007, it was established that the average residential consumer used 824 kWhs a month. This average residential consumer is seeing substantial reductions in base billings from CUC under the new billing arrangement when compared to the billing rates that applied before the new rates were agreed in January 2008. The base rate per kWh has reduced from 15.91 cents to 10.15 cents.

Despite the huge increase in fuel costs, the average residential consumer is still seeing a lower bill, due to the lower base billing rate and the fuel rebate from Government.

For the month of May 2008, there were 20,474 residential consumers, of which 9,424 or 46 per cent consumed 824 kWhs or less.

Despite the facts that many are continuing to see the benefits of the recently completed negotiations, the Government is mindful that there are many who are experiencing increased costs in their electricity bills as a result of increasing fuel costs. To that end, the Government is reviewing all options with a view of further rebates providing they will result in direct and meaningful savings to consumers.

In recent months the price of crude oil (together with its derivatives diesel and gasoline) has increased dramatically from US$90 per barrel at the time of our press release (December 2007) to almost US$140 on Friday, 6 June. Some analysts expect prices to reach a level of US$150 this summer.

For the month of April 2008 CUC consumed some 2,539,408 gallons of diesel oil at a cost of CI$3.68 per gallon, plus lubricating oil. This price could climb significantly higher in the coming months. Clearly, neither the Cayman Islands Government nor CUC has any control over these prices. The spiraling prices of fossil fuels are not a local issue but a global issue. However, recognising that lower income residents in particular would feel the effects of increasing fuel prices Government gave and continues to give a rebate to the consumer of 20 cents for each gallon of diesel fuel consumed by CUC, which is 40 per cent of the import duty charged on each imperial gallon of diesel. Without that rebate, from Cayman Islands Government consumers would be even harder hit by the world wide increasing price of diesel.

Under the New CUC Licenses (as under the previous Heads of Agreement), fuel costs are a direct pass-through. There is no mark-up by CUC so that an increase in the price of diesel does not increase CUC’s profits. Each month CUC submits to the ERA a return of fuel and lubricating oil consumed in that month, the costs of that fuel and lubricating oil, the gross generation and sales of kWhs of electricity, and the efficiency per gallon of fuel used in producing those kWhs. These figures are checked by the ERA to ensure the accuracy of the fuel cost submission.

There is nothing unfair about this practice, which is in accordance with industry practice. The choice was between including this (together with the licence and regulatory fees) as cost items in CUC’s rates on which it would make a profit, or separating these components as pass-throughs. For the sake of transparency, the latter was chosen.

The ERA is in the process of being established. It will regulate the provision of service by CUC, and will apply performance standards in respect of efficiency and availability of its generation, outages, consumer service as well as a number other factors. Rewards and penalties will be applied accordingly. In order to fund the operation of the ERA it was necessary to introduce a regulatory fee. Once again, the Government was mindful of the small residential consumer and ensured that the licence and regulatory fees are charged only on consumption above 1,000 kWh, so any residential consumer with a monthly consumption of less than 1,000 kWh will not see any charge for licence and regulatory fees. In the past CUC has always paid a licence fee, which was imbedded in billing rates, and therefore all consumers paid these licence fees, now only those with monthly consumption above 1,000 kWh will see any charge for fees.

CUC’s base billing rates are frozen until June 2009. Under the new licence agreement the introduction of a Rate Cap Adjustment Mechanism, will limit the extent to which CUC can raise rates as a function of inflation. The target range for CUC’s allowable return is in the 9 per cent to 11 per cent range, with an average of 10 per cent, which is, 1/3 less than the 15 per cent that CUC was allowed under its old licence. Billing rates after review by the ERA could go up or down, depending on the RCAM calculation.

The Return on Rate Base that CUC actually achieved for 2008 was 11.1 per cent (2007 10.4 per cent per Final Return submission), however due to the agreed freeze on base billing rates, there will be no adjustment to base rates. Under the old licence, these RORB returns could have meant an increase in base billing rates of between 4 per cent and 4.5 per cent in each of the two years.

The ERA is now in the first stages of the first competitive solicitation process for additional generating capacity (16 MW for 2011 and 16 MW for 2012).

The ERA requested and has received a proposal from CUC to encourage generation from renewable resources, whether it be wind, solar or photovoltaic. Under this proposal a home owner with self generation who has excess generation of kWhs he cannot use, will be able to sell that excess back into the grid, and be reimbursed for that generation by CUC.

The Government continues to encourage residents to conserve on electricity use were ever possible in the short term by eliminating unnecessary usage. For example, house lights, computers and monitors should be turned off when not in use; raise the temperature on your air-conditioning to a comfortably high level etc. The greater your usage the more gallons of diesel are consumed, the cost of which is passed through to you.

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