The fact that Caribbean Utilities Company can bid on new electricity generation capacity has drawn harsh criticism from one of the Opposition MLAs.
West Bay Representative Cline Glidden Jr., who served as the chairman of the Electricity Regulatory Authority during the former United Democratic Party administration, said the government’s decision to allow CUC to compete with potential new companies for an additional 32 megawatts of generating capacity would hinder competition.
‘The Government has not displayed a serious commitment to competition in the long run,’ he said. ‘By allowing CUC to bid and control the process, it encourages CUC to utilise its inherent advantages to fend off potential competitors. In the long run this will only ensure that we are held hostage by a single provider and that cannot be good for the Caymanian consumer.’
On 16 October, the Electricity Regulatory Authority posted a Request for Proposal for the 32 megawatts of generating capacity, with 16 MW to begin service no later than 1 May, 2011, and 16 MW to begin service no later than 1 May, 2012. Proposals are due by 17 December, 2008.
CUC has 136.6 MW of generating capacity and has ordered another 16-MW generator that will go online by the end of September 2009. Although peak demand has been under 100 MW, CUC requires a minimum reserve margin of 35 per cent and a maximum reserve margin of 55 per cent to provide reliable service.
On 15 May 2008, CUC filed with the ERA a Certificate of Need, which it is required to do to demonstrate the need for additional generating units under the terms of its license agreement.
Just six weeks earlier, CUC signed a new exclusive 20-year transmission and distribution licence and a new 21.5 year non-exclusive generation licence.
In the Certificate of Need it filed, CUC projected peak load demand to increase five per cent a year from 2009 through 2012 and four per cent in 2013, up to a projected peak demand of 117.2 MW.
In addition to the expected growth in peak demand, CUC has scheduled the retirement of three of its generators in the years between 2010 and 2012, which will reduce its generating capacity by a combined 16.55 MW.
Satisfied with the Certificate of Need, the ERA issued Request for Statement of Qualifications on 1 July. On 16 October, it issued the Request for Proposal to four pre-qualified bidders, which included CUC; Basic Energy out of Santo Domingo, Dominican Republic; Marubeni Caribbean Power Holdings out of Georgia in the United States; and The Wood Group, also out of Georgia.
The generation license allows CUC to bid for additional generating capacity. Should the ERA award new generation to CUC, clause 7.3 of that license agreement allows for the automatic extension of the term of the license to the estimated retirement date of the new generators, not to exceed 25 years.
The government gave CUC its generating licence for 21.5 years because that was the estimated time until retirement of its youngest generating units when the agreement was signed.
Mr. Glidden said if the government were serious about opening up the generation of electricity to competition, it would not have allowed CUC to bid on this first tranche – after the signing of the new license agreement – of additional generation capacity needed.
‘There is no point telling the public that we are offering competition in power generation if the conditions of the RFP do not explicitly encourage that,’ he said.
In the event the ERA were to award the contract for the new generating capacity to a company other then CUC, Mr. Glidden explained that one of the provisions of the RFP requires the winning bidder to then enter into a separate negotiation with CUC for a Power Purchase Agreement before the new company can proceed.
‘But due to the way the RFP is written, it means that if those negotiations were unsuccessful, CUC would then start new negotiations with another firm and so on,’ he said. ‘CUC could essentially use this as leverage to have an unfair advantage in negotiating the PPA.’
Mr. Glidden believes the ERA should first license the new provider and then act as an arbitrator to ensure that the PPA is equitable for all parties.
‘The ERA’s role is crucial in ensuring that CUC, as the incumbent, does not abuse its monopoly position as a generator as well as distributor of electricity,’ he said.
Mr. Glidden said there were other competitive advantages for CUC in the bidding process.
‘If a new entry is awarded generation capacity, it has to put up a bond to CUC,’ he said. ‘If CUC is doing [the additional capacity], it doesn’t have to put up a bond to itself.’
Mr. Glidden said he understood there were no guarantees a new entrant could match CUC’s price, especially for the amount of new generating capacity available.
‘I’m not saying we should introduce competition at whatever the cost,’ he said. ‘I don’t want to see consumers pay more for electricity because there’s competition.’
If the bidding process were opened up only to companies other than CUC, Mr. Glidden said CUC’s current generation cost should be used as a reference point for the bids from the other companies. Those companies would have to demonstrate they could provide electricity at a rate that matched CUC’s or was less expensive, he said.
However, Mr. Glidden questioned why CUC was allowed to order the 16-MW generator that will go on line next year without putting it out to bid.
‘Why not put all 48 MW out to competitive bid so a new entrant could reap the benefits of scale?’ he asked.
Last year, however, CUC stated new generation capacity was needed by summer 2009 to meet expected demand with the proper reserve.
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