Frequently Asked Questions

The last comprehensive review of JPS’ rates took place in 2004. JPS is required to submit its non-fuel rate application once every 5 years (in keeping with the provisions of the All-Island Electricity Licence, whereby non-fuel base electricity rates are reset every five years). In the five-year intervening period, JPS is only allowed to make annual adjustments to its non-fuel tariffs for inflationary purposes, net of a reduction for expected efficiency gains (called the X-factor adjustment). JPS is also allowed to make a Z-factor claim annually for extra-ordinary events, such as hurricanes.

This application is made based on current costs facing JPS. This includes the operating and maintenance costs for the business, the financing costs, the depreciation of the asset base and a reasonable return for shareholders based on their equity in the business.

It is true that JPS has a monthly adjustment for changes in the price of fuel and a monthly Foreign Exchange adjustment as it relates to the non-fuel rates.

However, these adjustments do not cover the exposure to changes in input prices other than fuel (i.e. non-fuel inputs. Examples of these non-fuel costs include changes in interest rates (which impact financing costs), changes in commodity prices (which impact the prices of materials and equipment used to maintain the network), and changes in fuel prices (which impact the operating costs of JPS’ fleet of vehicles).

No. JPS does not derive any of its core profits from the fuel rate charged to customers. Fuel costs are meant to be a pass-through in general but subject to two efficiency measures: heat rate and system losses. Over the last five years (2004 – 8), JPS has in fact suffered net penalties on the fuel charges amounting to approximately $1.6 billion.

The proposed new tariffs will result in an increase in the total bill of customers, ranging from 4.3% to 26.8%, with an overall average increase of 22.8% for all customer groups.

While JPS sympathizes deeply with everyone’s plight at this time, the fact is that the Company has made losses in three out of the last five years (2004 – 8) and the current rates are not enough to sustain the business. JPS has invested approximately $4 billion per annum over the last three years to maintain the network and will continue to invest similar amounts going forward given the size and age of the network. An increase in rates is absolutely critical to ensure that the Company can finance these much needed capital projects going forward.

It is true that the reclassification exercise has resulted in an increase in employee costs going forward. JPS expects to have annual employee costs in excess of $6 billion dollars by the end of this year. While notable, this is not the main reason for the rate increase, which contemplates annual non-fuel costs in excess of $35 billion.

Although JPS has a new owner, it must be able to operate as a viable stand-alone entity on its own merit. The Company must generate enough revenues to cover its own operating costs.

As it relates to capital projects, which could include generation expansion, it is important to have a strong financial partner to help raise much needed capital. For example, to meet Jamaica’s need for a diversified fuel source, JPS plans to spend at least $20 billion (if approved) to introduce Petcoke to Jamaica; and possibly upwards of $50 billion to introduce Coal. These projects typically have a very long pay back period (approximately 25 – 30 years), so it is extremely important to have strong financial partners who are willing to invest and recover their money over these long time horizons.

JPS has made cumulative profits over the last five years (2004 –8) of approximately $2.6 billion. This is far less than the amount made by comparable company’s each year. In fact, in three of the last five years, JPS made a loss.

It is extremely important for JPS to be profitable if it is to continue investing in the development of the electric sector. This is to ensure that it will be able to attract much needed financing so it can continue to invest over $4 billion per annum on capital projects in relation to the existing network.

The Company also incurs annual operating costs in excess of $20 billion and has finance costs in the region of $3 billion per annum. JPS currently has an equity base of approximately $30 billion and total debt of more than $25 billion. JPS is an extremely capital intensive business, one of the largest by far in Jamaica, with annual revenues in excess of $70 billion in 2008.

JPS is doing everything within its capabilities to reduce the cost of electricity, including offering special discounted rates to the very poor. However, this business is extremely capital intensive and JPS must expend tens of billions of dollars per annum to keep the vital electricity sector going. In order to do this, it must run a viable business that can attract much needed capital to keep the sector going.

JPS does not have a guaranteed return. That is exactly why the Company made losses in three out of the last five years. JPS must manage its costs within certain regulatory parameters (efficiency targets). However, the regulatory regime does allow for JPS to apply for rates once every five years which will yield a reasonable rate of return provided the utility operates the business efficiently.

No. JPS made its first rate application in March 2004 and is required under the Licence to make an application every five years thereafter. Hence, JPS was due to make a rate application in March 2009.

JPS has made a concerted effort to reduce the theft of electricity, which now stands at about 13% of the electricity generated by the Company. In fact, the Company has spent between $300 and $800 Million each year on initiatives to address the problem of theft at all levels of the society. This rate increase will ensure that JPS can continue to intensify its campaign against electricity losses.

However, it is important to note that the theft of electricity is a crime and a socio-economic problem. Therefore, all stakeholders must get involved to ensure that we reduce this problem of crime in Jamaica. Accordingly, JPS has proposed several new measures as a part of this rate case application to address this crime. We believe we need to have certain legislative changes (e.g. increased penalties for the crime), increased support from the Government, increased collaboration with the police forces, as well as increased effort on the part of JPS. The Company has even suggested the stronger levying of penalties by the courts, and the direction of those funds (penalties) towards programs that are specifically geared towards infrastructure development (and other loss reduction initiatives).

JPS continues to work in collaboration with the police force to address losses in volatile communities. It has also made a suggestion in this rate application that would require legislative changes with a view to minimizing losses in volatile communities with high losses. Additionally, JPS is implementing anti-theft wiring and tamper-proof meters in certain communities to reduce the theft of electricity.

Despite making only $2.6 billion in cumulative profits over the last 5 years, JPS has invested in excess of $14 billion in capital projects alone to improve the electricity network, with a view to: improve the quality and reliability of its power delivery service, improve the efficiency with which it delivers this service, and reduce system losses (both technical losses and the theft of electricity).

This rate case application is really to the benefit of all stakeholders. It will allow JPS to be able to raise much needed financing to continue improving and expanding its network, to continue improving the quality of its power delivery service, and to continue its fight against losses. JPS is committed to improving the electricity sector for the benefit of providing a reasonable quality service to the people of Jamaica. However, this is a very capital-intensive business with annual operating costs in excess of $70 billions in 2008.

JPS has in fact made a loss in 3 out of 5 years since 2004. Despite this it has remained committed to spending over $3 billion per annum on capital projects alone. However, this is clearly not sustainable, given that JPS has debt-financiers to the tune of $25 billion and equity-financiers to the tune of $30 billion. JPS will not be able to attract much needed capital from these groups, let alone to honour its current obligations, if it does not obtain a rate increase.

JPS has improved its operational efficiency in several ways over the last 5 years. Here two such examples:

1. it has reduced its non-fuel costs by 2.72% per annum in the last three years through the tariff adjustment mechanism. This translated into savings of approximately $600 million for 2008/9; and
2. As a result of the significant capital expenditure since privatization, JPS is proposing to improve the efficiency with which it converts fuel oil consumed into electricity (as measured by the heat rate) by 4.5%. The proposed heat rate target of 10,600 kJ/kWh, actually represents an 11% reduction from the heat rate target of 11,900 kJ/kWh, which was set in 2002. This reduction is primarily the result of the significant generation expansion since 2002 including the 120 MW combined cycle plant and expansion by the IPPs. The 11% reduction at 2008 prices would translate into an annual savings of fuel costs of approximately $3 billion.

JPS has committed significant expenditure to continue upgrading its network, making the likelihood of an island-wide outage only a remote possibility. However, the system remains vulnerable to momentary interruptions due to weather related incidents (e.g. lightning strikes etc.) and due to trips on generation units (though we have significantly improved the availability of our units generally, while also reducing the forced outage rates). The Company’s intention is to continue investment in order to further strengthen the transmission and distribution systems. A number of customer service improvement projects will also be expanded of introduced, to include enhancement of our Customer Care Centre, continued training of team members, and ongoing reviews of our business processes to ensure that we deliver on our service guarantees.

JPS’ proposal reflects its mindset of continuous improvement and, in this regard the Company has recommended several improvements in its efficiency targets. The OUR will ultimately decide in which areas it wants to increase the quality of service measures, efficiency targets or penalties generally (e.g.. guaranteed and overall standards, quality of service measures, quantum of penalties, heat rate target and system losses target).

JPS has, in fact, been passing on annual efficiency gains of 2.72% to customers since 2006. This means that for the last two years the annual inflation adjustment to non-fuel rates has been reduced by 2.72%, which is the percentage by which the OUR expects JPS to improve its efficiencies.

The Company has also made significant contributions to community and national development, beyond the provision of electricity. Each year, the Company invests an average of $30 Million in community development, sports, education and health. Each year, the Company provides scholarships for needy secondary and tertiary students; sponsors a school feeding programme across the island; donates computers to primary level students; fosters the development of science and technology among students; sponsors community netball, football, and basketball league competitions; support medical institutions; and creates partnerships aimed at supporting the nation’s economic development.