A consortium of foreign and local investors last Friday announced plans for a US$600 million investment in Liquefied Natural Gas (LNG).
Jamaica, however, will not begin using the cheaper source of fuel until 2012, provided the project remains on track.
SECTOR leaders yesterday blasted the Jamaica Public Service Company (JPS) and the Office of Utilities Regulation (OUR) over new increases in electricity rates and rubbished Energy Minister James Robertson
Businesses say any hike in electricity costs will hurt them
BUSINESS operators have joined the chorus of voices appealing to the Office of Utilities Regulation (OUR) to consider the welfare of customers of the Jamaica Public Service Company (JPS) in making their decision about a potential increase in electricity rates at this time.
On Monday, the Observer found little support from the business community for the annual inflation adjustment to non-fuel rates applied for by the JPS, which has attracted anger among householders and the tourism sector.
Erwin Burton, CEO of GraceKennedy’s GK Foods division, said that a hike in the cost of energy will erode his company’s ability to compete within the Caribbean.
“Any increase in the rate is going to affect our competitiveness. It is going to increase the cost of production. One of our biggest competitors is Trinidad and Tobago and the cost of electricity in Trinidad may be just 25 per cent of what it is in Jamaica. It means that our goods will continue to be less competitive,” Burton said.
“An increase in the cost of any input will have a negative effect on our competitiveness and energy is a significant input,” he added.
According to a report by the Caribbean Association on Electric Utilities (CARILEC) on electricity charges within the region the cost of electricity per 100,000 kWh for industrial customers in Trinidad is US$3,370.08 ($293,196.96). In Jamaica it costs US$26,187.14 ($2.3 million) for the same amount of electricity for industrial customers.
John Mahfood, CEO Jamaican Teas Limited (formerly Tetley Tea Limited), said the prohibitive energy costs are driving away potential investors from manufacturing.
“I think that operating a manufacturing business is pretty difficult in Jamaica because of some of the problems that we face,” said Mahfood. “One of them is that we have the highest cost of electricity in this hemisphere compared to what it is in the US and one of our major competitors which is Trinidad.”
He said coupled with the very high cost of security and bank lending rates, increases in the cost of energy also cause a strain on businesses. To make matters worse, Mahfood believes that this is due primarily to inefficiencies within the organisations which then try to compensate with high rates.
“What the OUR should be doing is trying to insist that the JPS finds a way to improve its efficiency rather than pass on the increase in inflation to the consumer,” said Mahfood.
The December 2009 CARILEC tariff report indicates that among the 18 countries listed, electricity rates converge around US$24 to US$36 per 100kWh per month for domestic customers and US$22,757 to $39,892 per 100,000 kWh per month for industrial customers. Jamaica’s rate at US$28.81 for domestic customers and US$26,187.14 is within this range. However, of the 18 countries listed, Jamaica’s utility company has the largest customer base of 584,218 customers as at the end of December.
In fact, countries such as Antigua, St Vincent and Dominica, which have slightly higher rates — US$35.70, US$28.68, and US$34.40 for domestic use, and US$745, US$682, and US$875.67, for commercial use (2,000 kWh per month) — have far fewer customers than the JPS. Antigua’s APUA, St Vincent’s VINLEC and Dominica’s DOMLEC have 32,067; 39,531; and 30,549 customers respectively, which brings into question the issue of the productive efficiency of the JPS.
The Observer tried to verify from the company whether it could not benefit from the economies of scale that would allow it to lower its cost relative to these other companies. However, the company did not respond to a request for comment on the issue.
Mahfood said he understood the issue of inflation affecting profitability but disagreed with the ‘principle’ for the increase. “It is not a cost that you can pass on to the consumer when the economy is performing so poorly and the spending power is so weak,” he said. “We can’t put up our prices because inflation increased, why should this institution be allowed to do that?” he asked.
Carrie McKie, sole proprietor of Dencari Salon and Spa, bemoaned the fact that even though the number of customers have declined since the recession and with it the use of electrical appliances in her salon, her electricity bill has increased more than four times the usual amount since the 10 per cent General Consumption Tax was added in March this year.
“My light bill has jumped. It is constantly going up. It is too much,” she said. “It already increased by 10 per cent because of the tax, so how much more they going to bring it up to?
“This is just too much. Everybody is crying because from the market go down people not doing their hair as much now. To face the bill at the end of the month when you are not making any money is too much,” she said.
McKie called on the OUR to consider the micro and small businesses that are already struggling when making their decision on the increase.
GraceKennedy’s Burton added that while some businesses would be able to absorb the cost of the increase, it would put more pressure on the viability of others. “If the cost of electricity is increased somebody will have to pick up that cost,” he said.
He, however, added that the OUR must perform a delicate balancing act to resolve the issue. “The JPS has a contract with the Government for a guaranteed return. I don’t think the OUR would want to renege on that contract,” said Burton. “There is a time when hopefully it will come up for review when we could change that. However, the OUR has to act in the best interest of Jamaica and the best interest of industry. I believe it has to be a negotiated settlement between the OUR and the JPS.”
The business operators have already made attempts to reduce energy consumption, but say these efforts cannot counter the real problem, which is the inherently high cost of electricity.
“We are constantly looking at how to reduce or overall cost and energy is one of our major costs in terms of our HiLo stores, manufacturing and cold storage facility,” said Burton. “Our new distribution centre has also put in LED (light-emitting diode) lights which should last about 15 years and are extremely efficient, six times more efficient than regular bulbs.”
McKie said her operations have changed as well. “I don’t have any AC, I hardly use the dryer because I mostly do locks and I have one computer which I use less than half of the day,” she said.
Mahfood said he has implemented a number of recommendations garnered from an energy audit done on his company to reduce the level of energy consumption.
“I think we have done as much as we can do, but when the rate itself is double the rate of countries that you are competing with you cannot really do anything to compensate for that,” noted Mahfood.
HOUSEHOLDERS yesterday reacted with anger at the possibility of an increase in electricity rates this month, with some saying that any such hike would be cruel at this time.
According to the majority of persons polled by the Observer in Cross Roads and New Kingston in the early afternoon, the Office of Utilities Regulation (OUR), which is to decide on the annual inflation adjustment to non-fuel electricity rates, should not grant the Jamaica Public Service Company (JPS) an increase.
THE possibility of electricity rates going up this month has triggered frustration in the island’s tourism sector which says it is already reeling from extremely high energy costs that are threatening to cripple its operations.
As a result, the sector is urging the Office of Utilities Regulation (OUR) to forego the annual inflation adjustment to non-fuel electricity rates, especially given that forward bookings have seen a significant decline because of the civil unrest in sections of Kingston last month.
Hoteliers and operators of attractions with whom the Observer spoke at the weekend all complained that their electricity bills have doubled over the past year.
“It’s killing us,” said Vanna Taylor, head of the Jamaica Association of Villas and Apartments. “It’s our single biggest expense. It is crippling, it really is.”
Pointing out that electricity costs vary depending on the product, Taylor said some stand-alone villas are receiving electricity bills of up to $40,000 per month, sometimes even in instances when the villas are not occupied.
“It’s still very, very expensive, just to run the pool and the basic things. Some small hotels are paying up to $1 million a month,” Taylor said.
“The OUR should forego any increase to JPS at this time; we just cannot afford it,” she said, adding that her concern was for householders as well.
Last Thursday, Spanish Ambassador to Jamaica Jesus Silva pointed out that the high price that local and foreign investors have to pay for electricity is hurting their ability to stay in business.
“The electricity factor is a very great hurdle to make investment in Jamaica profitable. It is a concern that the foreign investors have, and it is a concern also shared by some companies of the private sector,” Silva told the Observer after speaking to the issue at the Rotary Club of Kingston’s weekly luncheon at the Jamaica Pegasus Hotel in New Kingston.
He said that due to the high cost of electricity, Jamaica has become the second most expensive country in the Caribbean for Spanish hoteliers and that the problem is threatening their viability.
“There is only one country which is more expensive; Bahamas, which is only a little bit more expensive,” Silva said. “But apart from that they (investors) are paying something like 50 per cent more than in the Dominican Republic, which is an expensive country, and almost 100 per cent more than in Mexico,” he said.
Yesterday, Judy Schoenbein, area chairperson for the Jamaica Hotel and Tourist Association (JHTA) South Coast chapter agreed with Silva.
“You’re looking at small properties on the South Coast that have like 10 bedrooms with a swimming pool, some of them are up to $600,000 and $700,000 a month. Now how on earth are you going to be able to cover your operational costs with that kind of bill,” said Schoenbein, who is also a vice-president of the JHTA.
She gave an example of an attraction which, she said, operates six days a week from 9:00 am to 5:00 pm and is billed somewhere in the region of $420,000 per month for electricity.
The magnitude of the effect that energy charges is having on the sector was reflected in the figures provided by the Sandals/Beaches group, which said it has experienced an average increase of just over 50 per cent in utilities costs for the first four months of this year.
“In April alone, for instance, our utilities costs came out at $138 million, and electricity accounted for the lion’s share,” said Sandals executive David Davies.
He pointed out that the cost would have been higher had the resort chain not employed strict energy conservation measures.
“It’s really, really killing us,” said Sandals chairman Gordon ‘Butch’ Stewart, who called on Tourism Minister Ed Bartlett to get acquainted with the operations side of the tourism industry and ensure that the product is not prohibited from being upgraded by high overheads.
“My advice, for free, to Mr Bartlett is to get with the important part of the industry and see to it that hotels, once built, can be efficient, modern and profitable,” said Stewart, who is also chairman of this newspaper.
It is impossible, he said, for an older product to successfully compete against products elsewhere that are able to refurbish with relative ease.
Stewart said that he and his marketing team — which is now engaged in extensive Jamaica sales blitzes across Canada, the United States, United Kingdom and continental Europe in an effort to counter visitor fallout from the civil unrest — are willing to do anything to support Jamaica’s tourism marketing efforts, however “we cannot stand by and watch costs soar and not say anything about the mixed-up, messed up policies that are strangling tourism”.
The view that the electricity rates are too high and that the OUR should forego the inflation adjustment was also supported by Evelyn Smith, chairperson of the JHTA Negril Chapter; and Ian Dear, CEO of Island Entertainment Brands.
Said Smith: “Any increase to the sector right now on any of the cost inputs would be incredibly burdensome. We can’t bear it.”
Dear, who said that his electricity costs have “more than doubled in the last two years”, lamented that even though the businesses in his group practice energy conservation they are having difficulty making anything looking like a profit.
While he accepted that JPS needed to make a profit, he said that a guaranteed percentage return “puts too much pressure on everybody else”, especially when you have no choice but to use the JPS.
SPANISH Ambassador to Jamaica Jesus Silva yesterday bemoaned the high price investors have to pay for electricity in Jamaica, saying that it is hurting the ability of local and foreign investors to stay in business.
Electricity consumers paid an approximately J$12.5-billion energy bill for fuel used by provider Jamaica Public Service Company (JPS) to power its grid between January and March this year.
The utility bills its fuel charges as a pass-through cost to customers. The current charges came close to doubling the March 2009 quarter’s J$6.8 billion, tracking with the near doubling of world oil market prices within that 12-month period.
World oil is now trading at around US$70 per barrel, trending down from April’s US$85 high, but Jamaica buys on concessionary terms from Venezuela.
For the quarter, JPS, which is majority owned by Asian corporations Marubeni and TAQA, collected just shy of J$20 billion in revenue from which it grossed J$5.9 billion after fuel expenses and payments to its contracted independent power suppliers.
Higher maintenance charges, however, pushed operating expenses five per cent higher to J$2.95 billion, from J$2.8 billion in the comparative quarter, erasing the J$207 million of gains on gross profit.
The surplus from operations, net of larger depreciation expenses, was close to flat at J$1.96 billion. (JPS publishes its earnings in US dollars, which have been converted at a rate of JMD 89.51 for this year’s results, and JMD 88.82 for the 2009 quarter).
Bottom-line profit outperformed the comparative quarter, swinging from a loss of J$142 million to net profit of J$840.7 million – a 693 per cent turnaround.
The company is now valued at about J$68 billion by assets but a substantial J$17 billion of that is in the form of receivables or funds owed by debtors.
RevenueUS$223.2mFuel BillUS$139.9mGross ProfitUS$66.02mEBITUS$21.86mNet ProfitUS$9.39mAssetsUS$757.6mWorking CapitalUS$104.9mNet CashUS$25.55m
THE nation’s electricity provider, Jamaica Public Service Company (JPS), earned US$9.4 million ($841 million) net profit after-tax due to a 40 per cent jump in revenues with core expenses remaining flat for the quarter ending March 2010, which reversed the US$1.6 million ($143 million) loss it made in the similar quarter in 2009.
The company’s profit performance resulted from a US$64.8 million jump in revenue over the corresponding quarter in 2009 to US$223.1 million, and only a 4.4 per cent increase in operating expenses to US$32.9 million from US$31.5 million comparatively, according to just-released financials to the Jamaica Stock Exchange.
JPS
The Government has announced it is moving to change the agreement by which the Jamaica Public Service Company Ltd (JPS) is paid for providing street lights across the country.
Robert Montague, state minister with responsibility for local government, said yesterday that the move was intended to ensure that parish councils pay only for street lights that are working.
