Last month, the Jamaica Public Service Co. (JPS) announced that it needed a 23% increase in the non fuel component of the electricity rate. At a press conference featuring the top brass of the company, Jamaicans were duly warned that if this increase was not granted, the JPS would be unable to upgrade its aging infrastructure and improve the service they provide. Board chairman Tomofumi Fudoka put it this way:
"Unless JPS becomes financially sound no one will make investment in base load facilities," he told journalists at a press conference at the JPS head office in Kingston on Friday.
Pointing to a worst case scenario if the OUR rejects its request for a rate increase, the chairman said they would be forced to reduce the annual capital expenditure which would affect any new electricity generation programmes in the future.
Having a reliable and efficient source of energy is absolutely critical to a developing economy like Jamaica. Without such, the country will stagnate even more and would have little prospect for the future growth. The words of the
JPS chairman are not simply a business request, they are ostensibly a threat. To temper his
veiled threat
Fudoka laid out the
dire alternative:
...without the increase, the company would have to turn to international lenders for the money, but these institutions would be wary of lending to a company in the financial position of JPS."It is very crucial that the JPS maintain a certain credit status, otherwise there would be no new project because no bank would lend money with such a weak financial credit structure," Fukuda claimed.
In an
earlier post, I argued that Jamaica needs to open up the power
generation market even more so in increase competition and stimulate investments in alternative energy. This is needed to reduce the strangle hold that the JPS has on the country.
From the Observer (4/3)
we find out that the
JPS has paid a substantial dividend to its shareholders. This
in spite of the fact that the company has not made a profit since 2006. Usually dividends are paid from profits, and if a company incurs a loss, not only is there no dividend, shareholders take a hit in the value of their equity. So whats the deal here? Well, in the absence of a profit, the
JPS has for the second year running, paid a dividend from their '
retained earnings.' As I understand it, retained earnings are from profits which are then reinvested into a company. Typically, earnings are 'retained,' rather than paid out in dividend, in order to increase the capital of a company, which then can be used make investments to improve or expand the company. Something smells here...
According to the Observer article, the
JPS has been guaranteed a '
return on equity' of 14.85% each year, and this is why they have depleted the capital of the company for the sake of making these dividend payments. Who made this deal? Who on Earth thought this was a good idea? How could this possibly be in the long term interest of the
JPS, or the Jamaican people? It seems to me that the overseas investors (who hold an 80% equity stake) are pillaging the
JPS and ripping of the Jamaican people in the process. This is a sham:
Yesterday, an industry analyst said that by remitting profit to its shareholders, JPS will reduce its capital and therefore the level of profit that it would be required to make in Jamaica - based on a return on equity formula worked out with the OUR.
JPS currently has a guaranteed 14.85 per cent return on equity based on its 2004 tariff review. The light and power company is presently seeking to increase the real return on equity to 21.6 per cent in its current tariff review submission.
JPS hopes to increase its non-fuel revenue by 60 per cent in an effort to secure $7 billion return on equity for 2009, and plans to get it by increasing energy rates to customers by as high as 97 per cent.
Who is looking out for the consumer here? Someone get the OUR on the line:
...the Office of Utilities Regulation (OUR) is not concerned that the raids will negatively affect JPS's ability to raise funds for expansion. This is because it benefits consumers (all things being equal) for JPS to rely more on cheap loans than equity to finance projects. "Equity is more expensive than debt. So from the consumer point of view it is better to finance projects by debt rather than equity," said a high-level technical source at the OUR who requested anonymity. "The banks prefer them to have the equity, but from a consumer point of view it is preferable to finance projects by debt rather than equity, so paying out a lot of dividends is not an issue."
In a normally a functioning world, the statement 'equity is cheaper than debt' would be farcical. Interest is not paid on equity like it would be on a debt. An equity investor becomes a partner in the business and takes on the risks and rewards which come along with running the business. Just like the equity partner the
JPS took on
earlier this year. This however is
Bizzaro World, and the OUR representative is 100% correct. Equity
is cheaper than debt in the case of
JPS because the OUR
guarantees a 14.85% return on equity!!! How my dear OUR friend is decreasing the capital of the company (essentially making it worth less) and taking on more debt (for a company which has not made a profit in three years), a
good thing for the consumer? Especially when we have been told by the chairman that people's light bill will have to be increased in order to secure THE DEBT!!!!
It seems to me that the Government of Jamaica did the country a grave disservice the way they privatized of the
JPS, and would have been better off keeping it. This approach of reducing capital and increasing debt, while raising prices is as harmful as it is
unsustainable. The real problem is, the
JPS is a monopoly and the majority owners (
Marubeni and their new partners
TAQA) know that at the end of the day, the government will have no choice but to bail out the
JPS if it gets into real trouble. It is heads we win tails you lose. This arrangement needs to be revisited immediately and the pillaging put to an end.
