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Even though the localeconomy continues on a downward slide, local consumers of electricityare faced with the reality of harder times as ...
CUC Seeks Rate Increase
Just eight monthsafter Grand Cayman's provider of electricity, Caribbean UtilitiesCompany (CUC) placed a reprieve on a two percent rate increaseas a gesture of good will after the September 11 attacks on theUS, local residents and local businesses may see a three percentincrease in their electricity bill come August 1, 2002 if theGovernment of the Cayman Islands approves the Company's requestfor a rate increase.
Peter A.Thomson, President & CEO , Richard Hew, Senior Vice President& General Manager, Eddington Powell, VP Finance and ChiefFinancial Officer
Last Thursday, CUC released its unauditedfinancial results for fiscal year ending April 30, 2002. In thereport, the Company cites a reduction in earnings from $19.306in 2001 to $19.275 in 2002, with earnings per share decreasingfrom .78 in 2001 to .77 in 2002.
According to the company's report, the declineis due to lower than expected electricity sales, unplanned generationmaintenance expenses of $318,000, restructuring costs of $120,000related to the phase out of the Planning & Engineering Division,and a one-time write down of $240,000 of obsolete equipment.
Despite an overall accumulative income of$83.7 million between 1998 and 2002, CUC is claiming entitlementof this increase as a result of CUC's US $29.3 million capitalinvestment program and the effects of foregoing a two percentrate increase on November 1, 2001 as a result of the impact onthe local economy stemming from the September 11 terrorist attacks.
According to CUC's financial earnings report,shareholders will receive a higher dividend, weighing in at 13.21percent over last year's earnings. Given that CUC will be writingdown its' 2001-2002 capital investments over the next five yearsthat the future earnings of the company, which will be realizedfrom the efficiencies expected from the new plant, could be reasonfor the company to put on hold the current three percent increase,especially as their own projections confirm that the electricitycompany will remain quite profitable despite the state of thecurrent economy.
CUC confirmed to Cayman Net News that ithas approximately 24 million Class A Ordinary Shares issued andoutstanding and 4000 shareholders. These shares are listed fortrading in US funds on The Toronto Stock Exchange. 77% of CUC'sregistered shareholders reside in the Cayman Islands holding morethan 50% of its outstanding Class A Ordinary Shares.
For instance, even with the current economicsituation still in a lull, CUC intends to make a global increasewithout even considering the prospect of forgoing a hefty returnfor an allotted period during these tough economic times.
Residents, instead will be expected to takethe load of the three percent increase despite the fact that 53percent of their income comes from commercial users and 47 percentfrom private residences.
However. Mr. Eddington Powell, Vice Presidentand Chief Financial Officer of CUC, counters that, "it isin every stake holder's interest that the company remain financiallystrong and attractive for the investment necessary to fund CUC'sCapital programs. Customers benefit directly from this Capitalprogram through improvements in reliability productivity and efficiency."
With this mantra, CUC has big plans forfiscal 2003, forecasting $15 million on expanding and upgradingthe T&D system and working on such Capital projects as thecompletion of the submarine high-voltage cable project and thetransmission line from Bodden Town to Frank Sound, closing thewest transmission loop, erecting a temporary Rum Point substation,energizing the Frank Sound substation, working on the loop-closingproject with a line from Rum Point to Frank Sound, and movingthe North Sound 69KV and South Sound Substations into full service.
Though Mr. Powell is careful to point outthat CUC has extensive forecasting models and through the company'sStrategic Alliance agreements, "we can move quickly to accelerateor decelerate the construction of a new plant if our forecastsdictate such action."
Yet, despite delays in the start-up of suchprojects as the Ritz-Carlton Resort and condominiums, the CaymanShores development, and the Kirk Harbour Centre shopping centre,CUC states that it needs a global rate increase as it expectsto spend $23 million to finance additional electrical infrastructureand generating capacity to accommodate these projects. Residentsare particularly perturbed that they will be expected to carrythe bulk of the cost to light up big-ticket commercial projects.
When asked whether it was fair or not toinitiate an across-the-board rate increase for predominantly large-scalecommercial projects, Mr. Powell responded, "We have experiencedgrowth across all our customer bases. The highest growth, however,has been in the small and medium commercial customer classes.It is important to our customers that our tariffs accurately reflectthe cost of service across all classes and customers."
To ensure this happens, the Company hascommissioned R.W. Beck Consulting Engineers in the US to conductan allocated cost of service study. The purpose of the study,according to CUC, is to "ensure fair, cost-based electricitypricing, to eliminate subsidized consumption and to develop ademand rate for larger consumers," the Cayman Islands Governmentintends to instruct the Cayman Islands Auditor General to conducta special audit of the Company's operations. The audit is expectedto be completed by September of this year.
Ernst & Young, appointed by the CaymanIslands Government, to look at the company's financial affairs,also audited the Company last year. E&Y's findings, submittedto the government in October of last year, is that the company'sfinancial results were correct in all material respects.
As the residents of the Cayman Islands awaittheir electrical fate, some suggest what others in past administration'shave. That a Utilities Commission be set up, with the supportof CUC. "We would have no problem with the concept of a regulatorybody as long as it is not a political body," says Mr. Powell."We do, however, have serious concerns about the potentialoperating costs of operating such a body."
CUC has a bit of an issue, however, regardingthe financing of a commission that will ensure fair and equitablepractices for all, Mr. Powell says, "CUC and its employeeshave a strong track record of community involvement that is secondto none within the business community."
Meanwhile, the question that still remainsis, what will CUC's record be within the residential communitywith a three percent rate increase at a time when unemploymentrates are at an all time high and Caymanians are being forcedto vacate their country and seek out work elsewhere just to makeends meet?
Come this September, the first anniversarymonth of the terrorist attack on America, local electricity consumers,especially residential subscribers are considering this act ofa threatened increase of electricity rates an untimely attackon their already thin pockets.
Terms of Referencefor Caribbean Utilities Company's Audit
The following are the termsof reference for the Special Investigation of Caribbean UtilitiesCompany Ltd. to be conducted by the Government's Auditor General:
1.0 The Guaranteed15% Rate of Return
a) To establish when and why was a 15% guaranteed rate of returnagreed; to advise whether this was a typical RoR expected forthis industry at the time the agreement was negotiated; and whetherit is still relevant in today's current economic environment withmarkedly lower interest rates, privatisation and competition inmany developed economies?
2.0 Generating Capacity
a) To validate whether the generating capacity complies with therequirements of the licensing agreement, and to prepare a historicalanalysis of actual generating capacity compared to maximum permissiblecapacity consistent with the terms of the Licence Agreement.
b) To determine why the formula for reserve generating capacitywas incorporated into the licence agreement and whether it isappropriate in the modern operating environment.
c) To review reserve generating capacity using a Loss of LoadProbability approach
[The terms of the licenceindicate that at all times CUC shall to their best efforts ensurethat the reserve generating capacity is not less than the ratedcapacity of the largest generator + 10% of the most recent annualpeak power demand. Unless approved by the Government, this reservegenerating capacity shall not exceed the rated capacity of thelargest generator installed + 40% of the most recent annual peakpower demand. Any new generating unit shall not exceed 20% ofannual peak power demand.]
3.0 Investment
a) To review CUC's power generation and transmission and distributioncapital investment program covering the period 1995 2010(forecast) and to evaluate the technical, economic and businessjustification of major projects from the viewpoint of all stakeholders(i.e., shareholders, employees, consumers, and Government), takinginto account the demand growth and customer growth forecasts.
b) This could be extended to other major capital projects oncepreliminary analysis of the Company's fixed assets has been completed.
c) To establish whether CUC perform ex ante evaluations of majorinvestments and to review the results thereof.
d) To examine the benefits of the strategic alliance agreementsbetween CUC and MAN B&W Diesel Germany and ABB T&D PowerCompany Inc. of the USA.
4.0 Production andSelling Costs
a) To compare CUC's actual production cost per KwH with othersimilar jurisdictions (i.e. small island economies in the Caribbeanand/or elsewhere that use diesel generation). A historical costtrend line could be established and projected if possible. A furtherbreakdown of the production cost per KwH would be useful (i.e.,Generation, T&D, Admin).
b) To compare CUC's KwH costs to residential and commercial customerswith other similar jurisdictions (i.e. small island economiesin the Caribbean and/or elsewhere that use diesel generation).A historical cost trend line should be established.
c) To benchmark key operating parameters, including system reliability,generating plant efficiency, losses by voltage level, and nontechnical losses
[It might be expected thatthere will be substantial variations in the costs of generationbetween different utilities, due to difference in fuel costs,local taxation, plant size and age, level of maintenance, etc.If possible, equalise the cost of hydrocarbon fuel tax (i.e. fueltaxes, surcharges, etc) when doing the comparisons.]
5.0 Fuel AdjustmentFactor
a) To validate the fuel adjustment factors applied for 2000 and2001 to CUC data.