The Incredible Increases in Electricity Rates To the Editor
Guyana Chronicle
February 4, 2002

The interim increases in electricity rates of more than 20% appear to be excessive. But I need much more than the newspaper reports to arrive at a firm opinion. I am awaiting a copy of GPL's submission to the PUC as well as a copy of its licence, which, if my understanding is correct, includes the formula for the fixing of rates. In the meantime, I offer some tentative comments.

If it is a fact that government subsidies were phased out in 2001 and that electricity rates have already been adjusted to absorb this loss, there is a justifiable presumption that the increases reflect a decline in the efficiency and productivity of GPL's operations. But, as will be shown later, GPL is effectively protected by the Electricity Reform Act from regulatory scrutiny of its operations. Without such scrutiny, regulation is a sham.

GPL's CEO, Mr John Lynn, has reportedly said that the hikes are necessary because GPL's assets have increased. Additions to assets (mainly new equipment) should not account for such steep increases, except in two situations. One is where the company is applying accelerated depreciation in its computation of its operating costs. This could lead to a significant inflation in the utility's rates. Accelerated depreciation is relevant for income tax purposes, but is not applied in determining expenses in public utility ratemaking. For public utility rates, depreciation charges should reflect normal asset utilization. This is consistent with the requirement that rates should reflect the actual cost of providing the service. It is unfair to require current consumers to pay for the cost of providing service to future consumers. Costs must be fairly distributed over the useful life of the asset.

Another possible reason is the method used by GPL for the valuation of its rate base. If the company is revaluing its assets in constant U.S. dollar terms, instead of using the original cost method, as required by the PUC Act, its rates could be significantly inflated. ATN's auditors, the international accounting firm of Arthur Andersen, has defended this practice by GT&T. I have shown elsewhere that the advice was wrong. In giving its advice, Arthur Andersen completely ignored the PUC Act and regulatory practices in North America. If the formula for electricity pricing rates allows GPL's assets to be revalued in constant U.S. dollar terms, the rates could rise very steeply, even without additions to assets and with other costs remaining unchanged.

Mr Lynn is reported as saying that electricity sales in 2001 fell below the level of the previous year. His explanation is that this, to some extent, was because of inflated sales in the past. I cannot pretend to understand this explanation. There could be other even more plausible reasons - declining demand due to higher prices and a slow down in economic activity. If this is the case, Mr Lynn and the Guyanese people have much to worry about. The steep increase in electricity and the deteriorating economic conditions could further reduce electricity demand and trigger another round of increases. This cycle could be repeated until the economy recovers.

A leading Guyanese businessman told me in Georgetown last December that, for many industries, the cost of utilities (mainly electricity and telecommunications) is already exceeding thirty percent of overall cost. Rising utility costs could drive out businesses, thus intensifying the downward pressure on the economy. Where will it all end? The situation is ominous.

Someone suggested to the C.E.O. that the rate of return formula employed by GPL was not used by other countries with stable electricity supply, implying that the formula was responsible for the steep increases. Mr Lynn responded that that was what the Government agreed to in the contract with CDC/ESBI. Mr Lynn's response cannot be faulted, but the concern expressed is absolutely justified. The fact is that the system for fixing GPL's rates has no parallel in regulatory history. It is a Guyanese innovation that is not exportable.

GPL has been guaranteed a rate of return of 23%. If in any year GPL fails to achieve this return, it is allowed to increase the rates in the following year to recover the loss. This alone could be responsible for the steep increases. As far as I am aware, this practice exists in no other country. What happens in all other systems is that rates are approved which are considered sufficient to allow the utility to achieve the agreed return, assuming reasonably efficient management. A regulated monopoly has an obligation to provide services on a least cost basis. If the rates are guaranteed by allowing the utility to recover losses by raising rates in subsequent years, there will be no pressure on management to maximize efficiency.

Increasing rates to recover losses is tantamount to retroactive ratemaking. Consistent with the practice in public utility regulation, this is not allowed under the PUC Act. When a rate case is concluded, section 46 of the Act does provide for the imposition of a surcharge, with Commission approval, to recover uncollected revenue, where the rates that have been finally approved (the permanent rates) exceed the temporary rates previously approved. However, this is not retroactive rate making. Space does not permit me to develop this point.

In rate of return regulation, a cardinal duty of the regulator is to investigate the utility's costs to determine whether they are reasonable and justified. In a cost plus arrangement, this is plain commonsense. The PUC has no such role with regard to GPL. In the GPL arrangement, the PUC has a secondary and most ineffective role in the fixing of the utility's rates. The real regulators are the independent firm of accountants ("IFA"), which is appointed to certify the information submitted by GPL in support of its case, and GPL itself, with GPL having the upper hand. The IFA is appointed by the Commission but the firm must be acceptable to GPL and "may be the Company's independent firm of accountants.

GPL's interim rates are based on its unaudited internal management accounts and an interim certificate presented by GPL, certifying the company's interim return. The submission has to be made within 28 days following the beginning of the financial year. The Commission's function is limited to the routine task of verifying the interim return presented in GPL's interim return certificate (the return actually earned in the previous financial year) and to authorise increases or decreases in the tariff to a level consistent with the agreed 23% rate of return. The most that the Commission could do is to see whether the computations are correct, based solely on the documents presented. (There is no need for this mechanical task to be performed by a commission).

Not later than the end of April of the financial year, GPL has to submit to the Commission (i) its audited accounts for the previous year, (ii) a final return certificate prepared by its management, (iii) a certificate of compliance or non-compliance issued by the IFA and (iv) any other documents required to be submitted by its licence. If the IFA submits a certificate of non-compliance, GPL and the IFA are given up to 21 days to resolve the difference. If they fail to agree, each is required to submit a separate report and the Commission is left to make a determination on the basis of the documentation before it. If the IFA fails to issue its certificate or present a report in case of disagreement, the Commission is legally bound to accept GPL's documentation for the approval of the rates. With GPL's leverage in the selection of the IFA, it is doubtful that there will be any serious disagreement, particularly where the IFA is GPL's external auditors.

What is most notable about this arrangement is that the Commission has no investigative role. The Commission is not required to investigate whether GPL's costs are justified or reasonable, an absolute necessity in cost plus ratemaking. Also, the Commission does not have the responsibility to investigate whether GT&T's failure to achieve its 23% rate of return is due to the incompetence or culpable negligence of its management. (In no circumstances should a utility be rewarded for such performance at the expense of consumers.) Here again, the Commission's function is limited to a review of the documents submitted by the Company and the IFA, and rubberstamping the final return and the permanent tariff, after examining the documents presented, a futile exercise, in terms of public utility regulation. Moreover, there is a total absence of transparency in the process and the system provides no means for consumers to ensure that they are getting a fair deal. The Commission, the people's watchdog, has been re-engineered by the Electricity Reform Act. A real responsibility to approve the rate of return report lies with the IFA, which, as previously stated, could be either GPL's auditors or a firm of accountants acceptable to it. The work of the IFA is done under an agreement between the firm and GPL. The Enron disaster has demonstrated to the world how unwise this kind of arrangement could be. Moreover, all that the IFA is required to do is to examine GPL's accounting records. This is less than the work of an external auditor. By no stretch of the imagination could this be seen as rate regulation. The accounts prepared by a public utility for income tax purposes, or in keeping with normal business accounting practices, are not of much use for regulatory purposes and the IFA could do nothing credible on this basis for the purposes of rate of return regulation.

As for the Consumers, residential and business, they have been excluded altogether from the process. I can think of no other system in which the interests of consumers have been so totally ignored or in which the regulatory commission has been so effectively neutralized. To be brutally frank, I do not see what can be done under the Electricity Reform Act or the PUC Act (which has been over-ridden by the former) to ensure a fair deal for consumers. Consumers can protest and the Government can protest, but the Electricity Reform Act has removed all the traditional regulatory controls and safeguards to ensure a fair deal for consumers. The only comfort I could offer to the consuming public is in the words of the Supreme Court of New Jersey:

"The law has been developed, no doubt, because the system of rate regulation and the fixing of rates thereunder are related to constitutional principles which no legislature or judicial body may overlook. For if the rate for the service be unreasonably low, it is confiscatory of the utility's property, and if unjustly and unreasonably high, it cannot be permitted to inflict extortionate and arbitrary charges upon the public. And this is so even where the rate or a limitation on the rate is established by the legislature."

The principles referred to by the New Jersey Court have been incorporated in the Guyana Constitution. It appears that if GPL's rates can be proved to be "extortionate and arbitrary," a challenge could be mounted on constitutional grounds. But this may not be an easy task partly because of the lack of transparency in the ratemaking process. Challenging the recovery of past losses (retro-active ratemaking) appears to be a less formidable case. Consumers who may not have had service in the previous year are being forced to pay for what they have not received. This would appear to be an act of confiscation, which would violate a constitutional right.

In 1999, when the Electricity Reform Bill was being considered in Parliament, I pointed out that the system proposed for the fixing of rates, would prove to be a disaster for consumers, making some of the very points contained herein. Judging from the experience so far, the system may turn out to be a disaster, not just for consumers, but also for the country in general.
Joseph A. Tyndall