"Guyana is the only country in the world where a regulated monopoly is guaranteed a rate of return and has the right to recover revenue losses or shortfalls by increasing rates in subsequent years," Joseph Tyndall, utility commentator says about the government's agreement with the power company.

"This is simply outrageous. I haven't encountered this travesty in all my readings on the history of public utility regulation," Tyndall told Stabroek News in an invited comment on the weighted average cost of capital rate of return method for the Guyana Power and Light (GPL).

The government has guaranteed the GPL a rate of return of 23% before taxes using the weighted average cost of capital approach. And Prime Minister Sam Hinds has recently said that if someone can prove that the formula used will consistently be to the advantage of GPL then he would be willing to press a case for its review.

Tyndall argues that for regulated monopolies, the rate of return is never guaranteed, as the utility would be allowed to demand rates that would enable it to earn the agreed return.

Rates, Tyndall says, should be prospective, not retroactive as in the case of GPL.

"Retroactive rates are confiscatory and unconstitutional," he asserted.

Touching on the formula, Tyndall says the problem lies in the way it has been applied to GPL and that the inclusion of loss recovery in it is a Guyanese innovation.

He posits that in rate of return regulation, the aim is to allow the utility to charge rates to cover all expenses and provide a "reasonable return" to the investors. He said the weighted average cost of capital is a conventional approach to measuring the return attributable to the rate base, for inclusion in the utility's required revenue. The rate base should be equal to the total of equity and long term debt, unless the rate base is not correctly valued.

To remain viable, Tyndall says, the public utility must realise a return on the value of its rate base sufficient to enable it to meet the interest payments on long term debt and to provide an adequate return to shareholders' equity.

He said that in normal circumstances, it is the regulatory commission's responsibility to determine what should be an adequate return to equity for the utility and it does so by fixing the return at a level which compares favourably to the return obtained in other enterprises having commensurate risks. This approach, Tyndall says, is enshrined in section 32 (2) of the PUC Act and is the norm in all US regulation. It is also allowed in Canada and the UK. Tyndall says that although the UK does not apply the rate of return system, regulators have to grapple with the problem in the system they apply.

The utility commentator and former PUC Chairman noted that determining an acceptable rate of return on equity is not needed in Guyana as the government fixed this by agreement with the firms.

He said that the weighted average cost of debt and equity is designed to measure the relative contribution of these to the revenue of the utility and once this principle is followed in GPL's case there will be no problem. He said the problem might arise in how the rate base is valued and what is included in long term debt as well as the reasonableness of the interest rate on the borrowed funds.

Tyndall contends that rate base valuation is a demanding task and is not simply a matter of an accounting examination of the asset registers of the utility. He feels that the PUC has been guilty of regulatory negligence in this regard for both GPL and the phone company, GT&T.

Tyndall says that he has not been able to secure the documents filed by GPL with the PUC and the reason being given for the non-access is that the financial statements are unaudited and hence confidential.

But Tyndall is critical of this saying that non-disclosure of the documents denies consumers the right to challenge the reasonableness of the rates in an informed manner. He is of the opinion that this is against the constitutional right of consumers from protection against confiscation of property. "Unjustified increases amount to confiscation of property. Money is property," Tyndall argues. He further maintains that rate making is an act of delegated legislation and barring persons from challenging this is both undemocratic and unconstitutional. He said that any order of the commission is subject to judicial challenge. Tyndall also noted that he has been unable to access a copy of GPL's licence or sales agreement to date and says this does not speak well for regulatory transparency in Guyana.