Fuel shortages loom at GPL
Revenue shortfall of US$600,000 per month
Hinds says all options on table
By Gitanjali Singh
February 15, 2003
If the government and AC Power do not reach a deal on restructuring the power company in ten days and proposed new tariffs are not implemented consumers would face blackouts as GPL has limited finances to buy fuel, well-placed sources have warned.
And Prime Minister Sam Hinds said yesterday that Guyana Power and Light (GPL) made a $475M loss in 2002 and is currently running at a negative cash flow of US$600,000 per month from a monthly income of US$4.9M. The average 15% increase in tariffs which was blocked by a court order would have brought in an extra US$735,000 per month for the firm.
"GPL is at the point of being unable to sustain its operations and is without sufficient funds to purchase enough fuel to maintain a full generation of power in the immediate future," Hinds told reporters at a media briefing at GTV 11. He said, "there would be no subsidies or bail-out for GPL" and short-term options to bridge the financing requirements would include short-term loans from the local financial market. Asked afterwards if the government would let the company be short of fuel, Hinds did not answer.
Officials within the company say that GPL has twice short-ordered on fuel in recent weeks and the firm's ability to finance its order for next week is currently being reviewed. Fuel alone accounts for US$3M per month, with the price of diesel oil currently standing at US$50 per barrel. A source said if additional income did not come into the company it would be strapped for cash to purchase fuel.
But Hinds at the media briefing said the government would not support consumers being asked to pay for the inefficiencies in GPL's operation.
Hinds said the government has always taken the position that the utility needed enough funds to be viable in an efficient and effective way and the tariffs must be the lowest possible for sustaining the utility.
He said the failure to overcome losses has added 15% (a low end estimate) to the company's operating cost and fuel price increases since 1999 of over 60% have had a heavy impact on GPL's costs and subsequent tariffs.
Winston Brassington, a member of Hinds' team briefing the media yesterday said, had GPL achieved the commercial and technical loss targets, the rates would have been "significantly less or avoided". He also said that had the company been managed efficiently, there would have been no need to increase rates as these increases contain some amount of inefficiency.
He said the company was in the red and had earned a negative return on its investment of US$20M. This was because it has made no profits and as a result, no dividend has been declared. Brassington later conceded that no dividends were declared because the guaranteed rate of return for rate base purposes was eaten away by inefficiencies in the system.
Tariffs were increased annually to make up for revenue required in the previous year to yield the company's rate of return to allow for profits and dividends.
While fuel prices would have impacted significantly on the cost of generating electricity, the situation was compounded by the fact that GPL operates at a 42% system loss and had to over-generate power to the tune of 160,000 megawatts last year to allow for sufficient power to consumers. System losses in the Caribbean are in the single digits with Dominica the only state with losses at 19%. In Antigua, system losses are 8.6%; Barbados 3.9%; St Lucia 10.7%, Trinidad and Tobago 0.7% and Guyana 42%.
GPL director Ronald Alli, also at the briefing conceded that securing debt financing to fix the system losses would have impacted on the rates but added that this would have been offset by improvements in the system and the gradual downward adjustment of rates.
He noted that the sharp increase in oil prices had hit the tariffs before debt service obligations did. He agreed that the oil price effect would not have been as great had the system losses been reduced.
But both directors and Hinds said that management had advised that to deal with the losses would have required significant investments.
It would have meant a change of meters including sensor meters and implementing a new billing system among other issues. It would have also meant dealing with illegal re-connections.
AC Power had indicated to the government at the time of its bid for GEC in 1999 that it had the ability to raise financing but failed to do so within the first two years of taking control of the operations when it was enjoying a government subsidy and there was a temporary stay on tariff increases. It secured financing in the third year of its operations from the European Investment Bank but was unable to secure matching funding. It was also unable to raise its obligation of US$1M for the rural electrification programme.
Hinds reiterated some of the aspects of the agreement with AC Power in 1999, which include the provision of an "efficient service at economic costs" with clearly defined performance targets. He said the development and expansion plan in the first five years included funding from private placements and debt financing to be raised by AC Power as well as the refurbishment of the transmission and distribution facilities of GPL and the introduction of reliable billing collection services to reduce commercial losses.
"AC Power has failed to raise the required funding and has failed to introduce a reliable billing collection service, resulting in continuing and unacceptably high technical and commercial losses", Hinds said yesterday, noting that at the time of the takeover, system losses were 36% but now are over 40%.
AC Power argues that it has found it difficult to secure financing and cites the compensation order by the PUC against GPL of $1.3B as one reason. The firm has also held back the last tranche of its equity investment in GPL of US$3.45M, demanding the revocation of the PUC order and insisting on a cap on future compensation orders by the PUC.
AC Power has taken the government to arbitration over this issue. The panel was appointed yesterday with Douglas McLaren, a Jamaican lawyer, engineer and financial expert based in Washington, the government's representative, and Paul Naumann, AC Power's. Timothy Hart is the third member approved by Naumann and McLaren and the panel has 30 days to come up with a decision, with a further 30 days if there is a difficulty.
Asked yesterday about the government's position on the revocation of the PUC order and the reduction of the targets, as proposed by AC Power, Hinds said it would not be appropriate to go into the details of the discussions. But he said the government was not taking a position to order the PUC to do "anything".
He said the negotiations between the two sides have not deadlocked and all of the issues on the table were still under discussion. He also said that the government was not bent on keeping AC Power as a joint-venture partner as it was considering an entire range of options, which might include AC Power going altogether.
The company has 1200 employees and every one of them mattered, Hinds said, adding that the government would keep going at restructuring until it gets the investor to deliver the goods.
The Prime Minister said that the negotiations were being treated with urgency and that his government had been in contact with the British government on the issue. Also at the briefing yesterday was Tourism and Commerce Minister, Manzoor Nadir and advisor to Hinds on electricity regulation, Maxine Nestor.