Dear Editor,
Please entertain a response to the article, ‘The economics of Linden and electricity rates,’ by Christopher Ram, in the ‘Business Page’ of Sunday Stabroek, dated July 29, 2012.
It would not have been expected that someone of the experience and expertise of Mr Christopher Ram, would have had difficulty, as has been displayed, in the understanding and grasping of what has been said about the provision of electricity in Linden.
Dr Ashni Singh’s statement, in which he related the subsidy of electricity in Linden to 10% of the revenues of the Guyana Power & Light, Inc, (GPL), is to be understood against the background of there being a total of 9,090 customers in Linden, versus about 165,000 customers on the GPL grid. Persons with the mathematical discipline of accountants, would quickly observe that, with the same subsidy, all 165,000 customers of GPL could have had their billings cut by a further 10%, or a representative 16,500 customers of GPL could have had all their bills totally paid with the subsidy to 9,090 customers in Linden!
The fact that the average price paid by five employees of Ram & McRae is $55 per kWh, does not in any way gainsay the stated average price of $64 per kWh paid by customers of GPL. Rather, it is indicative of the well-known cross-subsidy in the GPL tariff structure, from the larger commercial and industrial consumers to the smaller domestic consumers. Additionally, from 2008, a separate tariff structure was set up, at higher prices, for government customers (about 20% of electricity sold), thus providing an additional cross-subsidy to the private domestic consumers, such as the five Ram & McRae employees.
The fact is that there have been overall subsidies of up to 30% at times, from government to GPL, and to its predecessor, GEC, and taking account of the internal cross-subsidy, domestic consumers on GEC/GPL, at times, may be paying only 50% of the cost of the service provided to them. Thus, domestic consumers on GPL, enjoy a significant subsidy, but not as much as the subsidy in Linden, which has been 90% and more.
It should be noted that whilst electricity losses in GPL may be a little more than in Linden (about 31% v 25%), the cost of service in Linden is based on the more costly diesel-fuel, whilst GPL has been shifting to the less costly heavy fuel-oil (HFO), now attaining about 85% HFO, and 15% diesel. Further, it should be borne in mind that with the ‘hoped for’ coming into being of the Amaila Falls Hydro-Electric Project in about four years, for which GPL will be extending and holding the PPA, there is the projection of GPL enjoying about a one-third reduction in the average cost of generation at current fuel prices. For such reasons, and others, government had taken it that the integration of the Linden area into the national grid, of which GEC – now GPL –is the designated provider, would be accepted as a given, beyond question.
Mr Ram, in a paragraph that seeks to enclose him with seemingly sweet reasonableness, proposes that, assuming that the tariff was $5 per kWh in Linden in 1992, a sensible government would have considered a 6% semi-annual increase, which would have brought the Linden domestic tariff to the current GPL rate. Not so, Mr Ram! Even if it were accepted, (1.06) 40 would give a factor of an increase of about 10, but a quick check would have revealed that, in 1992, domestic consumers in Linden were paying $2.00 per kWh which, following the line of Mr Ram, would have grown in 2012 to $20 per kWh, still less than one-third of what is required today.
It must be noted that the circular which was issued by LECI, did not have the column headed “Inc. (decrease) %”, which was Mr Ram’s addition.
The circular was sent out to inform, and urge, domestic consumers to reduce their consumption to match that of fellow citizens on the GPL grid – a reduction to about 40% of the electricity that they have been taking.
Notice that the first 50 kWh is provided at the existing rate of $5 per kWh. This is a big subsidy at the bottom. Every additional kWh is billed at $50, still about 60% of the $80 per kWh required, but enough that was believed to drive down consumption.
So, a domestic customer burning 300 kWh before, and paying $1,500 per month, would need to pay $12,750 per month at the new rate if his/her consumption was unchanged (still less than what customers on GPL pay), but on reducing consumption to 40% of the previous amount, would then consume 120 kWh per month, and pay $3,750 per month. The thinking of an accountant of the expertise and experience of Mr Ram, should run along such lines.
Further, he should be aware that when one starts out with a small base, like 10% of costs, increases to get to full costs in a reasonable number of steps, will inevitably include large percentage increases. If Mr Ram wanted to present the new tariff structure in a helpful way, he might have considered inserting the average price per kWh in the new structure, and the price at GPL, for purposes of comparison, in order to make clear the significant subsidy which would still have been there.
It is to be regretted that Mr Ram has dragged BOSAI into this question of a step-wise reduction of the historical, huge subsidies on electricity provided to all consumers in Linden. BOSAI inherited, and continues, the agreements reached earlier with OMAI, when OMAI had taken a majority equity position in LINMINE after about two decades, during which
time a number of more traditional bauxite companies had been looking and turning away. Mr Ram could have found out that electricity generation and provision in Linden had degraded, over time, to the lowest ever level by that time. Omai acceded to our encouragement to install a
generating station to provide not only for itself, but also for the community. There is an established calculation procedure in the PPA to determine the monthly average cost of a unit of electricity produced. The government undertook to, and did, pay OMAI services, monthly, for the power taken by the community and today, similarly, pays BOSAI. For 2012, so far,
the average generation costs incurred, and billed, by BOSAI, for electricity generated and supplied in bulk, is just about $60 per kWh.
For a sort of comparison, GPL, with a wide range of diesel sets, generally smaller, of higher speeds, and with many leased on an emergency basis, has had an average total generation cost of $70 per kWh. Recall, though, that with GPL generating about 85% of its electricity from HFO, its overall average generation cost is about $45 per kWh.
The unit price from BOSAI is good, and there is no profiteering from the subsidy. Monthly payment calculations are based on recovering accepted costs. There could be a small surplus, or deficit, from year to year; see, as reported in Stabroek News of July 17, a deficit of
US$394,000 for 2009, a surplus of US$233,000 for 2010, and $195,000 for 2011, giving a net surplus of US$34,000 over the three years, from total revenues of US$47,396,565, a net surplus of less than 0.1% of cash flows.
No accountant, other than Mr Ram, would see this as exploiting the subsidy!
Further, it should be noted that the community is receiving 2/3 of the power generated, whilst the plant receives 1/3. Any argument for a lower marginal cost approach, should probably favour the smaller consumer, the plant.
It is unfortunate that an accountant like Mr Ram, should take the opportunity to move from the issue of electricity tariffs to denigrating BOSAI, and the arrangements with BOSAI, when he knows the history of our bauxite operations and, in particular, the period from nationalization in
July 1971. From nationalization until privatization in the first half of the early 2000s, following a change in policy (a reversal in policy) since the mid-1980s, the books would show total support of the bauxite companies and communities in the amount of about US$500 million, much from the national treasury (Consolidated Fund), and the remainder from general
support directed to Guyana.
The arrangements for privatization, and the positive dividends received since, must be seen against the background of the period of national ownership. All privatization arrangements are within the laws of Guyana – no laws are being broken. The agreements have been made available. In the long years when there were no takers for the bauxite companies and other
potential mineral resources, Guyana was told that it was demanding too much, and reports were presented by international groups showing how poorly Guyana compared with other countries in having an attractive investment regime.
Mr Ram would know this! Further, royalty on bauxite has been traditionally small, at 1.5%, and zero during our period of ownership.
As in many other countries, the focus has been put on privatizing, on the jobs provided and on the corporate tax payments; the 1.5% royalty is maintained as a minimum payment to be made, even if BOSAI is to suffer an overall loss. Note also that bauxite assets were for decades loss- making and, therefore, economically speaking, of zero or negative value. In being put as 30% of equity in the new privatized company, in the agreements struck originally with OMAI, they were in that process revalued positively, and have provided positive income in the profitable years since privatization.
One should be surprised if an accountant like Mr Ram, cannot grasp the primary, significant consideration that we are better off today than in our youthful days of the mid-1970s when we were carried away with the prospects of a bauxite levy or nationalization, but ended up with huge subsidies to the bauxite industry. Young, newly-minted accountants might be forgiven for
not knowing that history!
Yours faithfully,
Samuel Hinds
Prime Minister
