The Barbados Light & Power Company Ltd

• Jurisdiction: Barbados
• Judge: Sir Neville Nicholls,Mr. Andrew Brathwaite,Mr. Gregory Hazzard,Mr. Alfred Knight,Mr. Andrew Willoughby
• Judgment Date: 25 January 2010
• Docket Number: NO. 0002/09
• Court: Fair Trading Commission (Barbados)

In the Matter of the Utilities Regulation Act, CAP. 282 of the Laws of Barbados;

In the Matter of the Utilities Regulation (Procedural) Rules, 2003;

And in the Matter of the Application by the Barbados Light & Power Company Limited (the Applicant) for a review of electricity rates pursuant to Section 16 of the Utilities Regulation Act, CAP. 282 of the Laws of Barbados;

The Barbados Light & Power Company Limited

Applicant

Before:

Sir Neville Nicholls Chairman

Mr. Andrew Brathwaite Commissioner

Mr. Gregory Hazzard Commissioner

Mr. Alfred Knight Commissioner

Mr. Andrew Willoughby Commissioner

NO. 0002/09

FAIR TRADING COMMISSION

INTERVENORS

Barbados Association of Retired Persons (BARP) in association with Public Counsel

Barbados Small Business Association (BSBA) in association with Public Counsel

Barbados Association of Non Governmental Organisations (BANGO)

Barbados Consumers Research Organisation, Inc. (BARCRO)

Dr. Roland Clarke

Mr. Errol E. Niles, Attorney-at-Law

Mr. Douglas B. Trotman, Attorney-at-Law

CANBAR Technical Services Ltd.

DECISION AND ORDER

PART ONE – EXECUTIVE SUMMARY

On May 8, 2009 the Barbados Light & Power Company Limited submitted an application for a review of its electricity rates. The Application was accompanied by Affidavits of the Applicant's witnesses; employees, Mr. Peter Williams, Mr. Hutson Best, Mr. Mark King and Mr. Stephen Worme and expert witnesses, Mr. Robert Camfield and Mr. Michael O'Sheasy.

The Commission was asked to approve a Rate Base computed by the Applicant at $544,198,726 and a capital structure of Debt 35% and Equity 65% in addition to a 10.48% Rate of Return on Rate Base. The Commission was also asked to approve a Revenue Requirement of $502,238,415 and to replace existing tariffs with new tariffs which should come into effect from October 1, 2009.

In its Memorandum on Proposed Tariffs, the Applicant proposed the introduction of a new Time-of-Use (TOU) Tariff, a Renewable Energy Rider and an Interruptible Service Rider. The Commission determined that these pilot programmes would not be dealt with during the rate review process but in a separate public consultation.

The Applicant further requested that the existing Standards of Service be retained pending a decision by the Commission on its review of the Standards of Service and that the Commission grant any such further Order or other relief as may be warranted.

After examining the information placed before it and additional information requested, and cross-examination of all of the witnesses by both the Commission itself and the Intervenors, the Commission approves the rate base of $544,198,726 and the Applicant's use of a capital structure of Debt 35% and Equity 65%.

The Commission assessed that the operating expenses were prudently incurred. However, the Commission denies the requested rate of return of 10.48% and grants a rate of return of 10.00%. Consequently, the Commission rejects the Applicant's proposed revenue requirement of $502,238,415 and determines that a revenue requirement of $499,165,291 is appropriate.

The Commission orders the Applicant to resubmit its tariff schedule based on the determinations described later in this summary.

The Commission considered the Applicant's request to use a capital structure that differs from the actual capital structure of the test year. In view of the fact that the 78.56% share of equity in the Applicant's actual capital structure is high compared to other regulated regional companies (the average capital structure of most electricity utilities in the Caribbean between 2004 and 2006 was 36% debt and 64% equity), the Commission believes that a hypothetical/notional capital structure with a lower percentage of equity should be used for rate making purposes. Since the cost of equity is higher than the cost of debt this would reduce the cost of capital and ultimately the rate of return which would provide some benefits to consumers. The Commission therefore approves the Applicant's use of a capital structure of Debt 35% and Equity 65% in the determination of its cost of capital.

The Commission, in determining an appropriate rate of return for the Applicant, examined the methodology, assumptions and recommendations in the document entitled “Study of the Cost of Capital and Rate of Return Recommendation” prepared by the Applicant's expert witness Mr. Robert Camfield. The Applicant's Weighted Average Cost of Capital (WACC) was also examined in order to determine the appropriateness of the 10.48% rate of return. The Commission is of the view that the Applicant's Study overstated the sovereignty risk and small size risk for Barbados and believes that these should be reduced in deriving the cost of equity. The Commission will allow the Applicant a rate of return of 10.00%.

The Commission examined the Applicant's operating and maintenance expenses to determine if the expenditure was necessary to provide the service, whether the expenses were actually incurred and whether the amount of expenditure was reasonable. After examination of these expenses the Commission determines that the Applicant has established the reasonableness and prudence of expenditure including operating and maintenance expenses.

The Commission examined the revenue requirement which is made up of the operating income plus the operating expenses, depreciation and taxes. Having examined these issues and having determined that the allowed rate of return should be 10.00% the Commission rejects the Applicant's proposed revenue requirement of $502,238,415 and approves a revenue requirement of $499,165,291. Therefore, the requested additional revenue of $28,221,603 was reduced to $25,148,480 for the test year.

Cost is determined at all stages of the supply chain from generation through to billing. A cost of service (COS) study was undertaken by the Applicant to estimate the actual cost of providing electricity service to its various customer classes. The results of the study were used to allocate the revenue requirement and allow the Applicant to set rates to recover costs. In considering the Applicant's embedded and marginal cost studies, the formulation of the models and key assumptions, the Commission determines that the approach and methodology adopted by the Applicant are acceptable. In the COS study the Applicant assigned rates of return for Domestic Service and General Service classes that are below the overall requested rate of return; rates of return for Secondary Voltage Power and Large Power classes that are above the Applicant's overall requested rate of return; and zero rate of return for the Street Lighting class. The Commission accepts the measures taken by the Applicant to minimise billing impacts and is satisfied that the proposed rates have moved closer to marginal and embedded costs.

The Commission considered the Applicant's rate design objectives and philosophy as well as the appropriateness of the proposed rate of return and revenue allocations for different customer classes. The analysis showed that, among other things, the Applicant sought to encourage energy conservation by its customers, minimise the impact of any rate increase on the lower usage Domestic Service (DS) and General Service (GS) customers without unduly overburdening higher usage customers and to move the DS tariff towards its true cost of service. The Applicant sought to maintain an inclining block structure for both the customer charge and base energy charge of the DS tariff, introduce a similar structure in the General Service and Employee tariff schedules and adjust the rates for the Secondary Voltage Power (SVP) and Large Power (LP) customers so that the demand and energy charge more closely match the cost of providing the service.

The Commission accepts the Applicant's proposal of an inclining block structure for the DS, GS and Employee class. The Commission believes that the inclining block structure increases the incentive to conserve energy since it provides the opportunity to mitigate the effect of the rate increase by reducing consumption. However, in order to capture a larger number of low usage and low income customers, the Commission has determined that the Applicant should adjust the first block from 0–100kWh to 0–150kWh for the customer charge and the base energy charge of the Domestic Service class. Approximately 14,000 more customers would be included in this band for the purpose of calculating the customer charge. With respect to the energy charge, all customers who use over 100kWh would pay for the next 50 kWh at the rate of $0.150/kWh + VAT instead of the proposed $0.176/kWh + VAT.

The Commission has considered the Applicant's information pertaining to the GS customers and accepts the rate structure proposed by the Applicant.

The Commission is not convinced that the existing ratchet billing of the demand charge for SVP and LP customers promotes efficient use of electricity. In practical terms ratchet billing, where the customer pays a monthly demand charge based on the highest demand of the past 11 months, may in some instances operate to reduce the incentive to conserve electricity which is counter to the Applicant's stated rate design objectives. The Commission determines therefore that the Applicant should remove the use of ratchet billing from the demand charge and adjust the demand and/or energy charge accordingly. This will allow the SVP and LP customers' bills to be reflective of the peak KVA demand for each month. The Commission appreciates that the implementation of this will require adjustment to the Applicant's billing system and will consult with the Applicant on the timely implementation of this particular change.

The Commission notes that based on the Applicant's rate design and billing impact information some SVP and LP customers will incur significant increases. To this end, the Commission...