The National Water Commission, NWC, is projecting a $3.9 billion surplus this fiscal year, which would reverse losses recorded two years earlier, but a major plank of that growth will rest on increased revenue and cost containment, especially in relation to the utility’s swelling electricity bill.
The water monopoly recovers most of its cost of electricity from customers but not fully. In fact, it indicated to its regulator that over a year and a half ending August 2022, it underrecovered its costs by $1.2 billion.
NWC’s electricity bill amounted to $15.3 billion in the period spanning seventeen months, but its recoveries were just over $14 billion.
The water agency argued that the pandemic and oil-price volatility induced by the Russian-Ukraine war negatively affected its ability to fully recover the costs, primarily because the recovery mechanism was inadequate to handle extraordinary price shocks.
“The NWC is underrecovering because the formula isn’t allowing us to cover the increased cost of providing the service,” said an NWC source knowledgeable on such matters but not permitted to speak to the media on the issue.
The regulator grants the NWC the ability to recover costs under a formula called the Price Adjustment Mechanism or PAM. The mechanism allows for recoveries related to inflation as estimated by movement in the consumer price index, foreign exchange rates, and electricity costs.
Last year, the state-led NWC had expected its electricity bill to hit $9 billion, but that figure swelled to $12 billion, according to the Jamaica Public Bodies report produced annually by the Ministry of Finance. This fiscal year, the electricity charges are expected to top $12.8 billion, which would be equivalent to one quarter of the NWC’s total expenses of $50.8 billion.
Consequently, the NWC wants its regulator, the Office of Utilities Regulation, to adjust the weighting of the PAM to place more emphasis on movements in electricity and cost of foreign exchange.
The OUR’s initial assessment shows that customers might benefit from the adjustment, but that’s just a preliminary review that could change once it applies a more rigorous test or makes adjustments to the water agency’s proposal.
In December, the NWC sent a letter to the OUR indicating that the current PAM was not fully taking into account changes in the real cost of operating the service.
“The NWC argued that since 2021, oil prices on the global market have been trending upwards. Additionally, the impact of the health pandemic and the geopolitical tension between Russia and Ukraine has further exacerbated the situation,” stated the OUR in its most recent determination on NWC’s interim tariff review, which made reference to NWC letter.
“These events, the NWC contended, have impacted its ability to offset its electricity costs given the weight assigned to the electricity component of the PAM,” the regulator said.
The NWC source explained that the current PAM places emphasis on inflation CPI movements, but that there are industrial costs, including costs for electricity pumping stations that are not adequately covered by the CPI basket.
The OUR in its determination noted that it would review the PAM weightings but not right away.
The regulator opted to retain the existing PAM structure until the NWC’s five-year tariff review when a comprehensive analysis will be done. It will make a determination at that stage.
“It is agreed that the structure of the PAM mechanism ought to be reviewed periodically,” the OUR conceded.
The NWC will submit its five-year tariff application later this year or early next year.
“We are currently preparing our tariff application,” said the NWC source.
Despite its decision to avoid adjusting the weighting for PAM right now, the OUR still compared the current mechanism with a potential PAM structure that gives more weight to electricity costs and foreign exchange movements.
In its comparison, the ‘proposed PAM’ resulted in a slightly cheaper customer bill at $3,636 for April, whereas the current mechanism produced a bill of $3,666 for the proposed PAM.
“This implies that there would be a small reduction in NWC’s billed revenues,” stated the OUR.
Commodity gas and oil prices, which account for roughly half of a customers’ electricity bill, have waned by one-third and 15 per cent, respectively, year to date. It would likely also have an impact on reductions in water bills.
The current PAM structure gives inflation a weight of 62 per cent compared to the potential PAM structure at 50 per cent. That change places greater weight to the other components, thereby moving electricity to 26 per cent and foreign exchange to 24 per cent.
In addition to the PAM adjustment, the NWC also wants to add a new category of extraordinary tariff reviews added in between scheduled reviews. That would address unforeseen shocks.
“The OUR takes the position that this is a deeper issue, which would best be explored in NWC’s upcoming tariff review scheduled for later this year,” stated the OUR.