Erik Lavoie, a recent intern with Guardian Media Ltd, has written several recent articles exposing weaknesses in the process by which the Regulated Industries Commission (RIC) recommended rate increases for the Trinidad and Tobago Electricity Commission (T&TEC), one of several important players in the Trinidad and Tobago (T&T) electricity market and its regulation.
Here, he seeks to explain the issues behind the fact that the RIC’s recommendation for an increase in home electricity bills of between 15 per cent and 64 per cent has been stuck with a Cabinet sub committee for over ten months. The RIC also recommended that commercial and industrial customers pay higher rates.
The Trinidad and Tobago Electricity Commission (T&TEC) is the state-owned sole electric utility provider for both islands (Trinidad and Tobago). T&TEC is not a vertically integrated utility (VIU), although close to being one.
While Transmission and Distribution (T&D) is completely owned and operated by T&TEC, generation is predominantly provided by independent power producers (IPPs) that engage in Power Purchase Agreements (PPAs) with T&TEC. Some of these IPPs have partial (51 per cent) or full (100 per cent) T&TEC or Government of the Republic of Trinidad and Tobago (GORTT) stakeholder ownership. The only exception to this is generation operations on the island of Tobago, where T&TEC owns an 64-megawatt (MW) power plant (natural gas, simple cycle), which provides electricity for the entire island of Tobago, and a backup 22 MW plant (diesel) on Tobago as well. T&T’s electricity generation, in watt hours, is more than 99 per cent sourced from plants that use natural gas. The less than 1 per cent is a mix of solar and diesel. T&D system losses are around 9 per cent.
The three IPPs generating electricity for the larger island of Trinidad are PowerGen, Trinity Power Limited (TPL), and Trinidad Generation Unlimited (TGU), with T&TEC engaging in four different PPAs: PowerGen: T&TEC has a 51 per cent stake in PowerGen (49 per cent private-owned).
PowerGen operates two different power plants: (200 MW, combined cycle), (624 MW, simple cycle).
T&TEC has two PPAs with PowerGen, one for each of the power plants.
Trinity Power Ltd (TPL): TPL is 100 per cent private owned (Contour Global). TPL operates one power plant: [210 MW, simple cycle]. T&TEC has one PPA with TPL.
Trinidad Generation Unlimited (TGU): TGU used to be owned by AES Corporation, but now is 100 per cent GORTT owned as of 2013. TGU operates one power plant: (720 MW, combined cycle). T&TEC has one PPA with TPL.
Generation costs are primarily of an operational expenditure (Opex) nature and are considered uncontrollable for the most part. T&TEC faces two types of Opex generation costs: fuel costs and conversion costs. T&TEC faces these two types of distinct costs because the electricity market works in a “tolling” format, where T&TEC is responsible for purchasing the fuel for the IPPs at no cost to the IPPs. This is T&TEC’s fuel cost. At the same time, T&TEC must pay the IPPs for converting T&TEC’s purchased fuel into electricity. This is T&TEC’s conversion cost.
Fuel Cost—Understanding
what the National Gas
Company (NGC) does:
The NGC is the state-owned sole distributor and pipeline operator for domestic natural gas consumption. The NGC purchases natural gas from wellhead producers like bpTT and sells the gas downstream. The NGC has multiple large customers, one of which is T&TEC. The NGC practices price discrimination, offering the lowest gas price to T&TEC ($1.74/MMBTU in 2024, escalating 3 per cent per annum) relative to other large customers. The gas price charged by NGC to its customers is determined by the GORTT.
Conversion Cost—Understanding the PPAs:
Information about the structure of the three PowerGen and TPL PPAs are publicly available (information as of 2006, assuming nothing has changed since), while information about the TGU PPA is not publicly available (TGU’s financial statements suggest capacity costs are treated as a lease which consist of 99 per cent of total costs faced by T&TEC and adjusted by US CPI). The PowerGen and TPL PPAs contain three formulas, with the sum of these formulas making up the monthly cost incurred per PPA by T&TEC. These formulas are Capacity Cost, Energy Cost, and Excess Cost.
Capacity Cost Formula:
The capacity cost formula is what is used to pay the IPPs for the available maximum contracted capacity for use on-demand by T&TEC, measured in kilowatts (kW). In other words, this portion is a take-or-pay agreement that does not reflect the actual kilowatt-hour (kWh) electricity demand as a function of PPA. Capacity costs allow the plant to recover fixed costs and the cost of building the plant.
The capacity formula takes in the following variables: contracted capacity (kW), a base capacity rate ($/kW), the change in the United States (US) Consumer Price Index (CPI), and a weight for the US CPI influence (PowerGen is 1, TPL is 0.275). Capacity costs consist of about 97-98 per cent of total conversion costs (excluding excess formula costs) for T&TEC. When analysing conversion costs, most attention should be given to changes in capacity costs.
Energy Cost Formula:
The energy cost formula is what is used to pay the IPPs for the actual kWh generation of the power plants. This is intended to
allow the plant to recover the variable costs of operation. Energy costs consist of about 2-3 per cent of total conversion costs (excluding excess formula costs) for T&TEC.
Excess Cost Formula:
The excess cost formula is what T&TEC pays when T&TEC needs capacity from the IPPs that is beyond what is obligated by the IPPs in the PPAs. I will not attribute a percentage of PPA costs originating from the excess cost formula as this type of formula is activated irregularly.
T&TEC’s financial
situation and tariffs:
T&TEC consistently sustains annual deficits of around $1 billion per year (US$150 million). While Opex has steadily increased over the years, T&TEC’s electricity rates charged to consumers have not increased since 2009, marking a 15- year period without a rate review.
This is directly in violation of Section 48 of the RIC Act, a law which states that rate reviews should be conducted every five years. To this day, the public does not know the true reason why rate reviews were not conducted/finalised in 2011, 2016, and 2021.
The politicisation of electricity rate hikes and/or the lack of experience needed to conduct rate reviews or ability of regulated utilities to publish proper business plans could be responsible for the lack of a rate review. As a result, T&TEC has negative equity, meaning liabilities exceed assets. T&TEC relies on subventions from the Government to finance its loan obligations. (T&TEC’s unconsolidated financial statement for 2021) T&T has one of the lowest retail electricity rates in the world. The median household pays around $US 0.05 per kWh (retail) for electricity. Other Caribbean nations, like Jamaica, have residential retail rates close to $US 0.40 per kWh. The low residential cost in T&T is due to the use of domestically sourced natural gas for electricity generation and is further supported by three different layers of indirect and direct subsidies:
1) NGC selling gas to T&TEC at a loss/break-even: If the NGC were to prioritise its profits like most publicly traded and non-government owned companies do, it would sell natural gas to T&TEC at a minimum rate of around $US 2.50 to 3.00 per MMBTU. The NGC does not do this, selling gas to T&TEC at $US 1.74 per MMBTU. This is an indirect subsidy that lowers the retail cost of electricity for all of T&TEC’s consumers.
2) T&TEC running billion-dollar deficits: An electric utility should be able to recover its cost of providing service and receive a rate of return on its Regulatory Asset Base (RAB). T&TEC’s losses are an indirect subsidy that lowers the retail cost of electricity for all of T&TEC’s consumers.
3) Cross-subsidisation of residential consumers: Cost-of-service studies are undertaken to economically allocate costs per user category (industrial, consumer, commercial) based on the ‘impactor pays’ principle. T&TEC’s rates do not reflect the individual cost-of-services for each of the consumer categories, as industrial and commercial consumers pay a proportion of costs that is more than what the cost-of-service study would prescribe, and residential consumers pay a proportion of costs that is less than what the cost-of-service study would prescribe. This is a subsidy for residential consumers.
The RIC’s role
The Regulated Industries Commission (RIC) is the regulator of natural monopolies in T&T, analogous to what a Public Utilities Commission (PUC) does in the US. In T&T, other greater regulatory mandates that would be regulated by the Federal Energy Regulatory Commission (FERC) in the US are normally handled by the Ministry of Energy and Energy Industries (MEEI), Ministry of Public Utilities (MPU), or T&TEC itself.
One responsibility the RIC has is setting General Electricity Standards (GES) and Overall Electricity Standards (OES). These are metrics that regulated monopolies such as T&TEC, must exceed or meet the RIC’s prescribed target (metrics like billing punctuality, complaint responsiveness, etc.). Regulated monopolies pay a fine if they do not meet these standards.
The RIC is also tasked with regulating the IPPs that fall under the schedule of the RIC Act. The RIC Act only includes PowerGen and TPL in its schedule. TGU is not regulated by the RIC.
The RIC’s primary task is facilitating the rate reviews for the regulated monopolies. We will substitute T&TEC for the term “regulated monopoly” to emphasise T&TEC as the regulated monopoly of interest. The appropriate rate review process is summarized as follows:
• Either (1) A 5-year period has passed, requiring the RIC to pursue a rate review for T&TEC, per section 48 of the RIC Act, or (2) T&TEC submits a “written notice” (unclear what this notice constitutes) indicating that “extraordinary circumstances” require a fundamental rate review before the 5-year period has passed, per section 49 of the RIC Act;
• The RIC works on developing the framework and approach towards conducting a rate review in a document called “Framework & Approach: Second Regulatory Control Period Electricity Transmission & Distribution Sector”. The RIC has historically favoured the building blocks method, which utilises incentive-based regulation;
• (This step might precede and/or follow step 2): The RIC publishes a document titled “Information Requirements: Business Plan 2021 – 2026 T&TEC”, outlining the information and justifications it expects to see contained T&TEC’s business plan to be sent to the RIC;
• The RIC and T&TEC briefly consult following the publishing of the “Information Requirements” document by the RIC;
• T&TEC works on and refines their Draft Business Plan to be sent to the RIC;
• Upon receipt of T&TEC’s Draft Business Plan, the RIC scrutinises it and then provides guidance to T&TEC, allowing T&TEC to correct/adjust any problems the RIC noted in the Draft Business Plan. The RIC may also publish technical papers to support the upcoming determination.
• T&TEC works on and submits a Final Business Plan to the RIC. RIC may continue to publish technical papers to support the upcoming determination.
• The RIC begins writing the Draft Determination, where it should scrutinise T&TEC’s requested values for the individual components that make up Opex, Capital Expenditure (Capex), Depreciation, Weighted Average Cost of Capital (WACC), etc;
• Upon completion of the Draft Determination, the RIC consults with stakeholders (including T&TEC) and the public for 2 months. Stakeholders can provide written comments to the draft determination, or attend public hearings arranged by the RIC.
• Written comments are responded to in aggregate within a single document published by the RIC, justifying their decision to either accept or reject each of the recommendations made by stakeholders in their written comments.
• The RIC publishes its final determination after taking into consideration the comments made by stakeholders and the public. The RIC’s final determination is also sent to the Ministry of Public Utilities (MPU) for review.
• MPU sends the RIC’s recommendation to Cabinet, which takes the decision on whether to “accept” or “reject” the RIC’s final determination. Cabinet consults with both the RIC and T&TEC to make their decision.
Accept and reject are in quotes, since what Cabinet does is decide to implement the rates recommended by the RIC or not. If Cabinet “accepts” and implements the rates, T&TEC reserves the right to price at or below the RIC’s approved retail rates, and the process is successfully concluded. If Cabinet “rejects” the RIC’s recommendation, the situation becomes a bit unclear. Cabinet can, of course, send the final determination back to the RIC, indicating that the RIC must “redo their work”.
This whole process should take place in a time span of one to two years.
Unfortunately, the RIC has not been consistent in delivering on rate reviews every five years (mandated by section 48 of the RIC Act). The Water and Sewerage Authority of T&T (WASA), a state-owned monopoly provider of water and sewerage services in T&T, has not undergone a rate review for 31 years, compared to a lack of a rate review for 15 years for T&TEC.
The RIC has claimed that either these regulated monopolies (T&TEC, WASA, etc) do not submit a business plan when asked, or the business plans submitted by these monopolies are either incomplete or insufficient to such an extent where a proper rate review cannot be conducted.
Given the obscurity around the whole process, its is unclear whether the RIC’s claims are correct or not.
There are also questions whether the recent rate review was conducted using the ideal and expected process highlighted above.