Last week, Erik Lavoie, a re­cent in­tern with Guardian Me­dia Ltd, start­ed an in­ves­ti­ga­tion in­to the process by which the Reg­u­lat­ed In­dus­tries Com­mis­sion (RIC) rec­om­mend­ed rate in­creas­es for the Trinidad and To­ba­go Elec­tric­i­ty Com­mis­sion (T&TEC).

This week, he looks at T&TEC’s gen­er­a­tion and con­ver­sion costs.

The in­ves­ti­ga­tion in­to the rate re­view process for T&TEC be­gan in Jan­u­ary of 2024, when the Busi­ness Guardian sought to in­form the pub­lic with es­ti­mates of how much res­i­den­tial bills would in­crease over a five-year pe­ri­od. That, of course, was if Cab­i­net were to im­ple­ment the rates rec­om­mend­ed by the Reg­u­lat­ed In­dus­tries Com­mis­sion (RIC) in its fi­nal de­ter­mi­na­tion pub­lished in Oc­to­ber 2023.

This is not some­thing the RIC in­clud­ed in its fi­nal de­ter­mi­na­tion. A math­e­mat­i­cal re­con­struc­tion was con­duct­ed of the method the RIC used to al­lo­cate T&TEC’s rev­enue re­quire­ment among dif­fer­ent con­sumer class­es us­ing T&TEC’s Cost of Ser­vice Study (COSS) of 2017. It was cal­cu­lat­ed that the me­di­an house­hold, giv­en the in­creased rev­enue re­quire­ment for T&TEC and the RIC’s rec­om­men­da­tion to un­wind the cross sub­sidy from res­i­den­tial con­sumers to in­dus­tri­al con­sumers, would face an elec­tric bill in­crease of 124 per cent by 2028/2029.

In do­ing so, some anom­alies were not­ed in the RIC’s al­lowed rev­enue re­quire­ments for the gen­er­a­tion por­tion of Opex. The be­low graph shows the his­tor­i­cal da­ta for fu­el and con­ver­sion cost faced by T&TEC, ac­cord­ing to T&TEC them­selves:

Be­low is a chart (made by the RIC) of the ap­proved fu­el costs:

And be­low is a chart (made by the RIC) of the ap­proved con­ver­sion costs:

From 2021 to 2024 (2023 is writ­ten, but this is be­ing treat­ed as 2024 costs, due to de­layed im­ple­men­ta­tion), ef­fi­cient-op­er­a­tion fu­el costs are pro­ject­ed to in­crease from $1.08 bil­lion in 2021 (his­tor­i­cal) to $1.75 bil­lion in 2024 (pro­ject­ed), an in­crease of 63 per ce­ny over the three-year pe­ri­od.

From 2021 to 2024, ef­fi­cient-op­er­a­tion con­ver­sion costs are pro­ject­ed to in­crease from $980 mil­lion in 2021 (his­tor­i­cal) to $1.77 bil­lion in 2024 (pro­ject­ed), an in­crease of 80 per cent over the three-year pe­ri­od.

In ag­gre­gate, ef­fi­cient-op­er­a­tion gen­er­a­tion costs are ex­pect­ed to in­crease from $2.06 bil­lion in 2021 to $3.52 bil­lion in 2024, an in­crease of 71 per cent.

There are three things worth not­ing:

1) The per­cent­age in­crease cal­cu­lat­ed is the ef­fi­cient-op­er­a­tion (ac­cord­ing to the RIC) cost of gen­er­a­tion. What the RIC did to sim­u­late com­pe­ti­tion in a reg­u­lat­ed, mo­nop­o­lis­tic mar­ket and en­cour­age ef­fi­cien­cy is im­ple­ment cost pass throughs of 95 per cent for fu­el costs and 98 per cent for con­ver­sion costs (ca­pac­i­ty cost on­ly, rest is 100 per cent).

This means us­ing T&TEC’s pro­posed amount in­stead of the RIC’s pro­posed amount for gen­er­a­tion costs in 2024 would amount to a 77 per cent in­crease in­stead of a 71 per cent in­crease;

2) It does not seem like the RIC prop­er­ly scru­ti­nised the ac­tu­al T&TEC es­ti­mates, and in­stead opt­ed to adopt T&TEC’s pro­jec­tion and fit a cost pass through mech­a­nism over it as the ef­fi­cient cost;

3) The RIC did not pro­vide a full jus­ti­fi­ca­tion for a 63 per cent in­crease in fu­el costs and any jus­ti­fi­ca­tion 80 per cent in­crease in con­ver­sion costs in its fi­nal de­ter­mi­na­tion! All it did was in­clude the charts with the ap­proved amounts, which alone in­di­cate the 71 per cent in­crease in gen­er­a­tion costs.

No rec­og­niz­able ef­fort was made to ex­plain the un­der­ly­ing changes to the sta­tus quo that were dri­ving the sharp in­creas­es in con­ver­sion costs in the fi­nal de­ter­mi­na­tion. This would ex­plain why on­ly one out of the 24 stake­hold­ers who sub­mit­ted a writ­ten re­sponse on the RIC’s draft de­ter­mi­na­tion point­ed out this anom­aly. This stake­hold­er mere­ly point­ed out the “70 per cent” (stake­hold­er’s own cal­cu­la­tion) in­crease in gen­er­a­tion costs, but did not ques­tion the RIC’s as­sess­ment.

Be­low are im­ages of the fu­el cost and con­ver­sion cost sec­tions of the fi­nal de­ter­mi­na­tion that come the clos­est to jus­ti­fy­ing the RIC’s ap­proved amount:

Fu­el costs

Un­der the terms of the Pow­er Pur­chase Agree­ments (PPA), T&TEC has to pay for the fu­el that is con­vert­ed in­to elec­tric­i­ty by the gen­er­a­tors. T&TEC buys fu­els from the NGC, at a pre-de­ter­mined price that is in­flu­enced by the Gov­ern­ment. The RIC has used a fu­el price in keep­ing with T&TEC’s as­sump­tion in its busi­ness plan. (T&TEC has in­di­cat­ed it is based on guid­ance it has con­firmed it has re­ceived from the Gov­ern­ment) and an es­ca­la­tion fac­tor of 3 per cent per an­num in its rev­enue cal­cu­la­tion

Con­ver­sion costs:

Two of the ma­jor com­po­nents of T&TEC are the cost of pow­er (con­ver­sion cost) and fu­el cost, com­pris­ing 75.2 per cent of T&TEC’s to­tal op­er­a­tion ex­pen­di­ture. COn­ver­sion and fu­el costs are con­sid­ered to be un­con­trol­lable costs, that is costs over which the ac­tion of the util­i­ty have lit­tle or no ef­fect. Hence they are treat­ed as pass through. These costs are al­so sub­ject to long-term con­trac­tu­al agree­ments (PPAs).

On the ba­sis of its as­sess­ment of growth in de­mand, T&TEC sub­mit­ted fore­casts for con­ver­sion costs from all the gen­er­a­tors. In the case of con­ven­tion­al gen­er­a­tion, this com­pris­es both ca­pac­i­ty and en­er­gy pay­ments. The gen­er­a­tion com­ing from the pro­posed so­lar pho­to­volta­ic plans com­prise en­er­gy pay­menys on.

In the draft de­ter­mi­na­tion, the RIC’s view was to al­low a 98 per cent pass through of ca­pac­i­ty pay­ments and 100 per cent pass through on the en­er­gy com­po­nent of con­ver­sion costs.

The re­main­der goes on to dis­cuss in­te­gra­tion of util­i­ty scale so­lar in 2025.

As one can see, there is ab­solute­ly noth­ing the RIC says that re­mote­ly touch­es on jus­ti­fy­ing the RIC’s ap­proved con­ver­sion costs, be­yond stat­ing the ob­vi­ous.

With what was seen in the fi­nal de­ter­mi­na­tion, the Busi­ness Guardian turned to ask­ing the RIC some ques­tions.

The RIC was asked to pro­vide a jus­ti­fi­ca­tion/ex­pla­na­tion as to what fac­tors were dri­ving the dras­tic in­crease in fu­el and con­ver­sion costs. The RIC replied with an ex­pla­na­tion stat­ing that the de­mand re­bound from the COVID-19 re­cov­ery pe­ri­od is re­spon­si­ble for the in­crease.

This re­sponse seemed to de­fi­cient as the fi­nal de­ter­mi­na­tion in­cludes his­tor­i­cal elec­tric­i­ty de­mand and the RIC’s own de­mand pro­jec­tions for each year be­tween 2023/2024 and 2027/2028. From 2021 to 2024, elec­tric­i­ty de­mand is pro­ject­ed to in­crease by 6.5 per cent.

Fac­tor­ing in the 3 per cent in­crease per an­num in fu­el costs and 2 per cent in­crease (es­ti­mat­ed) in the US CPI for cal­cu­lat­ing in­crease in con­ver­sion costs, while as­sum­ing -1 per cent per year sys­tem heat rate ef­fi­cien­cy im­prove­ment per year (im­pacts fu­el cost) and no changes to T&D sys­tem loss­es, the sta­tus quo in­crease in to­tal gen­er­a­tion costs from 2021 to 2024, giv­en a 6.5 per cent in­crease in de­mand, should be be­tween 8 per cent and 13 per cent. Thus, the RIC on­ly ex­plained up to 13 per cent out of the 71per cent in­crease in gen­er­a­tion costs, leav­ing more than 58 per cent un­ex­plained.

I sent a sec­ond email re­it­er­at­ing the ques­tion and an­swer in the first email, then ask­ing the RIC to pro­vide a dif­fer­ent an­swer giv­en that their ex­pla­na­tion was chal­lenged. Their re­sponse to the sec­ond email was the fol­low­ing:

“Thank you for your fol­low-up in­quiry. At this time, we do not have any ad­di­tion­al in­for­ma­tion to pro­vide be­yond what has al­ready been shared on the mat­ter. Please feel free to reach out again should you need any­thing fur­ther.”

This re­sponse was par­tic­u­lar­ly con­cern­ing, as it im­plied that the RIC that they are not will­ing to jus­ti­fy the re­al rea­son.

Re­vis­it­ing the fi­nal de­ter­mi­na­tion:

There was some­thing no­ticed when re-read­ing the RIC’s fi­nal de­ter­mi­na­tion fol­low­ing its re­sponse to the news­pa­per’s ques­tions.

T&TEC did not, and his­tor­i­cal­ly has not, re­port­ed a prop­er reg­u­la­to­ry ac­count to the RIC for the rate re­view process. The full text in the de­ter­mi­na­tion ad­dress­ing this can be found in An­nex I, which is at the very bot­tom of this doc­u­ment.

The RIC is try­ing to get T&TEC to pub­lish the reg­u­la­to­ry ac­count quar­ter­ly to the RIC, which has not hap­pened. This, of course, is some­thing that is crit­i­cal­ly im­por­tant, as it would hin­der the RIC’s abil­i­ty to scru­ti­nize T&TEC’s pro­pos­al with­out a prop­er reg­u­la­to­ry ac­count sub­mis­sion from T&TEC. This is an in­te­gral step to con­duct­ing a prop­er and fair rate re­view.

Fur­ther­more, the RIC looks to man­date the quar­ter­ly pub­lish­ing of T&TEC’s reg­u­la­to­ry ac­count in at least one of T&T’s lo­cal news­pa­pers.

Ques­tion and re­quest to T&TEC:

Af­ter ask­ing the RIC, a sim­i­lar ques­tion was asked of T&TEC to the one sent to the RIC, as fol­lows:

“If per­mit­ted, can T&TEC ex­plain the main rea­son(s) why T&TEC re­quest­ed such a large in­crease in fu­el costs and con­ver­sion costs? For in­stance, did T&TEC’s cost struc­ture change (ex. NGC gas price in­crease)? Are T&TEC’s broad­er fi­nan­cial oblig­a­tions to NGC and/or IPPs, such as debt, be­ing rolled in­to op­er­a­tional gen­er­a­tion costs? De­tails would be ap­pre­ci­at­ed.

“Would T&TEC be able to pro­vide Guardian Me­dia with a copy of cer­tain pages/page of T&TEC’s busi­ness plan shared with the RIC that con­tains ev­i­dence prov­ing T&TEC pro­vid­ed a writ­ten jus­ti­fi­ca­tion to the RIC re­gard­ing a 71 per cent in­crease in gen­er­a­tion costs?

If T&TEC agrees to do so, we can as­sure T&TEC that no part of the busi­ness plan, even unredact­ed por­tions, will be quot­ed or shared in an ar­ti­cle. It will be kept com­plete­ly con­fi­den­tial. On­ly a men­tion that T&TEC pro­vid­ed Guardian Me­dia ev­i­dence demon­strat­ing T&TEC’s ef­forts in com­mu­ni­cat­ing the ne­ces­si­ty for a 71 per cent in­crease in gen­er­a­tion costs to the RIC will be men­tioned in the ar­ti­cle.”

This is the re­sponse re­ceived from T&TEC: “As you are aware, a fi­nal de­ci­sion on the pro­posed new T&TEC rates is out­stand­ing. To avoid the pos­si­bil­i­ty of prej­u­dic­ing out­stand­ing mat­ters, we are un­able to re­spond to your ques­tions at this time.”

Their re­sponse meant that I would have to search for some­one with a copy of T&TEC’s Draft Busi­ness Plan.

An­a­lyz­ing T&TEC’s 2021-2026 Draft Busi­ness Plan:

T&TEC’s draft busi­ness plan is not well or­gan­ised. It lacks ex­plana­to­ry writ­ing where nec­es­sary and has lots of charts and graphs plas­tered through­out the plan with­out clear or­gan­i­sa­tion. Con­se­quent­ly, it feels rushed and is in­ad­e­quate in sev­er­al ways. Ad­di­tion­al­ly, the draft busi­ness plan had two dif­fer­ent in­come state­ment pro­jec­tions in the same plan for iden­ti­cal years, with dras­ti­cal­ly dif­fer­ent pro­jec­tions ($USD ~118 mil­lion dif­fer­ence each year) for gen­er­a­tion costs.

The fu­el and con­ver­sion por­tions of T&TEC’s draft busi­ness Plan will be ad­dressed sep­a­rate­ly:

Note that a long pe­ri­od of time (about two years) passed be­tween T&TEC’s sub­mis­sion of the draft busi­ness plan and the RIC’s pub­li­ca­tion of the draft de­ter­mi­na­tion, lead­ing to the years in ques­tion in the draft and fi­nal de­ter­mi­na­tion be­ing two years ahead (2023-2028 in­stead of 2021-2026 in the Busi­ness Plan). By time the Cab­i­net de­cides/im­ple­ments, it could be 2024-2029, or even 2025-2030.

An­oth­er clue is con­tained with­in the Fu­el Costs sec­tion of the Busi­ness Plan:

“T&TEC has made strides in its at­tempt to liq­ui­date its cur­rent ar­rears to the NGC and ne­go­ti­ate a long-term gas price con­tract.” (pg. 40).

In­ter­est­ing­ly, this seems to sug­gest that T&TEC, at the mo­ment, does not have a for­mal gas con­tract with the NGC, like­ly due to the in­abil­i­ty for T&TEC to pay for the gas.

Com­bined with the state­ment in the RIC’s fi­nal de­ter­mi­na­tion stat­ing that “T&TEC has in­di­cat­ed it [the gas price] is based on guid­ance it has con­firmed it has re­ceived from the Gov­ern­ment”, it can be rea­son­ably in­ferred that the state-owned NGC is rais­ing the price of gas charged to T&TEC from US$1.74/MMB­TU +3 per cent per an­num to US$3.00/MMB­TU +3 per cent per an­num.

Fur­ther­more, it is as­sumed that the in­crease in the price of gas to be sold by NGC to T&TEC is con­di­tion­al on the ac­cep­tance of a rate hike for T&TEC. Note that the pre­vi­ous state­ment is mere­ly a rea­son­able as­sump­tion made; T&TEC does not pro­vide any guid­ance on whether this would hap­pen or not. It is a rea­son­able as­sump­tion since an in­crease in the price of gas to T&TEC with­out a rate re­view would just am­pli­fy T&TEC’s year­ly deficits, leav­ing NGC with more pay­ments from T&TEC un­ful­filled and thus like­ly repack­aged as an ad­di­tion­al bridge loan.

Al­so, giv­en that T&TEC’s gas price as­sump­tions be­ing de­rived from Gov­ern­ment guid­ance is nowhere to be seen in the draft busi­ness plan, but is present in the draft and fi­nal de­ter­mi­na­tion, clear­ly sug­gests that ei­ther some sort of in­for­mal con­sul­ta­tion be­tween the RIC and T&TEC took place, and/or this state­ment was added in T&TEC’s sub­mis­sion of the fi­nal busi­ness plan to the RIC.

There­fore, while the jus­ti­fi­ca­tion is in­com­plete and lack­ing in the draft busi­ness plan, ev­i­dence sug­gests it is pos­si­ble that T&TEC made a sat­is­fac­to­ry jus­ti­fi­ca­tion in the fi­nal busi­ness plan for a 63 per cent in­crease in fu­el costs.