FortisTCI filed a rate variation application under Section 34 of the Electricity Ordinance on July 11, 2018. The application proposes an average rate increase of 6.8% on electricity bills.
FortisTCI is aware, that since filing, some customers have questions regarding the application, aspects of the company operations, and hurricane restoration efforts.
We thank you for the feedback and take this opportunity to provide answers here, to the most frequently asked questions and comments that have been raised.
ABOUT THE APPLICATION: Why is FortisTCI applying for a rate increase at this time?
The hurricane restoration weakened the company’s financial position and FortisTCI must restore the financial health of the company. The total impact of Hurricanes Irma and Maria on FortisTCI was $42 million. In addition to the Rate Increase Application, the financial restoration package includes reinvesting by the parent company, and a comprehensive austerity program.
INSURANCE: Did FortisTCI have insurance to take care of hurricane damages?
FortisTCI does have different types of insurance coverage, like property, mechanical breakdown and business interruption insurance. However, the company sustained the most damage to its transmission and distribution (T&D) network – poles, wires, and transformers. These assets are not covered by insurance because it is not economical, which is standard in the utility industry. Simply, insurers do not take the risk. It should also be noted that T&D exclusions generally apply for assets installed above and below ground.
The only insurance claim the company was able to make was for business interruption which does not cover the company for the first 45 days which is the deductible period. Business interruption specifically covers loss revenues. FortisTCI received a payment of $4.2 million for this claim. However, the company lost approximately $5 million alone during the deductible period.
PROFITS AND INVESTMENTS: What about the years and years of collecting money with no hurricane damages? Where have all the profits gone?
FortisTCI has reinvested most of its earnings (in addition to debt financing) since 2006 to build a strong and reliable company that could restore in record time as it did following Hurricanes Irma and Maria. We were able to finance the restoration on the basis of a strong balance sheet, which the company has built up over many years. We are now seeking to restore the company financially, so that FortisTCI can be prepared, in the event of future storms.
FortisTCI invested over $250 million over the past decade. This level of investment was necessary because the utility was previously undercapitalized, unable to meet growing customer demand, and suffered from poor reliability with rolling blackouts.
RATE OF RETURN: Doesn’t FortisTCI receive a guaranteed rate of return of 17.5%?
While a 17.5 % return on rate base (RORB) is allowable under the Company’s Takeover Agreement, our actual average return on rate base through 2016 was 5.4%, nothing near 17.5%. Yet, the company has never applied for a rate increase until now, which is necessary to restore the company’s financial position after last year’s hurricanes.
REGULATIONS: FortisTCI is a monopoly and making a guaranteed return of 17.5% and should be able to pay for the hurricanes without a rate increase. Who regulates FortisTCI?
FortisTCI is a regulated public service provider and operates under the Electricity Ordinance of the Turks and Caicos Islands. As a regulated utility, FortisTCI reports to the Energy and Utilities Commissioners office based in Grand Turk. As mandated by law, the company files annual returns and audited financial statements and regulatory returns, as well as submits monthly fuel factor calculations for authentication by this office. Electricity systems (generation, transmission and distribution) are natural monopolies in most areas around the world. That is because it is a highly capital intensive business and it would not be economical for multiple providers to supply the same services at a reasonable rate to customers.
FortisTCI is allowed a 17.5 % return on rate base (RORB) under its Takeover Agreement. However, the company’s actual average return on rate base through 2016 was 5.4%, and is nothing near 17.5%. Yet, FortisTCI has never applied for a rate increase under Section 34 until now, which is necessary to restore the company’s financial position after last year’s hurricanes.
THE REQUEST FOR INCREASE: Why is FortisTCI asking for an increase to cover the cost of the restoration?
FortisTCI has never applied for a rate increase under Section 34, until now. The hurricanes weakened the company’s financial position and have made an increase necessary. As a government regulated business, FortisTCI does not have the authority to adjust rates, unlike unregulated businesses that can increase their prices based on market or operational conditions. A request for increase by FortisTCI, as prescribed under Section 34 of the Electricity Ordinance, is subject to the review and approval of the Governor.
INVESTMENT IN INFRASTRUCTURE: How much does FortisTCI invest annually in infrastructure?
FortisTCI has invested over $250 million over the past decade. This level of investment was necessary because the utility was previously undercapitalized, unable to meet growing customer demand, and suffered from poor reliability with rolling blackouts. Today, the TCI has one of the best utilities in the Caribbean that creates enormous value for the country.
In 2017, the company spent over $32 million to restore electricity after Hurricanes Irma and Maria (none of which was covered by insurance). The total financial impact of the hurricanes on the company was $42 million. In addition to the hurricane restoration costs, another $30 million was committed and spent on infrastructure development last year alone to meet future growth and ensure continued reliability. Two key infrastructural investments that were made in 2017 are the Leeward Highway transmission line project and the South Dock Road transmission and distribution project which saw the installation of new, larger utility poles and power line upgrades. Both of these investments withstood Hurricanes Irma and Maria, which enabled the company to restore more quickly in those areas.
FortisTCI has also reinvested most of its earnings (in addition to debt financing) since 2006 to build a strong and reliable company that could restore in record time as it did following Hurricanes Irma and Maria. We were able to finance the restoration on the basis of having a strong balance sheet, which was built up over many years. We are now seeking to restore the company to financial strength and ensure that FortisTCI can be prepared in the event of future storms. The rate increase, together with further reinvestments by our parent company and the implementation of a cost restructuring plan, are the bases for rebuilding our financial position.
GOVERNMENT FEES: FortisTCI has exclusive licenses to generate, transmit, and distribute electricity. Does the company pay any government fees?
Per the company’s Licenses and Takeover Agreements, imports directly linked to energy delivery are duty free. However, like all other businesses in TCI, FortisTCI does pay a 7.5% customs processing fee on everything the company imports into the TCI for its business operations. This includes fuel used to generate electricity. In 2017, FortisTCI paid customs processing fees totaling over $2 million. Materials and equipment that are not directly linked to energy delivery are subject to normal duties and customs processing fees.
REDUCED ELECTRICITY COSTS: What is FortisTCI doing to help reduce the cost of electricity in the Turks and Caicos Islands?
Electricity rates in the TCI have not increased since the 1980s, with the exception of the large hotel category which went from 17 cents to 21.5 cents in 2012.
Electricity costs in the TCI are impacted by the fuel supply chain, which typically ships from the Gulf of Mexico to The Bahamas for transshipment to TCI. This route is the only reliable option because of the absence of a deep water port in Providenciales. The cost of electricity would be significantly reduced if Providenciales had a deep water port. In addition, there is no pipeline and trucking fuel from the dock to the plant adds to the overall cost of electricity for consumers. FortisTCI also operates four independent electricity systems across multiple islands, which naturally increases operating costs compared to a single electricity system.
FortisTCI is committed to providing reliable, least-cost electricity in the TCI. The company continues to invest in renewable energy solutions while exploring new energy sources and innovative technologies. It is possible that as the company incorporates lower cost energy options into the energy mix, the TCI will see reduced electricity costs. This is something we remain focused on at FortisTCI.
COST OF SERVICE STUDY: The government has said that they are commissioning a cost of service study on the energy sector, so why is FortisTCI applying for an increase at this time?
FortisTCI welcomes a cost of service study. However, a cost of service study is a completely different exercise with different objectives. A cost of service study allocates the cost to provide electricity to the different customer classes and service territories. A cost of service study is revenue neutral to the utility.
At FortisTCI, we work hard every day at being a good utility. That includes keeping our customers informed in a timely manner. FortisTCI will continue to engage customers and answer their questions via the media and in public meetings as the application moves further through the process. We look forward to your participation.
