Level this playing field
August 7, 2013
The Ascendant Group owns Belco, which is a monopoly. Their ability to perform work and carry out functions through their various subsidiary holding companies, give the group a grossly unfair competitive advantage in the market place. By law, most democratic countries restrict such monopolies from engaging in business other than their core business. In the context of Bermuda, the question is asked: “Should such monopolies be permitted to carte blanche compete with service providers, retail and any other businesses?”
This is a question we must put to the Government, Ascendant Group and the people of Bermuda. Natural justice should guarantee a level playing field in which the private sector can operate in a fair competitive environment.
The first issue to be addressed is the fact that the Ascendant Group is allowed to purchase individual private companies on the Island who will compete against other privately owned businesses. It could be perceived that when they need cash for further development of their company and subsidiaries, they might seek to raise the cost of power to the consumer, and, do so when the profits of every other established business is diminished and household income is low. This could occur in their attempt to raise rates for the building of the North Plant.
The Ascendant Group indicated publicly that they cannot build the North Plant without raising their rates. Yet, they can pay their shareholders dividends for many years and spend considerable sums of money of their earnings to purchase their privately owned air conditioning company Air Care to compete against other privately owned companies that have the same business model. They have purchased the majority share of the facility management company IFM. Now we have an air conditioning company and a facility management company owned by the monopoly power supply company. Keep in mind, they also own Bermuda Gas & Utility. This goes against the normal practices in many developed countries, where it could be considered illegal.
This select ownership creates an unfair advantage to these businesses that the private sector cannot compete with. Take into account that as an air conditioning service provider and a facility management company, part of their responsibility to their clients is to provide them with the latest technology for reducing their energy usage and saving money. Here we have the company that is your air conditioning service/facility management provider working to save you money on your power consumption and they are the ones that own the power being supplied to you. I would say that is quite a conflict of interest. What is to prevent the major power supplier to use that advantage to get contracts for their air conditioning service and facility management companies by reducing their rates to specific building and business owners and operators?
The second issue is the alternative energy field. There are various private companies that are trying to bring cogeneration to large individual property owners to save on energy consumption costs. The hotel industry on the Island is less competitive in the worldwide market due partly because of the high cost of electricity. One of the ways to bring this cost down is through alternative energy and specifically cogeneration, also referred to as combined heat and power or CHP. This alternative energy source would provide hotel owners the opportunity to cut costs. Co-generation would involve large diesel or natural gas fired generators on each hotel's property to produce electricity and then using the waste heat from the generators to provide either reduced heating, reduced hot water, reduced air conditioning, or a combination of these secondary uses.
Co-gen is a technology that is supported by the Energy White Paper. For a typical hotel to obtain maximum use of the waste thermal energy, they will often have to generate more electricity than they consume and thus would need to export the surplus electricity to Belco's grid. After several local companies have tried to sell the cogeneration concept to local hotels and the hospitals, we now understand that Belco and or IFM Ltd are trying to sell co-gen systems. Participation by any of Ascendant's subsidiaries in the co-gen market would be blatant unfair competition for reasons including:
1. There is currently no commercial interconnection agreement for co-gen systems and any agreement drafted by Belco could give them or other Ascendant subsidiaries an unfair advantage.
2. Based on past experience, Belco would be likely to require any co-gen system owner to have 100 percent backup (redundancy), yet they could wave this requirement, for themselves or other Ascendant subsidiaries. This would give them a tremendous first cost advantage against other local suppliers of co-gen systems.
3. Until fair and equitable commercial interconnection and feed in tariff agreements are established, Belco or IFM are in a position to take unfair advantage of the lack of regulatory authority to achieve dominance in the co-gen market, when any jurisdiction with better regulation of the energy sector would in all likelihood prevent them from competing in this market. Should this Belco/IFM participation be allowed in the market before any interconnection and tariff agreements are established, it will likely be to the economic detriment of the hotels and Bermuda in general, due to the lack of competition which has seen such a huge drop in prices in the telecoms industry since it was introduced.
Belco/Ascendant should not be allowed to monopolise the power industry and the playing field needs to be levelled. One way to do this is to allow commercial properties access to the grid when needed and also be allowed to sell power back to the grid. This is good for the property owners and also good for Bermuda in general. If the playing field is levelled and the market is opened to competition, only good things can happen. The other fact is by opening up this market, our carbon footprint as a country will be greatly reduced. BELCO has ageing heavy fuel generators that will need to be decommissioned in the next few years.
These must be replaced with other sources of fuel. Natural gas in a liquid form is a perfect example of this. Co-generation plants can now be installed using this natural gas. Containers could be brought into the Island to supply these operations now, and property owners could be reaping the benefits by lowering their costs and making them more profitable, which will help the entire country. The future could bring a tank farm here for natural gas and eliminate the container version. But why wait five to seven years for this to happen. It can happen now, but only if government policies are changed to allow for a competitive market.
The third issue is the exemption from the 60/40 Bermudian ownership rule that Ascendant has applied for. There should be no objection to Belco receiving one of these exemptions, however, its subsidiaries should not get the same exemption as they are competing against Bermudian companies that are not eligible for this exemption. This creates an unfair playing field for these local companies in the present market. In the future, offshore wind farms, large solar farms, or other major projects that are put out for proposals, will see Ascendant and their subsidiaries having an even greater advantage over their Bermudian competitors. If you read the issues above you can see that this would only add fuel to the fire and not very good future options for Bermuda.
While Belco continues to apply for rate increases for new generation capacity and continue to pay large dividends when the rest of Bermuda is struggling in our drawn out recession, we have come to the conclusion that Belco is not cost efficient in comparison to other island utilities. This lack of cost efficiency is contributing to make Bermuda less competitive compared to our economic competition. If you compare the 2012 annual report for Ascendant to the 2012 report for Caribbean Utilities Co Ltd (CUC, a similar size company in the Cayman Islands) you can easily see where Belco/Ascendant are cost inefficient. CUC's General and Administration expenses are only 31 percent of Ascendant's. CUC's Transmission and Distribution expenses are only 27 percent of Ascendant's. In 2012, CUC paid approximately 39.1 percent more per unit of energy in the fuel purchased than BELCO.
This presumably includes the Cayman Customs duty on fuel which is approximately 2.21 times higher per energy unit than the duty on Belco's fuel. Yet in spite of CUC's substantially more expensive fuel, they still generated electricity at only 4.6 percent more cost of fuel per kWh sold and their average residential price per kWh is almost identical to Belco's. From these figures, we can easily conclude that Belco's generation operations are far less efficient than CUC's and so are their non-generation operations. We estimate that these combined inefficiencies are costing Bermuda approximately 20 percent more than if Belco was as cost efficient as CUC in The Cayman Islands. This puts Bermuda at a huge economic disadvantage compared to one of our main competitors in both International Business and Tourism.
As Bermuda strives to get its house in order, the Ascendant Group should do the same. It is all about efficiency and fair competition.
City of Hamilton