Printed in the "Business Monday" newspaper on July 27, 2009
Electricity,
telecommunications, water and sewerage, natural gas and transportation services
are commonly referred to as public utilities. These industries (with the
exception of transportation and some telecommunications services) have tended
to operate in a monopoly environment so regulation was considered important in
view of their value to both consumer and economic welfare.
This regulation is
undertaken either by a government or a regulatory agency. In Barbados the Fair
Trading Commission (Commission) regulates electricity services provided by the
Barbados Light & Power Company Limited (BL&P) and the domestic and
international telecommunications services of Cable & Wireless (Barbados)
Limited (C&W). The rates of the other utility companies - water and
sewerage, natural gas and transportation services - are set by the Barbados government.
Regulation of a
utility company generally relates to its rates, services, standards, safety and
efficiency. The regulation of rates or prices is by far the area that generates
the most attention from the operators, consumers, the press and the public.
Rate regulation has two aspects: a) control of the level of earnings to be
derived from the rates, referred to as "rate level" and b) control of the
tariffs in the rate structure. The Commission, in establishing the principles
for setting rates under the Utilities Regulation Act adopts these four generally
accepted objectives:
Prevention
of excessive profits
Assurance
of adequate earnings to enable the utility to develop and expand
Provision
of service to a maximum number of customers
Promotion
of cost efficiencies within the operation of the regulated utility
Additionally the
Act also states that the Commission shall protect the interest of consumers by
ensuring that the service providers supply service that is safe, adequate,
efficient and reasonable. Efficiency of the company is therefore an important
element in utility regulation. Under rate of return regulation, which will be
used for the BL&P rate review application, a company will request approval
of a revenue requirement, a computed rate base, a rate of return on rate base
and a capital structure as well as approval of proposed tariffs. The Commission
will assess the tariffs through a determination of the utility's revenue requirement
and its related components.
In order to
determine the revenue requirement several different types of information are
needed but for rate
of return regulation the income statement and balance sheet are of
particular interest. Revenue
and operating expenses related to projects and normal operations are recorded
on the income statement. These include wages, salaries, fuel, maintenance,
advertising, taxes, and depreciation
expenses. Operating expenses are costs incurred for inputs that are used within
a year's time. Assets (plant, other property and investments, current assets,
and deferred debts) and liabilities (stock, long-term debt, non-current liabilities,
current and accrued liabilities, and deferred credits) are recorded on the balance
sheet.
Information on
the rate base which is the value of the assets "used and useful" in producing
the service minus the accrued depreciation is also required. The assessment of
the rate base is sometimes contentious as the service provider and regulator
may differ on the usefulness of assets and equipment.
To assess
whether the rate of return being requested by the operator is sufficient to
attract investor capital, the regulator must determine an efficient operator's
cost of capital. Generally the cost of capital is calculated based on the Weighted
Average Cost of Capital (WACC). We say weighted
because it is based on the proportion of debt and equity
in the company's capital structure. The calculation of an appropriate WACC
requires market data including yields from treasury bonds, interest rate
trends, capital market and stock trading experience and when these data are
unavailable, similar information on comparative countries may be used with adjustments for risks associated with
a particular country, such as its size or location.
The submission
of sufficient and accurate information is essential for the Commission's
determination of the rate level. While a service provider such as the BL&P
submits operating and accounting reports on a monthly and annual basis to the
Commission, a rate application requires the submission of substantial additional
information. The Utilities Regulation (Procedural) Rules details the
information that the Commission requires to make its determinations and includes
among other things the financial statements mentioned earlier as well as
calculation of working capital, dividends, sales projections, capital expansion
plans, and five-year forecasts. Inadequate information could lead to the regulator
not making the correct decision.
A service
provider therefore needs to do a significant amount of preparatory work before
it can approach the Commission for a rate adjustment. With regard to the
BL&P rate review Hearing, the Commission will be considering the information
that the company has submitted to justify its rate application, as well as the company's
responses to additional written questions from the Commission and the intervenors.
Parties to the hearing including intervenors will also have access to the information
submitted by the company and the Commission, in its determination, will provide
its reasons for the decision.
Utility Regulation 
