Cayman Electricity Choices

| 26/06/2008

By Dr Donald Hardy – Posted Thursday, 26 June 2008

4 comments

Clearly, the Grand Cayman people are asking for electricity changes.
People want a new, and better, approach to making and delivering
electricity. The key question is this: what might such changes be?

When we were students in school, copying from our neighbors was
frowned upon. However, in public policy, borrowing good ideas that
work elsewhere can be a sign of wisdom. Whatever is decided and done
will bear the mark of the Cayman community. Ideas borrowed from
elsewhere will be adapted to the unique goals and lifestyle of the
Cayman Islands.

With these thoughts in mind, what has worked well elsewhere? Certain
newer approaches to electricity encourage more competition, more
innovation, and more environmentally friendly utility operations.
Let’s not forget that Eco-Tourism is popular. Years ago, wind turbines
in Palm Springs California were opposed, but now are used to promote
local tourism and symbolize a region changing to energy independence.

Based upon success at many other locations, in general I recommend the
three types of Electricity Freedom listed below. Such freedom would
apply to and be for the benefit of the Cayman Islands electricity
consumers and new producers.

For clarity only, I will use CUC as an example of the key local
electric utility to better illustrate these ideas. These are the three
basic types of freedom that encourage more competition, more
innovation, and more environmentally friendly utility operations:

(1) Freedom to connect with the grid and to self-generate electricity,
without any discrimination from CUC.

(2) Freedom to connect with the grid and to sell electricity to CUC on
a fair basis.

(3) Freedom to buy non-CUC electricity delivered through the grid,
without any hindering from CUC.

The three types of Electricity Freedom above could be quickly
implemented by the new Cayman Electricity Regulatory Authority (ERA),
but a consumer friendly ERA would be needed. Perhaps the present
single ERA manager could be changed to become a Board of three elected
Cayman persons, with three staggered ERA Board Member term expirations
(e.g., 2008, 2009, and 2010).

The Cayman ERA could have open public meetings, e.g., at least every
three months, with ample opportunity for on-the-record comments from
Cayman electricity consumers and from experts. Any costs of CUC
participating might not be charged to the electricity consumers, but
rather be paid by the CUC shareholders. A community Consumer Advocate
and Ombudsman could be created and related costs paid by the
Government.

Several types of laws are successful in establishing Electricity
Freedom, such as the following:

Net Billing. Under Net Billing a home or business gets full money
credit, against their electricity bill, for all self-generated
electricity. Any such electricity exceeding home or business
consumption usually is credited to the next month’s utility company
electric bill. The right to interconnect with the utility and to
receive non-discriminatory utility service (no extra utility fees)
usually isincluded within Net Billing regulations and/or laws.

Electricity Feed Law. Electricity Feed Laws exist in Germany and
California. Such laws require the utility to allow grid connection of
nonutility generating equipment under fair and reasonable terms, and
also require the utility to buy all renewable electricity offered for
sale, at fair and reasonable purchase prices. Larger non-utility
renewable electricity projects (bigger than homes or typical
businesses) use Electricity Feed Laws to justify their investments in
non-oil generating systems.

More than half of the 50 states in the USA have Renewable Portfolio
Standard (RPS) laws. An RPS requires electric utilities to achieve an
increasing percentage of their total electricity from renewable
resources. Utilities can either invest in renewable generating
equipment or buy renewable electricity from non-utility sources.
Failure to achieve the Government required RPS quota usually involves
a substantial annual financial payment paid by the utility
shareholders (but not paid by the electricity consumers).

Seeing what can be done is more useful than reciting reasons why
things that are not working cannot be changed. It is the difference
between the “can do” and the “never happen” attitude. Businesses and
Governments get to choose the attitude they present to the people.

CUC might begin to see that renewable energy is not so bad. Utilities
far larger than CUC have invested Billions of US dollars into
renewable energy. The fastest growing energy business in the world is
renewable energy. Maybe CUC is falling behind, or missing out on
something good.

Something more may be needed. After implementing basic Electricity
Freedom, a phased program of special incentives to CUC might be
started. The purpose would be to encourage rapid expansion of
Electricity Freedom.

If Electricity Freedom were resisted or defeated, there would be no
benefit from offering or paying any incentives. Perhaps CUC might be
paid a modest fee, approved and controlled by the ERA Board, for
simply moving renewable electricity from non-CUC renewable electricity
producers to the retail customers. Studies have shown that the actual
(system incremental) cost is very small.

CUC recently sold approximately 540,000,000 kilowatt-hours (kWh)
annually which is 540,000 megawatt-hours (MWh) of electricity
annually. Thus, an incentive fee of US$2 per MWh paid for moving
100,000 MWh of non-CUC renewable electricity to Cayman consumers would
total US$200,000 as an incentive paid to CUC.

For comparison, under present 2008 Government policies, the allowed
CUC annual profits (‘earnings’) were approximately US$23,760,000 for
the fiscal year ended 30 April 2008, up 29% from the year before. CUC
spent US$112,879,000 for oil, which is almost US$4,700 per CUC
customer annually for oil.

Yes, CUC has largely created its own problems. Yes, CUC is both a
monopoly (the only seller of retail electricity) and a monopsony (the
only buyer of wholesale electricity), giving the Grand Cayman
electricity consumers and new electricity producers no choice at all.

Yes, the cost of the public grid is charged to the Cayman electricity
consumers. CUC also gets an assured profit on “its” investment in the
public grid. The cost of oil CUC burns is charged to CUC customers.
The electricity consumers are charged for the cost of oil-dependant
generating equipment that CUC buys. CUC also gets an assured profit on
“its” investment in the oil-dependant generating equipment. And in the
business world, getting an assured profit, administered by the
Government, is like shooting fish in a barrel.

But maybe, as an incentive to do what needs to be done, CUC might be
paid a modest amount per megawatt-hour to move non-CUC renewable
electricity.Such payments could be used year-by-year to change the
basis of CUC’s profits. Profits from oil-dependant generating
equipment could be reduced. Over ten to fifteen years, the CUC profits
from oil-dependant generating equipment might be reduced to roughly
20% to 40% of the total CUC profits allowed by the Government, with
roughly 80% to 60% of CUC’s profits coming from moving non-CUC
renewable electricity to Grand Cayman customers.

There is another possibility. After implementing basic Electricity
Freedom, electricity restructuring similar to US reforms in 2005 might
be done. This would take longer to finish. Electricity Freedom would
make the wait more bearable. Business ownership of electric generation
could be separated from ownership of the public grid, by divestiture
of CUC assets into two separate and independent companies. In addition
to separate company ownership, new rules might require that no
Directors, Officers, or Managers could be the same in both companies.
The concept would be that no divided loyalties and no conflicts-of-
interest would be allowed. CUC might be given the choice of being in
either (a) the electric generation business or (b) the electric retail
delivery and sales business, but not in both.

CUC is an IOU company. That does not mean that you get to handle your
monthly electric bill by just sending a note that says “IOU” to CUC.
An IOU is an Investor Owned Utility. The investors are the utility
shareholders. The business goal of an IOU typically is to maximize
profits for the shareholders (and company management) who own the IOU.
The dominant shareholder in CUC is the Fortis group, a global
insurance and banking company. After Hurricane Ivan, apparently
related to CUC being under-insured, Government gave CUC approval to
add a Hurricane Ivan Cost Recovery Surcharge to consumer electricity
bills. Ironic, isn’t it, that a global insurance company would under-
insure one of its utility companies.

As another alternative, ownership of CUC might be changed to ownership
by the Cayman voters or residents like the electric utility company
owned by the city of Austin, Texas. The Austin utility is a non-
shareholder organization. It is responsible to the citizens of Austin.
It is controlled by the city government of Austin. The Austin city
electric utility is also a national leader in the use of renewable
electricity. Austin Energy (www.austinenergy.com) also leads in
innovative energy efficiency programs that actually help the people of
Austin reduce electricity consumption and lower their utility bills.

Other US examples of community utility ownership are the Public
Utility Districts (PUDs) in the Pacific Northwest, the Rural Electric
Cooperatives across much of America, the many city-owned Municipal
Electric Utilities like Austin, and also the federally owned electric
utilities including the Tennessee Valley Authority (TVA), Western Area
Power Administration (Western) and Bonneville Power Administration
(BPA).

In one entire US state, Nebraska, electricity comes mainly from one
citizen-owned utility, the Nebraska Public Power District (NPPD). NPPD
is a political subdivision of the state of Nebraska. The NPPD electric
utility is governed by an 11-member Board of Directors, elected by the
people from NPPD’s chartered electricity service territory.

More information about the 2,000 US community-owned electric utilities
can be found at the American Public Power Association (APPA) internet
site (www.appanet.org).

The new CUC license was announced in early April 2008. Cayman
Government negotiations with CUC on the question of extending the CUC
electricity license were very slow. Little or no community input
concerning alternative policies and laws was included. The Government
may say, or CUC may say for the Government, that the Government’s
hands are now tied. They may say thatthat a new license was issued.
That nothing can be changed.

Such a position could be taken, but it would be, I think, scandalous.
The anguish expressed by Grand Cayman electricity consumers is a cry
of despair. What Government or business wants to be seen as heartless
and thoughtless?

There may be a positive role that the Crown could play in facilitating
the possible reform of the electricity sector in the Cayman Islands.
You, the Cayman people, would know better than I. After all, the UK
has extended the Kyoto Agreement, for international action to combat
Climate Change, to the Cayman Islands. Renewable energy is essential
to achieving Kyoto objectives. CUC apparently has failed to
significantly use renewable energy.

Furthermore, CUC’s only apparent plans are for more fossil fuel
generation (as summarized in CUC public documents like the 2008 annual
report). Thus, reforming the Cayman Islands electricity sector appears
to be essential. However, perhaps there are other solutions
satisfactory to the Cayman people.

Chris Randall: Dr Hardy makes frequent reference to the
situation in various places in the USA vis-a-vis the practices or
policies of CUC and the Cayman Islands.  It is a common failing
of US nationals that they believe whatever is good for, or works in,
the USA should apply to the rest of the world.

While no-one would sensibly propose a continuation of the status quo,
the solution must be one developed specifically for the Cayman
Islands, or Grand Cayman in the case of CUC, and not something copied
in toto from a different society.

It is, perhaps, unfortunate that the CUC shareholders, in their
collective wisdom, opted to sell a majority of the shares to Fortis as
a means of raising needed capital for expansion.  For the
ownership of an essential utility company to fall into foreign
hands is undesirable to say the least, raising questions as to whether
it’s policies and practices are calculated to best serve it’s
customers or overseas owners.

The solution here would be by an act of the Legislative Assembly, in
the form of a law stipulating that no more than 49% of the shares of a
utility company may be held by persons not of British Overseas
Territory (Cayman Islands) nationality; with a provision excluding
exemptions such as are obtainable under the Local Companies Control
Law. This would be preferable to simple nationalisation which has been
proven to be a grossly inefficient method of ‘ownership in the public
interest’.

All of which will become irrelevant when the cost of oil becomes too
high for small economies to bear.  The time will come when the
only places in the world able to maintain an electricity supply
will be those with access to nuclear energy, hydrodynamic power
(either tidal or rivers) or aerodynamic (wind) power.  None of
these will be economic or practicable for places having
small populations and thus there will be a major shift in population
distribution throughout the world.  Larger countries will have to
change their immigration rules so as to permit these movements; or,
they may decline to do so, condemning large areas of the world to
regress to a pre-industrial revolution existence, using animal-fat oil
lamps for lighting and horses or camels for transportation.

For the Cayman Islands, nuclear and hydrodynamic power are both
impractical.  Nuclear is too expensive; the tidal range is
only about 12 inches and there are no rivers.  (Thermal energy
from temperature gradients in the deep ocean costs more in power to
operate the pumps than can be derived from the technique).  Wind
power has yet to be proven in the C.I., but it seems unlikely that
there is sufficient sustained wind to provide continuous
reliable power.  Wind power is a useful supplement to an existing
electricity system, but cannot function as the sole source ofpower
generation for a town, industrial complex or whatever, as there is no
economic means of storing unused energy and then accessing it when a
surge in demand occurs.  There is also the question of direct
current/alternating current where the technicalities are beyond the
scope and intent of these comments.

So what is the answer? 

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