No bill hikes says CUC boss

| 09/02/2011

(CNS): The combination of the recent explosion at the power plant on Grand Cayman along with a major failure of a generator at the weekend will not result in any kind of new surcharges to customers, the president of CUC has said. Although the company has, and will be, investing in replacement equipment and significant repairs up front, affecting the company’s cash flows, Richard Hew says CUC is insured and will eventually be paid for the losses, so it will not be introducing a surcharge to cover any costs associated with the mechanical issues. Hew has also defended the company’s safety record, saying that despite the very risky business of generating electricity, in 45 years the explosion was the first serious incident at the firm.

Twenty-six-year-old Kurt Scott, one of the two men injured in last month’s explosion, remains in critical condition in hospital in Miami, CUC’s president and CEO told the media on Tuesday, while his colleague, 53-year-old Arney Ebanks, is out of hospital and on the road to a full recovery. Hews said Ebanks was expected to be back at work within the next couple of weeks.

CUC is continuing the investigation into the incident, along with the manufacturers and insurers. Hew revealed that once finished, the results of the investigation would be given to the relevant regulators and authorities but only a summary would be made public.

At this stage CUC is aware, he said, that the explosion occurred in the exhaust system when the engine was going through the start up process but he had no other details about the possible cause. He noted that there were numerous reasons why a generator might fail and cause an explosion and pointed out the dangers of the business.

“The electricity business has numerous risks with respect to health and safety,” Hews noted. “Electrocution, explosions, falls from height are all possible and CUC has always focused very heavily on minimising the risks and reducing the severity and frequency of accidents.”

The power boss said that it was in the company’s interests to do a thorough investigation in regard to the explosion and that nothing would be swept under the carpet as the company had to learn from this incident to improve methods and procedures.

Warning that there may be some power outages over the next two or three days as a result of the various maintenance issues, the president said no customers would be without power for more than an hour as any need to cut capacity will be rotated across the districts.

He said that at present the country’s peak demand was running at around 85 mega watts, but with several units out of commission, CUC currently only had a capacity of 95 mega watts and it needed to increase the gap between the two. Two units undergoing routine maintenance at present are expected to be back in action in a couple of days, taking capacity to over 100 mega watts, but the firm has decide to rent a temporary generator to increase the cushion of capacity.

“As an island we can’t just borrow from somewhere if we get a surge in demand so we need a significant cushion between the peak demand levels and our peak generating capacity,” Hews explained.

With three generators now out of use for what is expected to be a long period, Hew explained that the firm is likely to incur significant costs as it works to repair the unit which exploded last month, the unit which failed at the weekend after a piston came through the engine, and another generator that failed in September and is still under repair. He explained that CUC is covered by its insurance for these machines but in the first instance the company would be paying for parts and work before the insurance firms paid out. However, this did not mean customers would see an increase in their bills.

Hew said the situation was not the same as what the firm experienced in the wake of Hurricane Ivan in September 2004, when significant uninsured assets were lost. The president explained that it is not possible to insure equipment which is more than a thousand yards from either the main plant or a substation on any insurance market and this was the same for many power providers. In this case the generators affected are all within the CUC plant on Sparky Drive in George Town.

With further increases in fuel costs, however, there are no guarantees that bills won’t be increasing in the future, but the CUC CEO said that the company was hedging against major price increases as fears grow that crude oil could reach $100 a barrel, which he said would keep the fuel surcharge down.
 

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Comments (26)

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  1. anonymous says:

    Thank you Mr. Hew for the good news. CUC will continue to thrive, and find news ways on how to fully satisfy its customers.

  2. BusinessSense says:

     "If Foster’s freezer blows up and is uninsured, do they expect to be able to add a surcharge to every receipt they issue to customers?" You’re right! They won’t add a surcharge to every receipt! But your Corn Flakes will cost $0.39 more and boneless chicken breast may go from $2.29 per lb to $2.35 per lb! All businesses operate to turn a profit and, unfortunately, businesses can’t turn a profit if they absorb all of their expenses. Business 101 = pass expenses on to customers. Do you think Car City absorbs the cost of shipping? Or is it built into the price of the Honda Accord? Food for thought! Every other business does it. Why would CUC be any different?

    • Anonymous says:

      CUC are different becaue they are guaranteed profits with a set rate of return on every kw they sell…..

      therefore we should not be charged more for thier incompetence or faulty machinery…

      • Anonymous says:

        You are confusing the old licence with the new licence. CUC is not “guaranteed” any particular level of profit under the new licence. They are different from other businesses in passing on increases in costs to customers in so far as the amount of any increase is determined by increases in CPI.

  3. candles and weed says:

    “No bill hikes says CUC boss” My response, LOL…LOL…LOL…LOL…LOL….I am so tickled for another smoke.

  4. Anonymous says:

    If you have to make a claim with your insurance company, then naturally you can expect your premiums to increase the next year around. This being the case, guess you pays for the increase in premiums ??

    WE THE CONSUMERS !!

  5. Michel Lemay says:

    Thank you. We could not absorb another price increase the way things are going right now. Let’s hope and pray that it will continue that way for the future as well.

  6. O'Really says:

    " Richard Hew says CUC is insured and will eventually be paid for the losses, so it will not be introducing a surcharge to cover any costs associated with the mechanical issues."

    The problem I have with this statement is that there is a very clear implication that if the company were not able to recover money from its insurers, management’s expectation is that it has the authority to introduce a surcharge.  

    Maybe CUC has this right written into its licence with Government, in which case whoever negotiated this was a fool. But if not, why should theconsumer pay for this rather than the company itself and its shareholders? If Foster’s freezer blows up and is uninsured, do they expect to be able to add a surcharge to every receipt they issue to customers? No, they have to swallow it because customers can vote with their feet. CUC’s monopoly prevents us from voting with our feet, but does that change the principle that they should pick up the tab, not us?

    Here is a link to CUC’s financial performance:

    http://performance.morningstar.com/stock/performance-return.action?t=CUP.U&region=CAN&culture=en-us

    In the expanded view you can see CUC’s dividend yield which in the last 10 years has never dropped below 4.43%. The performance of CUC’s share price has significantly outperformed the industry as a whole, in some years by as much as 32%.

    CUC shareholders have a sweet deal. Their total return over the last 10 years outperformed the industry as a whole by just over 11%.  Bear in mind that while the industry as a whole was hit in the 2007/8 market fall, CUC was also hit by a very specific event in Ivan, without which I have no doubt their performance against their industry group would be even more impressive.

    If  CUC have a clause in their licence which automatically allows them to raise surcharges, someone in Government needs to take a look at it. If they don’t, someone in Government needs to tell them they need to lose their assumption that uninsured losses can be automatically passed on to us suckers,

    • Anonymous says:

      Num Num!! why worry youself about surcharge. If Foster’s or any other have a lost it would be passed on to the consumer. Surcharge is such a “word”. Why you think every week the supermarket’s prices are higher and higher. You really believe it all stems from the US providers. Get Real!!. We will pay for CUC losses whether it be through surcharge or increase in the next utility billings, or at the signing of another govt contract. We will pay!!. Nothing is for free. If CUC makes a claim in this magnitude their insurance premium is going to increase. Where is that money coming from? – the consumers.
      Why worry put your energy into something else.

      • O'Really says:

        I’m sure Fosters would try to pass on any uninsured loss, but they face competition from the other supermarkets on island. If their prices get out of line because they are seeking to recover unusual losses, we all start to shop at Kirks or Hurleys and Fosters lose business. CUC face no competition. If you can’t see the difference, I can’t help you.

        As for insurance premiums increasing after a loss, that may happen, but do you expect the premium to go up by the full amount of the loss? Because this is effectively what would happen if CUC were able to apply a surcharge any time they have an uninsured loss. Believe it or not, in the business world there are many times when, much as a business owner would love to pass on expenses, their customers won’t pay the higher price and the business has no choice but to absorb the loss. 

        CUC must love you, you’ll accept anything they might come up and make their case for them. Makes me wonder which of us is the num, num! Of course you could work for CUC; wouldn’t want to see that share price go down, eh?

        • Anonymous says:

          “As for insurance premiums increasing after a loss, that may happen, but do you expect the premium to go up by the full amount of the loss?”.

          That is precisely what they are designed to do (and then some) over time. The problem is that once they increase, premiums never seem to reduce while surcharges are at least temporary.

          Obviously the supermarket analogy doesn’t work because electrical utilities are natural monopolies while supermarkets are not. If you had more than one utility you would have two sets of T&D and 1/2 the consumers to pay for each set, i.e it would increase prices. Do the math.

          • O'Really says:

            I love how threads can get off topic. The issue I am concerned about is not the functioning of the insurance market but whether it is reasonable for CUC to have an expectation that in the event that they have one-off non-operating losses, be it uninsured losses or some other type of loss, they can automatically raise a surcharge so it is passed onto the consumer, not absorbed by shareholders. My view is that they should not have an automatic right to raise a surcharge. End of my position. If you don’t agree with this, fine.

            I would point out that if CUC incurred a loss not covered by insurance, there would be no cause for premiums to increase and if CUC were not permitted to raise a surcharge, the consumer would be unaffected by CUC’s loss. This is the essence of my point. 

            • Anonymous says:

              If CUC’s loss is not covered by insurance then, like any other business, it would ultimately be paid for by the customer either directly or indirectly.

              • O'Really says:

                It’s not a question of would the customer ultimately bear the cost, but should the customer ultimately bear the cost? In some instances the answer will be yes. In other instances maybe the answer should be no. I would be surprised if CUC can raise a surcharge without government’s consent, so my point is that consent should not be given where doing so is unreasonable from the customers perspective.  CUC has shareholder equity of $170m+, it can absorb the odd loss or two if the loss is down to their own deficiencies and not, in the general sense, down to normal operations.

    • Anonymous says:

      I could be wrong, but wasn’t it the PPM who renegotiated this monopoly for CUC? It would not have had as much of a problem with this if the minister responsible at the time, Arden McLean, was not also a previous long-serving employee of CUC. If I recall correctly, when he took office the first thing he did was to disband the oversight board that was trying to protect the people from more monopolization. Many people thought that if this minister did not win office again that he would be re-employed by CUC just like Joey Ebanks, the former MLA who totally disgraced himself in the eyes of many by advancing himself personal loans without telling anyone at Boatswains Beach. Guess where he ended up again? Right CUC. CNS, I hope you publish this because I want to see what excuses the PPM people have to say. Surely somehow they will turn this around too against the UDP. Watch.

      • Anonymous says:

        What “oversight board”? If you mean the ERA Board that was not an “oversight” Board. ERA is a regulatory authority. There were no licensees at the time to regulate and therefore nothing for the Board to do.

        The ERA Board had some of the same people who had negotiated with CUC in 2004 before Hurricane Ivan. Their agreement will show that it was always intended to be a monopoly.

        This is just a pathetic attempt to smear Arden. Your comments are malicious and politically motivated. If you have nothing good or true to say better to be silent.

    • Anonymous says:

      I looked at the website you posted and it shows CUC’s total returns at -2.90 over the past 3 year period, 0.55% over the past 5 years and 2.61% over the past 10 years. Does not seem to be a rich investment to me. Are you seeing some other information that I missed?

      • O'Really says:

        No you are correct. The absolute returns you quote are, as with virtually every stock I would imagine, significantly adversely affected by the global meltdown in 2007/8. CUC also faced a unique setback with Ivan in 2004/5, yet in the 3, 5 and 10 year periods, it outperformed its industry group by 10-12%. The market is not sentimental, it is rewarding CUC for something. What is a matter of opinion, but for me it is the sweetheart nature of the deal they have here in Cayman where they are guaranteed to make profit. I have no problem with them making a profit; I do have a problem with the implication implicit in Hew’s statement that in the event of one-off financial losses not recoverable from outside parties, the company automatically assumes it is the consumer,not the company who must bear the cost.

        • Anonymous says:

          For any business to survive consumers pay costplus return on investment required to attract capital. CUC is a regulated utility and is not able to adjust prices on its own to pass on costs or to increase profits to the level the market can bear as other businesses do. So although you may not like hearing that CUC is allowed to pass through legitimate costs related to for instance uninsurable power lines, there is nothing wrong with this. Other unregulated businesses stick the costs in their prices and tell you nothing about it.
          The electricity industry is one of the most capital intensive and requires stable returns over a long period to attract investment required to fund purchase of new and replacement equipment. Without this the utility will not be able to meet customer demand, the whole system falls apart and customers are forced to resort to self generating at a much higher cost.
          CUC includes in their annual report a comparison of its total return against the canadian utilities index and it shows CUC underperforming significantly since Ivan. I do not know what utilities are included the benchmark your site shows but perhaps it includes those in the states like California that experimented with competition went bankrupt and left consumers in the dark. Guess who pays to get out of that mess.

          • O'Really says:

            I’ll use this as a generic response to the posts suggesting I don’t quite get it. You will see in my posts I have used the word " automatically" in referencing CUC’s position as I interpret Hew’s words. I do not believe the consumer, rather than the shareholders, should automatically pick up unusual financial losses. This does not preclude them from doing so when to do so is reasonable, for instance when the on-going viability of the company is threatened, as it was by loss to the virtually uninsurable distribution system after Ivan. 

            Situations where the company’s going concern is not threatened and therefore strategic considerations for the island as a whole are not in play are different. I know nothing of the circumstances leading to the generator failures Hew addresses, so I have no cause to believe CUC could have prevented the damage and avoided potential uninsured losses. However, if investigation were to show that management had failed to enforce safety codes and maintain maintenance schedules and had  routinely, over an extended period of time, ignored obvious signs of impending failure, I do not believe that passing such costs onto the consumer is reasonable and that more equitably such losses should be absorbed by shareholders. I am not suggesting this has happened, simply giving it as one example where assuming " automatically " that a surcharge is an option should be challenged.

            If your opinions are that there could never be any circumstances when it is fair and equitable for the shareholders, not the consumers, to be out of pocket, we’ll just have to disagree.

        • Anonymous says:

          Hello?! If a company doesn’t make a profit it goes out of business. Is that what you want – a utility that is bankrupt? we would all suffer.

    • Anonymous says:

      Your view, while popular, is simplistic and betrays a lack of understanding of how businesses actually operate. If CUC is insured its customers obviously pay for the cost of maintaining that insurance since its revenue is derived from its customers. If Fosters’ Freezer blows up they willl obviously add any extra costs into the price of their goods. Price control through market competition works in theory but often not in practice. For example, there are many insurance companies in Cayman but it doesn’t prevent them from charging extortionate premiums to their clients. Their justification is that they are passing on the costs of reinsurance.

      Why not read the licence and see what it says for yourself?

  7. Anon says:

    I would bloody well hope so!

    For how many months (years?) did we not pay a sur-charge after Hurricane Ivan?

  8. Anonymous says:

    Really? I hope not! BTW, am I the only one that noticed that CUC hiked up the cost per kwh by 100% between January 2009 and December 2010?

    • Anonymous says:

      CUC hiked up the cost per khw!. Now you are not real!! to think that you would be the only person to notice that. Evey month Icall ahead time to get my bill and that is the next question you will ask. Keep with the time

    • Anonymous says:

      It’s a bit unfair to say that “CUC hiked up the cost per kwh by 100%” as it were some abitrary, reasonable action on their part. In January, 2009 the price per barrel of oil was $40 while in December 2010 it rose to $91. Notice a connection? The bulk of your bill is for fuel charges.