Why we are raising the price of electricty

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From Chris Ambler, chief executive, Jersey Electricity Co Ltd.

FOLLOWING Lyndon Farnham’s letter (JEP, 7 January) raising a number of questions, we feel compelled to bring to the attention of your readers the current position with regard to electricity prices.

In January 2007, the JEC took the decision to absorb some of the costs it faced at the time and hold its tariffs fixed for two years in order to protect customers from high and volatile energy markets. Over this two-year period, the underlying cost of imported power has increased significantly. Even despite recent falls, it still stands at a level 60-70 per cent higher than it was at the start of that period. This is partly driven by the overall increase in the price of power on European wholesale markets and partly driven by a weakening of the pound.

The price of power on European wholesale markets is driven by many factors – not just the price of oil, gas, coal and carbon but also plant outages/ breakdowns, lack of peaking generation and interconnection capacity, maintenance, demand uncertainties, etc. While crude oil prices have come down significantly in recent months, electricity prices in the competitive European markets have eased more modestly.

Our predicted rise in JEC importation costs from 2008 to 2009 is around 40 per cent, as our hedging process on both power and foreign exchange has mitigated a large portion of the underlying increase referred to above. We are absorbing some of this 40 per cent cost increase, but we can’t absorb it all, and this is why regrettably some of these costs have to be passed to customers.

We should also recognise that while competing fuels, such as local heating oil and gas prices, have come down recently, they also increased significantly in 2007 and 2008 – in the case of heating oil, doubling from their 2007 levels. Similarly in the UK, gas and electricity prices rose by 48 per cent and 27 per cent respectively during 2008 alone, so we should not be surprised if their tariffs fall as well.

The JEC typically hedges one or two years in advance in order to secure supplies and ensure price stability, as is normal with many electricity utilities, and we use two energy specialists to provide independent advice. We buy ahead ‘a little and often’ so that we are deliberately not exposed to a single high price point and the average for the year was considerably lower than peak levels. We also forward-purchase known foreign currency obligations in a similar way which is generally accepted best practice. It is worth noting that had we not employed these policies and were obliged to purchase our requirements at current energy market prices at the current pound/euro exchange rates, the tariff increase would have been 36 per cent rather than 24 per cent.

We are generating electricity at La Collette power station during winter peaks and super-peaks, when importation costs are higher. However, the majority of our generation capacity is relatively old and costly to operate, and therefore more expensive than importing even at current low oil prices. We constantly review the option of generation at La Collette, and do run the power station if local generation is cheaper, although the savings are often small.

The JEC has already examined any likely opportunities to minimise the tariff increase due to growth in electricity sales. However, current sales are only marginally higher than we budgeted and certainly not at the level that could mitigate the price increase. Similarly, the opportunity exists to sell power to France, but only during periods of significant short-term price spikes on the French market – these are infrequent and normally last a very short time.

Dividend yields at three per cent are still low compared with other listed utility benchmarks of around five to six per cent. The JEC has invested (and continues to invest) in a number of other ventures that are linked closely to our core businesses. Performance of our non-energy businesses has not contributed to our price rise. In fact, our non-energy businesses have supported the Energy Division during low profit periods in 2006 and 2007 (lower because we absorbed some of the cost increases we faced at the time), and have indirectly enabled us to continue our capital investment programme to the benefit of consumers.

The La Collette power station site is the subject of a lease from the States and the JEC has simply paid the rental stipulated in the lease. The low rental is a reflection of the fact that when the JEC acquired the site, it was in a very poor state and required the company to, among other things, build a very substantial seawall, at its own expense, in order to render the site usable for the power station. The lease has recently been extended and the rental is currently under negotiation.

Mr Farnham’s initial question was if there was competition or regulation in the electricity market would the JEC still have been able to impose its increase? There is no question that over the long-term, energy prices have risen and will continue to rise in real terms. The JEC has successfully shielded its customers from the worst extremes by providing competitive pricing without the volatility seen in other fuels. Another competitor would have had to buy power from the same European wholesale market, which would have led to similar price increases, perhaps even greater because two companies in the market would not benefit from scale economies.

We should also be clear that we do have to operate within the bounds of regulation – we are subject to the Competition Law and oversight by the JCRA. Had the JEC been subject to tighter sector-specific regulation, it is quite possible that the company would have not absorbed any portion of the importation cost increases in recent years, resulting in even higher and possibly earlier tariff increases.

In summary, we realise that the increase in tariffs is significant and comes at an unwelcome time for our customers. We are sensitive that the future economy is uncertain and many businesses and individuals are struggling with their finances. However, electricity supply is fundamental to the Island and it is essential that we can continue to invest in maintaining and strengthening the network. Over the last ten years we have invested £100m in doing just that, and our investment will be higher over the next ten years.

Regarding the outlook for this year, we have made a commitment to no further tariff increases in 2009, and subject to the pound/euro exchange rate we are hopeful that we will see the benefit of falling energy prices in 2010. However, there remains considerable uncertainty about the future. We will continue to work with any interested parties to show that the actions we have taken have been in the best long-term interests of our customers and the Island.

Queen’s Road,

St Helier.

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