The Prospects for Competition in the Electricity Sector: from generation to distribution

The concept of electricity is mystifying. While it cannot be seen or stored, electricity can be generated and distributed. Nikola Tesla has been credited for devising the technologies that generate and distribute electrical energy for use in our homes, factories, hospitals and churches. Given the high price of electricity in Jamaica, the debate is focused on not just the reduction of fuel cost, but critically on the introduction of competition in a meaningful way in the supply of electricity as the best means of driving prices down. To engage the public on this issue and to facilitate the discussions, in September 2012 the Fair Trading Commission hosted the 13th lecture in its Shirley Playfair Lecture Series on the way forward in promoting competition in the generation and distribution of electricity in Jamaica.

In presenting this year’s Lecture, Professor Evan Duggan, Dean of the Faculty of Social Science, UWI, outlined the anticipated benefits of competition in the sector. These include increased efficiency, a more attractive investment environment, and lower prices to consumers.

Professor Duggan asserted that the electricity sector is organised into four segments: generation (production), transmission, distribution and retailing. He argued that there is an urgent need to reduce the price of electricity since high electricity price is one of the main causes of Jamaica’s anaemic growth, crippled productivity and low levels of global competitiveness. To stimulate productivity and economic growth, he stated that Jamaica has to tackle the seemingly insurmountable task of reducing the price of electricity. While introducing competition could provide such a solution, he highlighted the anticipated challenges and opportunities associated with it.

The primary opportunity for competition coincided with recent technological advances in production which has served to reduce the size of the plant that is required for an efficient production of electricity. This means that the sector could now profitably accommodate more producers. In support of this development, he informed the audience that the electricity sector in numerous countries was being restructured to accommodate competition — in those segments where it is feasible.

The primary anticipated challenge for introducing competition is that Jamaica is too small for competition and that rigorous economic analysis to its feasibility is absent. Furthermore, investments would decline since profits are expected to be lower in a competitive environment. The prospects for competition to lower the price of electricity was also brought into question since approximately 80 per cent of the cost of producing electricity is attributable to the price of refined petroleum. Professor Duggan informed the audience that based on these challenges, some have argued that the electricity sector should remain a regulated monopoly since any introduction of competition which failed to reduce price to levels that can stimulate economic activity would be pointless.

Following Professor Duggan’s presentation, the Fair Trading Commission outlined its perspective on the matter. The Commission, by way of Dr Kevin Harriott, re-asserted its view that there is a need for the introduction of competition in the electricity industry which would be facilitated by the unbundling of the sector. The Commission envisages multiple entities in the generation, distribution and retailing segments but a single entity in the transmission segment. A regulated transmission sector with open access to power producers and retailers would not only boost investors’ confidence but also mitigate abuse of power. The Commission pointed out that other countries’ experiences have demonstrated that this model is viable and the introduction of competition resulted in benefits, including lower prices, within six years. The Commission made the point that the challenges described during the Lecture should not serve as a hindrance to the introduction of competition but rather as a stepping stone to the careful plotting of the journey ahead.