In 2016 October, the Jamaica Public Service Company Limited (JPS) submitted a request to the Office of Utilities Regulation (OUR/Office) for an Extraordinary Rate Review. The company claimed that changes to the depreciation rate of its new licence, the Electricity Licence, 2016 (Licence 2016) which took effect in 2016 January had resulted in asset impairment amounting to US$13.4M in 2016 and an average increase in annual deprecation of approximately US$3.9M in 2017 and 2018.
The OUR reviewed JPS request for a rate revision but extended the scope of the review to the appropriateness of the depreciation rates in Schedule 4 of the Licence 2016. The Office concluded that JPS should recover the US$13.4M through the Z-factor mechanism in the revenue cap formula, commencing 2017 July 1. Additionally, it took the decision that to capture the effects of the increased depreciation expenses, the rate revision should be guided by detailed information on the company’s planned investments for 2017 and 2018. This is to ensure that the investments are in accordance with the regulatory principles of prudence and efficiency. Consequently, the rate revision determination is now subject to the information provided by JPS and is programmed to take effect 2017 July 1.
In respect of the appropriateness of the depreciation rates in the Licence 2016, based on the findings of the financial experts engaged by the OUR to undertake a review of such rates, as well as JPS’ own recognition that in at least two instances the depreciable rates in Schedule 4 of Licence 2016 do not necessarily accord with the historical useful lives of the assets, the Office took the view that the basis on which the depreciation rates were derived should be the subject of further review. Consequently, JPS will be required to conduct a depreciation study before the next Five Year Rate Review due in 2019.
