Caribbean Utilities Company, Ltd. - Government And CUC Reach Agreement



    GRAND CAYMAN, Cayman Islands, Dec. 20 /CNW/ - The Cayman Islands
Government (Government) and Caribbean Utilities Company, Ltd. (CUC) have
reached Agreement in Principle (AIP) on the terms of new 20 year licences for
CUC covering the generation, transmission and distribution of electricity in
Grand Cayman. The terms include competition for future generating capacity and
general promotion of the use of renewable sources of energy.
    The agreement will also result in savings to the average residential
consumer in excess of 15%. Consumer savings will arise from average reductions
of 3.25% of base rates, removal of the Hurricane Ivan Cost Recovery Surcharge
(CRS) which will reduce bills by 4.7% and the implementation of a Government
rebate of CI$0.20 per Imperial Gallon of fuel used in generation to be applied
to the first 1,500 kiloWatt-hours (kWh) of monthly residential consumption. It
is contemplated that the January 2008 billings will reflect all these changes.
These reductions and the agreement as a whole will support continued economic
growth on Grand Cayman.
    The parties have today signed an AIP which, while not legally binding,
reflects the framework to which the parties have agreed. The AIP will form the
basis of the licensing documents that are expected to be signed by February
2008, and defines the process through which CUC will surrender its current
licence in exchange for the new licences.
    The agreement will see the replacement of the current permitted 15%
rate-of-return-on-rate base (RORB) formula with a rate cap and adjustment
mechanism (RCAM) based on published consumer price indices. CUC's RORB will
now be targeted in the 9-11% range. This mechanism will ensure rate
predictability and provide further incentives for CUC to operate efficiently
and keep its cost increases below inflation.

    Highlights of the agreement include:

    Electricity Regulatory Authority

    The Electricity Regulatory Authority (ERA) will have the overall
responsibility of regulating the electricity industry in the Cayman Islands in
accordance with the ERA Law as amended pursuant to the AIP. The ERA will
oversee all licensees, establish and enforce licence standards, enforce
applicable environmental and performance standards, review the proposed RCAM
and set the rate adjustment factors as appropriate, administer the competitive
process for new generation and ensure a level playing field for all. The
licence standards will be designed to ensure that Grand Cayman has adequate
generating capacity and sufficient T&D infrastructure, that continued sound
business and engineering practices are employed in the electricity industry
and that standards for the protection of our natural environment are
established and enforced. The ERA will also annually review and approve CUC's
capital investment plan to ensure both adequacy and reasonableness from a cost
    In conjunction with the establishment of the ERA, a new Regulatory Fee of
1/2 of 1% of electricity revenues will apply to customer billings for
consumption over 1,000 kWh per month as a pass through charge on a per kWh

    Licences for Generation and T&D

    Generation Licence

    A competitive process for new generating capacity will provide an
opportunity for alternative suppliers to offer competitive, reliable power
supply in Grand Cayman.
    CUC will be responsible under the terms of its T&D Licence for
determining the need for future generation based on load growth, generation
retirements, and operating reserve requirements. Competition for required
incremental capacity will be introduced through a competitive bidding process
administered by the ERA. The successful bidder will enter into a Power
Purchase Agreement ("PPA") with CUC.
    CUC and the Government have agreed that the next increment of generation
capacity is required in 2009, which does not allow sufficient time to
implement the competitive bidding process. Accordingly, the Government has
requested and CUC has agreed to take immediate steps to procure, install and
commission a 16 megawatt (MW) capacity generator no later than June 30, 2009.
The ERA will solicit bids for an additional 32 megawatts of generation
capacity, consisting of two 16 MW units, as the next increment of generation
capacity, which would be operational not later than May 1, 2011 and May 1,
2012 respectively. CUC will be required to bid for this and future incremental
needs for additional generation capacity.
    CUC will work with the Government and the ERA to support and encourage
renewable energy suppliers on a large commercial basis as well as small,
customer-owned renewable systems. Customer-owned renewable systems will
receive credit for energy supplied back to CUC over and above their own
consumption, and such customers may be subject to special tariffs in order to
protect other consumers.
    CUC will surrender its existing licence with Government in exchange for
separate licenses for transmission and distribution (T&D) and generation.

    T&D Licence

    The T&D Licence granted to CUC will be exclusive as the duplication of
the T&D infrastructure and facilities is not in the public interest. The
initial term of the licence is 20 years and an "evergreen provision" will
allow for automatic renewal if no action is taken by either party not to renew
    CUC, under its new T&D Licence, will bill base rates to consumers to
cover the cost of T&D and generation and will bill pass-through charges for
fuel and lubricating oil, and for the Licence and Regulatory Fees.
    CUC will be granted a licence to operate its existing generating capacity
for an initial term of 20 years with renewals to reflect estimated economic
life of any new generation awarded to CUC.
    The current CUC Licence Fee of 5/8 of 1% will increase to 1% of
electricity revenues and will apply to customer billings for consumption over
1,000 kWh per month as a pass-through charge on a per kWh basis.

    Fuel Cost Reductions

    Effective January 1, 2008, the Government will provide a special rebate
to be applied to the first 1,500 kWh of monthly residential consumption. The
rebate will be calculated based on CI$0.20 per Imperial Gallon of fuel used
for generation.

    Electricity Rates

    Effective upon issuance of the new licences, CUC's base rate will include
generation and T&D costs and will exclude fuel and lubricating oil costs and
the licence and regulatory fees. An overall reduction in base rate of 3.25%
will be applied which represents an estimated annual revenue reduction to CUC
of CI$1.8 million (US$2.1 million). CUC's base rates (i.e. excluding fuel
costs) have been frozen since 2002 and as a result, CUC has foregone revenue
in excess of CI$16.9 million. Effective January 1, 2008, CUC will remove the
CRS which is estimated to be equivalent to a 4.7% reduction of the current
base rate or CI$2.1 million (US$2.5 million) of foregone cost recovery by CUC.
The combined effect of base rate reductions, removal of the CRS and
implementation of the fuel cost rebate will result in savings in excess of 15%
for the average residential customer, and lower but still substantial savings
for commercial customers, as set out below.

                   Comparison of Residential Bill Amounts

      Representative Monthly Bill Amounts(*)                (Decrease)
    Consumption -     Existing        Proposed        Amount
        kWh             CI$              CI$            CI$       Percentage
           500      $   149.31      $   125.71     $   (23.60)         (15.8)
         1,000          293.12          246.43         (46.69)         (15.9)
         2,000          580.75          509.83         (70.92)         (12.2)
         5,000        1,418.42        1,347.06         (71.36)          (5.0)

    (*) - Pro-forma based on December 2007 fuel charges.

                    Comparison of Commercial Bill Amounts

      Representative Monthly Bill Amounts(*)                (Decrease)
    Consumption -     Existing        Proposed        Amount
        kWh             CI$              CI$            CI$       Percentage
           500      $   165.66      $   153.89     $   (11.77)          (7.1)
         1,000          324.57          295.77         (28.80)          (8.8)
         2,000          641.20          585.85         (55.35)          (8.6)
         5,000        1,478.87        1,423.08         (55.79)          (3.7)
        20,000        5,667.22        5,609.21         (58.01)          (1.0)
       100,000       27,466.10       27,161.26        (304.84)          (1.1)

    (*) - Pro-forma based on December 2007 fuel charges.

    CUC Rate Cap and Rate Freeze

    Following the initial rate reduction, CUC's base rates, excluding fuel
costs, will continue to be frozen through May 31, 2009 and will be subject to
an annual review each June thereafter. The price cap mechanism will adjust the
base rates in accordance with a formula that takes into account inflation as
measured by a blend of U.S. and Cayman Islands inflation indices (excluding
fuel and food), and CUC's RORB. The higher CUC's return, the lower the allowed
rate increase, and base rates would be reduced at higher rates of return, as
shown in the table below. Under normal conditions, CUC would be expected to
operate in the target range of 9 - 11% returns on rate base, as adjusted over
time for changes in the cost of debt, and the base rate increases would be
limited to 80% of the rate of inflation, thereby requiring CUC to increase
productivity in order to maintain their rate of return.

                  Rate Cap and Adjustment Mechanism (RCAM)

     CUC Annual Return on       Rate Adjustment    Change in Base Rates as a
     Rate Base Values(*)           Factor (X)    Percentage of CPI (100% - X)
           Over 13%                  140%           - 40% (rate reduction)
           11 - 13%                  100%          0% (no rate adjustment)
            9 - 11%                   20%                   80%
            7 - 9%                    0%                   100%
           Below 7%                 - 40%                  140%
    (*) - Adjusted annually for changes in the rates for 10 year
          U.S. Treasuries

    Hurricanes and Other Catastrophic Events

    Under the new licences, CUC will continue to restore service to customers
as quickly as reasonably possible following a catastrophic event. Further,
after any future disaster which causes significant losses to CUC, the ERA will
work in tandem with CUC to determine and approve any temporary surcharge that
might be necessary in order to return CUC to the target annual RORB over an
appropriate time period. In this regard, the ERA will take into consideration
the impact on consumers, the loss of uninsurable assets and other relevant
circumstances, including the availability of regional catastrophe insurance
programs and any other resources.
    On behalf of Government, the Minister of Infrastructure and
Communications, the Honourable Arden McLean, stated that "This Agreement in
Principle will benefit consumers in many ways, starting with substantial base
rate reductions and rate restructuring, on top of rates that have been frozen
for more than five years. It will also provide for competition in generation;
meaningful incentives for CUC to maintain and improve its efficiency and
continue to provide reliable service; and an initial target CUC return that is
a full 33% less than it is entitled to under the current licence. Further, for
the first time, with the advent of the ERA, CUC will be regulated by an
independent statutory authority on many aspects of its operations, including
rates, environmental standards and policies to encourage renewable energy.
Truly this is the dawn of a new era in customers' and the CIG's relationship
with CUC, one which we are confident will solidify the power sector's role in
keeping our economy healthy and growing."
    Speaking on behalf of CUC, President and Chief Executive Officer Mr.
Richard Hew said, "The electricity industry globally is facing difficult times
in terms of increased costs and environmental challenges. A significant amount
of time and effort has been dedicated to these negotiations to ensure that the
blueprint which we will follow to provide efficient, reliable service in Grand
Cayman for many years to come is fair, effective and appropriate. We look
forward to working harmoniously with the Cayman Islands Government and the ERA
to continue building an island electricity system in Grand Cayman which can be
held as a model by other jurisdictions."

    Caribbean Utilities Company, Ltd., on occasion, includes forward-looking
statements in its media releases, Canadian securities regulatory authorities
filings, shareholder reports and other communications. Forward-looking
statements include statements that are predictive in nature, depend on future
events or conditions, or include words such as "expects", "anticipates",
"plan", "believes", "estimates", "intends", "targets", "projects",
"forecasts", "schedule", or negative versions thereof and other similar
expressions, or future or conditional verbs such as "may", "should", "would"
and "could". Forward-looking statements are based on underlying assumptions by
their very nature and are subject to certain risks and uncertainties that may
cause actual results to vary from plans, targets and estimates. Such risks and
uncertainties include but are not limited to general economic, market and
business conditions, regulatory developments and weather conditions. CUC
cautions readers that actual results may vary significantly from those
expected should certain risks or uncertainties materialize or should
underlying assumptions prove incorrect. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

    %SEDAR: 00002251E

For further information:

For further information: Cayman Islands Government, Philip Thomas,
Secretary, CUC-CIG Negotiating Team, Phone: (345) 949-8372, Fax: (345)
947-9598, E-Mail:; Caribbean Utilities Company, Ltd.,
Doug Murray, Corporate Secretary, Phone: (345) 949-5200, Fax: (345) 949-4621,

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