The impact of the FTC-approved electricity cost increase on business

here is no one in business who can deny that the cost of business has increased exponentially in the last decade. Several analyses have been done to show a variety of reasons for this, not least of which have been global supply disruptions, natural disasters and other exogenous shocks.

 

The one contributing factor that may be well within our grasp to control high costs is government policy and regulation. Whereas the government would wish to be disciplined with its fiscal policies and overall expenditure, the very nature of the interventionist role it plays in the economy suggests there are some risks and responsibilities it can take. This becomes even more relevant in a social democratic construct where the government inherently must protect and enfranchise the vulnerable sections of society.

 

It is against this backdrop that one must question the timing of the electricity rate increase approved by the Fair Trading Commission (FTC). The recent decision to allow the Barbados Light & Power Company (BLPC) to pass on rental and operating costs of temporary generators to consumers has understandably generated significant debate. This decision makes way for the BLPC to receive the cost associated with renting 11 megawatts of temporary Aggreko generator units through the fuel clause adjustment (FCA).

 

Most right-thinking persons may not question the efficacy of the business case for a rate increase, the last being given in 2010, but passing on the cost of rental equipment to consumers is extreme at best. Contextually, this is bad for business of any size and a further burden on consumers already suffering from austerity measures affecting the country.

 

Why weren’t the generators purchased instead of renting, or why didn’t the company absorb the rental costs?

Critics cited the fact that the fuel clause adjustment is traditionally used to manage uncontrollable fluctuations in fuel prices, not short-term infrastructure costs. Relying on diesel generators is also costly and inefficient.

 

The ruling by the FTC came four months after a significant event – the ICC Men’s Cricket World Cup –, raising questions about whether ongoing rental costs for generators, which were initially intended for temporary demand surges, should still be borne by consumers. The decision underscores a continued reliance on diesel generators which are known for their inefficiency and high operational costs. This reliance could lead to more frequent price increases in the future as fuel prices fluctuate.

 

Compounding this problem is the fact that in another few weeks, businesses will be looking to maximise on increased sales due to the Christmas season. Equally, consumers will be looking to increase expenditure in line with local traditions. This increase in electricity cost threatens to put a further strain on the purchasing power of consumers and the operational cost of firms.

 

Unlike Trinidad and Tobago and Guyana, there are no oil deposits to be discovered at this time to help reduce the high energy costs. While there are efforts to diversify to renewable energy, Barbados’ aim for a transition to 100 per cent renewable energy by 2030, which could eventually stabilise or reduce electricity prices, appears to be stalled, if at all possible.

 

Policy and regulation are the instruments at the government’s disposal to make life a bit easier for citizens.

 

The example of the new Labour Government in the United Kingdom is worthy of note.

1. Small businesses are facing substantial increases in energy expenses, which are squeezing profit margins. Many report that these rising costs are compounded by other operational challenges such as increased competition and a tough economic environment. Yelena Kalyuzhnova emphasises that without reducing energy costs, many small businesses may struggle to survive.
2. A significant portion of small and medium enterprises (SMEs) have become reliant on government interventions to manage their energy bills. Reports indicate that 74 per cent of SMEs have business strategies contingent on the level of governmental support they receive, highlighting their vulnerability in the face of rising energy prices.
3. The rising costs of energy have repercussions beyond individual businesses, affecting supply chains and product availability. UK farmers have reduced crop planting due to high greenhouse heating costs, leading to shortages in supermarkets and increased food prices for consumers.
4. The uncertainty surrounding energy prices has led many small business owners to adopt a reactive approach rather than pursuing growth or innovation. This financial anxiety is exacerbated by the lack of a clear, long-term support plan from the government, which is crucial for fostering an environment conducive to business growth.

 

Local businesses will not escape the effects of this decision by the FTC.

1. High electricity rates directly increase the operational costs for small businesses, which often operate on thin profit margins. This will lead to reduced profitability or even financial strain, forcing some businesses to raise prices, cut jobs, or reduce services to maintain viability.
2. Elevated electricity costs will deter investment in growth and expansion. Small firms will hesitate to invest in new equipment or technology that could improve efficiency if they are concerned about rising utility costs impacting their bottom line.
3. Small businesses will struggle to compete with larger companies that can absorb higher energy costs more effectively. This disparity can lead to a loss of market share for smaller enterprises and hinder economic diversity.
4. As businesses pass on increased costs to consumers, there may be a decrease in consumer spending. Higher prices can lead to reduced demand for goods and services, further impacting revenues.