Becki Patterson, Business Writer

E.G. Hunter, president of National Water Commission.

The president of the National Water Commission, E.G. Hunter, speaks on why he is asking customers to pay 44 per cent more for water.

Sunday Gleaner: How large is NWC's customer base?

E.G. Hunter: As at December 31, 2007, the NWC had some 332,600 active customers categorised as follows: domestic (including condominiums) 311,710, representing 55 per cent of revenues; commercial 19,900, accounting for 42 per cent of revenues; and other (schools, etc.) 990 and three per cent of revenues.

Why request a 44 per cent increase in rates; why not say 10 per cent or even a rate in line with inflation (17 per cent)?

The extent of the tariff increase was based on the revenue requirement which would allow the NWC to recover its reasonable costs, including the cost of capital.

Revenue requirement was determined as follows:

Revenue requirement = Operational Expenses + Depreciation and amortisation + Return on investment + Other expenditures - non-tariff revenues.

Operational expenses include operations and maintenance costs, sales, general and administration costs and interest on short-term debt.

Return on investment is calculated by multiplying the company's rate base - that is, equity plus long-term debt - by the weighted average cost of capital.

Increase required = [(Revenue requirement - Expected revenue without increase)/Expected revenue without increase] x 100%.

Based on the revenue requirement needed for NWC to cover its reasonable costs and to implement planned projects, it was determined that a minimum increase of 44 per cent was required.

The 44 per cent at one time seems unreasonably high. Can your customers afford to pay it?

The Survey of Living Conditions (PIOJ) indicates that the average household pays $1,200 per month for water compared to $2,540 per month for electricity and $2,776 per month for telephone.

The amount paid for water represents 2.5 per cent of the total consumption of a typical household.

It should be noted that 70 per cent of domestic customers consume less than 3,000 gallons of water per month. The cost to a domestic customer for 3,000 gallons is now $696.23 and with the increase, it will move this to $1,002.

While we appreciate that any additional amount that is required to be paid for any service can be difficult for some Jamaicans, it is believed that out customers will be able to afford the new rates that we propose.

How much of the water billed is now not paid for?

The average collection rate over the last 12 months is just over 95 per cent of what was billed by NWC. Achieving this level of collection has not come easy; it has largely come about through the strenuous efforts of our dedicated staff.

Would that situation not worsen when the water bill is higher?

It is possible that over the first few months following the increase NWC may face some challenges in collection as an initial reaction to the increase; however, this situation should improve as the water bill will continue to be among the lowest for the average household.

Why not look to improve efficiencies in your operation?

NWC has maintained efforts to ensure that it operates efficiently throughout the business. In 2004, NWC underwent a comprehensive restructuring and reduced staffing levels by over 500 persons.

Work processes were also revamped and improved arrangements put in place - the use of GIS and GPS technology, distribution-system management, leak-detection devices for in-line flow/pressure monitors.

A new customer-information system is now being implemented to improve a number of areas of the business. These include customer billing and general customer-service delivery. It will also provide information to improve our system operations.

It should be noted that through energy-efficiency measures - replacement of inefficient pumps, motors - electricity consumption has been relatively flat over the last four years.

What of your operational costs?

Expenses moved from $6.7 billion in 2004 to $11.5 billion in 2007, representing a 72 per cent increase over the three-year period since the last rate increase.

The key expenses and increases over the period were production cost, up 99 per cent; distribution expenses, 40 per cent; chemical expenses, 179 per cent; employee expense, 37 per cent, and, plant maintenance, up 66 per cent.

Electricity accounts for almost 90 per cent of production cost.

What are the three largest cost items? Electricity, 29 per cent of operating cost; employee expenses, 35 per cent; and indirect and administrative expenses - example insurance - 15 per cent.

Electricity increased by 104 per cent over the period, increasing from $1.3 billion in 2004 to $2.6 billion in 2007. This is recovered to some extent in our price-adjustment mechanism (PAM).

The point should be made, though, that electricity consumption has been declining as the cost for the service increases.

What of losses from leakages?

In the business, we refer to losses in terms of technical or commercial losses. The former refers to leaks, both surface - that which is seen - as well as underground - identified by way of sophisticated acoustic diagnostics. Most surface leaks are repaired within the OUR's stipulated schedule of up to five days of notice, but it is the underground leaks which account for most of the waste, estimated at about 35 per cent of production.

The age of the distribution system islandwide makes comprehensive mains replacement the required solution rather than mere mains replacement.

If you were to fix that problem, would you still need a rate increase?

NWC would still need an increase in rate as explained above. Furthermore, it requires huge sums to purchase replacement pipes and fittings, excavate and relay and then to sterilise and commission this infrastructure ... while maintaining service to customers.

What makes up NWC's revenues?

Total revenue of $8 billion comprises water, $6.08 billion, 76 per cent; sewage $1.756 billion, 22 per cent; other $0.17 billion, two per cent.

Are there other sources of revenue?

NWC obtains limited revenue from fees for miscellaneous services such as processing subdivision applications.

Is NWC a profitable operation? How much so?

Given its mandate to operate autonomously, NWC, despite making negative net profits, makes every effort to ensure that its cash resources are managed in the most astute manner.

This has been complemented by an aggressive drive to collect on outstanding bills.

Under tight budgetary management, cash flow from operations has shown a gradual improvement. However, with the financial challenges, there has been a noted decline over the last two years caused by the 15-month delay in the new tariff, increased operating costs and the impact of natural disasters.

What is the state of the water and sewage systems?

NWC provides water to some 73 per cent of the population. The level of service varies, with some areas receiving 24-hour service throughout the year, while others receive intermittent supply during the day.

Customers within the urban fence receive a higher level of service than rural customers, although rapid urbanisation has put a severe strain on existing infrastructure.

NWC operates some 68 wastewater treatment plants and associated sewage facilities. Most of these plants are over 25 years old and require extensive rehabilitation to perform at acceptable levels. NWC has commenced a programme to retire/replace or rehabilitate some of these plants and will continue to do so in the coming years.

How long have you run the NWC? What is the most challenging aspect of the job?

I have been president of the NWC since December 1999. My main challenges are balancing the demand of our customers for excellent service with the reality of a suboptimal tariff and a general reluctance by a large number of these customers to pay their bills; and striking an equitable balance between the demands of the staff and their unions on the one hand, and that of our single shareholder, the government of the day, on the other.

But, more so, the problems of water theft and the major effort to collect payments for the services which we provide have kept me on my feet.

beckipatterson@gleanerjm.com