A host of benefits from power plant privatization

By Frank Guerrero

The privatization of the CUC power plants is expected to bring a lot of benefits to the Commonwealth. Whichever company will be chosen to be CUC’s independent power producer for the Lower Base power plants will fix the existing generating unit. Since both Power Plants 1 and 2 are under administrative order by the U.S. Environmental Protection Agency, the new company will upgrade the generating capacity of the power plants to meet all environmental regulations.

The other benefit is that they’re going to add two additional 15-megawatt slow generators to replace Power Plant 2. Right now, that power plant has about 7-megawatt capacity. So we will have additional reserve capacity. Furthermore, we’re going to be able to serve a lot of the hotels and other industries that are currently not hooked with CUC’s power generation system.

But I guess, the best benefit that CUC will not be able to gain on its own is that we’ll be a reliable provider of electricity. A private company cannot afford to have outages because that would cause them to lose money. They will not be paid the moment that the generators stop. There’s a penalty also in the purchasing power agreement if that thing happens.

The whole idea behind the power plant privatization is the difference in the amounts of money it will cost us if we beef up the power plants or if we hire an IPP to do it for us.

If CUC has the power to borrow at 10-percent interest the total money that it needs to beef up the power plants, we don’t need to hire an IPP. But we just cant. We can’t borrow $60 million. No lending institution will allow us to borrow that money because we already have a lot of debt.

If CUC pays more than 10 percent interest, and that’s $60 million that we need to beef up Power Plant 2, then an IPP is more economical. If it’s less than 10 percent, I think CUC can self-perform, then we don’t have to go on an IPP.

Let’s say if CUC goes out and gets 15 percent on the loan that they need to beef up the power plants and all the generators, including transmission and distribution system, the price of power per kilowatt hour will go 14 cents higher than the existing cost.

But if we go on the lower side, and we get 4 percent interest for a $60-million loan, then CUC can go down by as much as 4 cents per kwh hour. That would be on the lower side.

Right now, rather than the 11-cent residential rate, we should be charging 18 cents because of the increase in fuel costs. But we cannot do that. Instead, we’re imposing fuel surcharge to cover at least part of the fuel price increase.

Once power plants 1 and 2 go under an IPP, of course the price will go up. The total cost to produce power will 19 cents per kwh.

But if we do all the facility upgrade and power generation ourselves, it will be 20 cents per kwh. So it’s still one cent less.

Moreover, the advantage is that the IPP is going to overhaul the existing engines and add some new ones, and that’s going to make the burning of fuel more efficient.

Another issue on this privatization is we asked the consultant to ask whoever is going to be awarded, to consider using heavy fuel rather than diesel because there’s about 30 percent difference in the price. We’re looking at getting some savings by doing that.

We will entering into 20-year contract with the IPP. After that, all the facilities will revert back to CUC, to be assets and properties of the utility and the Commonwealth.

(Frank Guerrero is the chairman of the Commonwealth Utilities Corp.’s board of directors.)