Electricity Theft in Jamaica

Keva Steadman
Department of Economics
State University of New York at Binghamton
Email: ksteadm1@binghamton.edu

Committee: Susan Wolcott (chair), Wei Xiao, Haim Ofek

Abstract
Electricity theft is a pressing problem that affects the bottom line and investment prospects of
utility firms across the globe. While it has minimal effects in some jurisdictions, in others
electricity theft is greatly affecting the viability of distribution firms. Even more alarming is the
fact that many policies targeting electricity theft have been made without adequate research into
how it is manifested. This paper is a first in a three part study that seeks to examine the patterns
of electricity theft in Jamaica since 1993 and try to determine the agents that are mainly
responsible for driving these patterns.
Background

Electricity theft is not a new phenomenon but it is becoming important because of its

impact on the cost of electricity to consumers and the utility companies alike. Unlike other forms

of theft, electricity theft hardly carries strict penalties. Recently, however, there has been the

development of more policies and stronger legislative power to deal with those who take part in

the fraudulent extraction of electricity1.

There are four main ways that electricity can be accessed illegally (Smith, 2004).

Electricity can be fraudulently accessed through illegal hookups, meter tampering or bypass,

billing irregularities and unpaid bills. Illegal hookups occur when electrical wires are directly

connected to the grid system from the individual’s premises. High risks of electrocution and

electrical fires are associated with this type of electricity theft. Technically, this type of theft is

the least sophisticated and is usually practiced by poorer households. It is also very easy to

detect.

Meter related theft is hardly found among poor households because it is technically

sophisticated and usually requires some electrical wiring knowledge. Meter tampering can be

done by inserting a device into the meter resulting in an inaccurately lower reading on the meter.

This tampering can be detected only by an audit on the premises or by discrepancies in the

electricity bill. Meter bypass occurs when some of the wiring of the premises is engineered to not

pass through the meter. Like meter tampering, this is also very difficult to detect.

Billing irregularities is a manifestation of corruption in the utility company through

bribes to utility officials. Usually, the meter reader is compensated for not reporting the accurate

1
See India’s Electricity Act (2003); Amendments to the Theft Act in the UK.

1
electricity usage of the property. This method again, is not a popular option with the poor.

Refusal to pay electricity bills is a common practice by all socioeconomic groups. The utility

company has the greatest control over this since they are able to disconnect customers for unpaid

bills. Disconnections are usually a prelude to another form of electricity fraud.

In spite of this knowledge, there still remains a vague understanding of how much theft is

being stolen by different groups of the society. This objective of this paper is to answer this

question by first examining the patterns of electricity theft over the period 1993 to 2006. This

will be done by graphical and regression analysis.

Global Picture

The problem of electricity theft is not unique to Jamaica. Electricity theft is becoming

increasingly more frequent in South Asia, South America and there are even isolated incidents

reported in the United States2. A correlation analysis done by Smith (2004) shows the

relationship between electricity theft and 5 political dimensions for 102 countries. These

countries were chosen based on the availability of data from the World Bank. In general, it is

found that electricity theft is more prevalent in countries that have poor governance. The main

argument is that poor governance harbors a culture of corruption which becomes innate

throughout the society over time. It is still unclear, which societal group or productive sector is

primarily responsible for the bulk of electricity theft. According to Smith, this can only be found

by doing a detailed power theft analysis, which is the objective of this research.

2
See the International Utilities Revenue Protection Association website www.iurpa.org

2
 Between 1980 and 2000, electricity theft as a share of total electricity generation grew by

roughly 4.5 percent worldwide. Large increases were recorded in all geographic regions except

North America, East Asia/Australasia and Western Europe.

Deterrence measures are mainly technical. Meter tampering can be reduced or even

eliminated by introducing advanced metering infrastructure (AMI) otherwise know as smart

meters (Haney et al, 2009). The AMI allows the utility to virtually disconnect the meter if there

are any discrepancies noticed (Loeff, 2008).

Because of the measuring difficulty, very little research has been done on electricity theft.

One of the first studies on electricity theft was done in a dissertation effort by Priatna (1999) who

looked at the case of electricity theft in Indonesia. This study emphasized that the lack of access

to the electricity grid by mostly the agricultural sector was the main cause for the pervasiveness

of electricity theft in Indonesia. In 1996, electricity theft in Indonesia was roughly between 58.4

percent of total distribution losses and between 1.4 to 6.4 percent of total revenue earned from

electricity sales. Foregone revenue could have been used for investment into capacity expansion,

which was dire in Indonesia at the time of this study. In addition, the utility company passed on

some of the costs to the legal consumers, causing regular increases in electricity rates.

In 2004, electricity theft in India was roughly US$4.5 billion and 1.5 percent of GDP.

The case of India differs in many aspects from the case in Jamaica. Electricity theft in India is

primarily political and has its roots in the agrarian sector of the society (Kumar, 2004). State

Electricity Boards (SEB) have grown increasing negligent of the problem (Smith, 2004) and

stealing electricity has almost become a way of life for some. Some provinces in India have

taken several measures to mitigate against the widespread practice of electricity theft in the

3
region. In Andhra Pradesh, they showed that although they have an SEB, they could still reduce

the volume of electricity theft in their region (Bhatia and Gulati, 2004). Prior to the mechanisms

employed, the implications of electricity theft were great. Subsidies to the electricity sector

imposed on budgetary allowances to other just as needy sectors. The subsequent strategy

targeting electricity theft had a four prong approach. This approach dealt with strengthening the

law and enhancing enforcement of it; there was also an effort to identify the corruption involved

within the utilities and a better management control and customer service system for the utility

company. With increased audits, more fraudulent connections were detected and persons found

to be involved in electricity theft were held accountable regardless of their political and social

affiliations. This resulted in, among other things, a change in the overall culture of electricity

provision in the region.

The most recent study on electricity theft was done in Brazil. A regression analysis was

done to see if there was any relationship between nontechnical losses and socioeconomic

conditions. The results showed that areas with higher murder rates, low income households,

households involved in the informal economy and without proper water supply infrastructure

were more likely to participate in electricity theft. In essence, this suggests that electricity theft is

more likely to be committed by persons who are poor.

Electricity Theft in Jamaica

The generation and transmission and distribution aspects of electricity provision are

unbundled in Jamaica. There is competition for generation; transmission and distribution is still a

monopoly guaranteed by an All Island Electricity License (2001). Nontechnical losses are borne

by the distribution firm.

4
 There are 2 dominant methods of electricity theft in Jamaica. Illegal hookups are mostly

found in the inner city communities and are most easily detected. However, it is very difficult for

enforcers to have these connections removed without the assistance of the police because of the

resistant nature of these communities3. There is a high risk to the culprits as well because of

frequent electrical fires and electrocutions.

The more wealthy residents and the commercial sector are the main culprits of meter

related theft which can be meter tampering or bypassing the meter 4. This is a more sophisticated

method of theft which is also more expensive. This method of theft is harder to detect and can

only be confirmed by a random audit. There is a potential for very large amounts of electricity

generated being lost to theft because of the lower rates of detection and the high usage activities

associated with meter related theft.

60000
50000
40000
MWh
30000
20000
10000

1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1

month

Figure 1: Nontechnical losses in Jamaica 1992 – 2006

Source: Ministry of Energy and Mining, Kingston Jamaica

3
JPS Tariff Review Application 2009
4
Jamaica Gleaner, January 18, 2009

5
 In Jamaica, nontechnical losses are about 13 percent of net generation of electricity which

amounts to 18 percent of total revenue5. In 2008, nontechnical losses accounted for over 20 times

in profits to the utility company. Even more alarming, is the share of GDP which has been rising

since 1996 and is now at about 1.4 percent (see figure 1), which is comparable with India.

What is unique to Jamaica is that despite the increased efforts in staving off electricity

theft, there still seem to be a regular increase. Unlike the results of the studies so far, anecdotal

evidence suggests that electricity theft is more common to urbanized areas and is not related to

lack of access. In fact, Jamaica is about 98 percent electrified. In addition, increased random

audits and regular removal of illegal hookups have been conducted but theft is still rising. Since

2006, the utility company has removed 74,000 illegal hookups with the help of the police6.

Recently, there have been renewed efforts on the part of lawmakers to introduce more stringent

punishment for those who steal electricity. Media advertisements now show that fine has been

increased from a flat rate of J$200 to J$100,000 for illegal hookups. Also, those found to be

involved in meter related theft face punishment of 6 years of electricity back payments based on

the estimated amount of electricity used.

5
This was the figure in 2007.
6
JPS Tariff Review Application 2009

6
 1.4
1.2
Share of GDP (%)

1
.8
.6
.4

1990 1995 2000 2005 2010

year

Figure 2: Nontechnical Losses as a Share of GDP in Jamaica

Costs of Electricity Theft

The costs of electricity theft can be categorized into three sub-groups: foregone revenue which

leads to a loss in profits, avoided investment costs and increased electricity rates to consumers.

A Government of Jamaica 2007 commissioned study7 showed that the present value of

required investments at least cost over the period 2009 to 2023 for new lines will be between

US$104.9 million and US$124 million and for new transformers will be between US$51 million

and US$58 million which in total is between US$156 million and US$182 million. The cost of

electricity theft in 2007 was equivalent to US$142 million in revenue. In addition, the bottom

line of the distribution firm in 2007 was also affected by theft. The firm recorded a net loss of

US$ 7.5 million and in fact, between 2003 and 2007, has only made a profit in 2 years, which

was below US$30 million. When comparing with other countries, electricity rates in Jamaica are

7
Preparation of a National Integrated Electricity Expansion Plan and Efficiency Study for Jamaica. Final Report. Vol
1 – Main Text. prepared by Acres Management Consulting.

7
relatively high. In 2007, electricity rates were 27.7 US cents per kWh in Jamaica; in the US for

example, electricity rates were 9.13 US cents per kWh in 2007.

Data and Methodology

As earlier mentioned, graphs and OLS estimation were used as the main tools of analysis.

The time trend and seasonality effects were removed from the time series of nontechnical losses

(NTL), residential sales, small commercial sales, large commercial sales, and industrial sales

which were also found to have unit root. After removing the time and seasonal trends from the

data, each series was first differenced so that OLS estimation could be used. OLS estimation on

series that have unit root will lead to spurious regression (Enders, 2004). The time span of the

data is from January 1993 to December 2006 in monthly frequency.

Electricity is at best an estimate based on the nontechnical losses in a utility system since

electricity theft is very difficult to detect and so very difficult to measure. According to Smith

(2004), the most precise estimate can be found by selecting a representative sample of the grid

customers to check for cases of electricity fraud within households. The information garnered is

then extrapolated to the population of customers and an estimate of the losses is found based on

the total electricity generation. A less precise but more practical methodology is to first get the

total system losses by looking at the difference between the net generation and total electricity

consumption. Then, the technical transmission and distribution losses are subtracted from the

total system losses and what are left are the nontechnical losses.

Nontechnical losses in Jamaica are estimated to be a fixed share, 13 percent, of total

system losses. Electricity consumption is measured as electricity sales and is categorized by rate

classes. Rate classes are determined primarily by usage and customer type. Rate 10 measures

sales to the residential customers. Rate 20 measures sales to small commercial firms; Rate 40

8
measures sales to large commercial firms, and also includes large hotels and water generation.

Rate 50 measures sales to industrial firms. Rate 60 measures street lighting usage. The utility

company submits these data regularly to the Ministry of Energy and Mining, the government

department primarily responsible for setting energy policy in Jamaica. The data is in monthly

frequency.

Two separate OLS estimations were done to find the determinants of electricity theft. In

the first estimation, nontechnical losses were regressed on residential sales, small commercial

sales, large commercial sales and industrial sales. Sales to street lighting were not included in the

regression since it is highly unlikely for such activity to be engaged in the fraudulent extraction

of electricity. The regression is specified as follows:

NTLt  Ct  Re st  SmComt  LgComt  Ind t   t (1)

The second estimation was done to determine which productive sectors of the economy

can best explain the movements in electricity theft over time. Each productive category was first

reclassified according to the most suitable rate class. Nontechnical losses were then regressed on

each rate class, excluding residential sales. The regression is specifies as follows:

NTLt  Ct  PSmComt  PLgComt  PInd t   t (2)

where the P is an indicator for the productive sector.

Results

The patterns of nontechnical losses and the sales in each rate category mirror the patterns

of the cost of living, which is proxied here by the consumer price index (CPI). In periods of a

relatively low cost of living, nontechnical losses were at its lowest (Figure 2). Comparably,

electricity sales were at its highest (Figure 1). This suggests that there is some substitution for

9
 buying and stealing electricity which is heavily influenced by the general cost of living in the

society.

10

10
.2
.2

5
.1
0

mgen_
mres_

eCPI

eCPI
0
0

0
-.2

-.1
-5

-5
-.2
-10

-10
-.4

1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1 1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1
period period

mres_ eCPI mgen_ eCPI

10
10

.3
.4

.2
.2

5
5

.1
0

mlgpow_
mpow_

eCPI
eCPI

0
0

0
-.2

-5
-5

-.1
-.4

-.2

-10
-10
-.6

1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1 1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1
period period

mpow_ eCPI mlgpow_ eCPI

Figure 3: Electricity sales compared with CPI (detrended and seasonally adjusted)

Each series was tested for and found to have unit root. Before OLS estimation was

applied, each series was first differenced. This was necessary because performing OLS

estimation on series that contain unit roots lead to spurious regressions.

10
 10
.5

5
0
mloss_

eCPI
0
-.5

-5
-10
-1

1992m1 1994m1 1996m1 1998m1 2000m1 2002m1 2004m1 2006m1

period

mloss_ eCPI

Figure 4: Detrended Nontechnical Losses and CPI monthly

Column 2 of Table 1 shows the results from the regression depicted by equation 1. The

substitution effect remains the highest for the residential customers and the small commercial

customers. The sales in both these categories also are strongly correlated. This substitution

represents the consumer’s decision to steal or to buy electricity for each month. There are several

possible reasons for this substitution. In the first case, a consumer might be disconnected for

nonpayment of his electricity bill. Since electricity demand is near perfect inelasticity, the

consumer will still have a high demand for electricity regardless of the price. This might provide

an incentive to the consumer to begin fraudulent extraction of electricity in order to meet hi

demand. This could continue until the consumer is able to pay to be formally reconnected or the

consumer is caught.

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Table 1: Results from OLS estimation
Regressor By Electricity Sales By Employment Activity
Nontechnical losses R2 = 0.65
Regressands
Residential -1.85 ---------
(0.236)

Small Commercial -1.02 0.40

(0.184) (0.137)

Large Commercial -0.77 -0.43

(0.109) (0.389)

Industrial -0.572 0.42

(0.149) (0.261)

Constant 0.0014 0.00

(0.0113) (0.00)

Secondly, a consumer that is connected by means of illegal hooking will continue to steal

as long as he is not connected. However, because this method of theft is most easily detected,

then it is very likely that he rotates his decision to steal versus pay for electricity each month.

Finally, a customer that is continually stealing electricity by means of meter related fraud is

thought to be stealing a constant share each period. All these reasons, plus the possibility of more

reasons will be explored more in upcoming research.

The large commercial and industrial customers also participate in some substitution,

though not as large as the residential and small commercial customers. All coefficients are

statistically significant.

Column 2 shows the regression as per equation 2, which uses the more reliable

employment data over the national accounts data.

12
Conclusion

So far, the data shows that theft definitely occurs in all rate class groups. It has its

strongest effects in the residential and small commercial groups. Results from the second

regression also show that the small commercial sector is contributing to electricity theft. This

means that the policy to deal with electricity theft must allocate efficiently across groups

according to each group’s contribution to electricity theft. For future work, there will be a test of

a policy that, in 2003, was implemented to regularize persons involved in illegal hookups.

13
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