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1 the cost of electricity IN JAMAICA WHY ARE THE prices SO HIGH?

2 Contents Overview What about Policy Decisions? Pricing Policy: Tariff Structure of the Electricity Bill System Distribution Losses Diseconomies of Scale Best Case Electricity Rates for Jamaica Conclusion Bibliography

3 OVERVIEW The average electricity price paid by Jamaican residential customers in 2013 was roughly J$38 (US$0.35)1 per kilowatt-hour (kwh), ranking amongst the highest in the world. Fuel costs, construction and maintenance costs for power plants, maintenance on transmission and distribution lines, and regulatory decisions all play a part in the final price of electricity. Jamaica s high electricity prices are lamented by both residential and commercial customers, the former alluding to its impact on disposable income and the latter viewing it as prohibitive to doing business. Jamaicans have blamed aged and inefficient generators, electricity theft, unfair billing practices, and the reliance of the Jamaica Public Service (JPS) on crude oil for this predicament. This brief examines the merit of each of these and other explanations put forward by experts, stakeholders and the general public. The policy decisions taken by the regulatory agency, the Office of Utilities Regulation (OUR); the Government of Jamaica (GOJ); and the JPS are examined in Section 2. The tariff structure of the electricity bill is analysed in Section 3. Next, the impact of system distribution losses to the final electricity price is quantified, and diseconomies of scale in electricity generation faced by the JPS is considered in Section 5. The best case scenario electricity rates in 2019 are estimated in Section 6 given that infrastructure is upgraded, electricity theft and other inefficiencies are reduced, and JPS billing practices accurately reflect fixed and variable costs of electricity generation, transmission, and distribution. 3 1 Calculations were made for average electricity consumption of 175 kwh/month. The benchmark consumption figure was obtained from Jamaica Public Service s 2013 Annual Tariff Adjustment Submission.

4 WHAT ABOUT POLICY DECISIONS? Government and Regulatory Agency Policy The Jamaica Public Service is regulated by the independent government agency the Office of Utilities Regulation. Ensuring that consumers of utility services enjoy an acceptable quality of service at reasonable cost is stated first on the regulatory agency s objectives. Therefore, decisions taken by the OUR in response to the tariff submissions made by the JPS are central to the mission of reducing (and explaining) electricity rates in Jamaica. Under the price cap regime introduced in JPS s licence, the OUR sets non-fuel base rates once every five (5) years. The JPS is allowed an annual adjustment to the non-fuel rates to reflect the impact of inflation as well as expected improvements in the company s efficiency. A system loss target of 17.5% has been set in the JPS Annual Tariff Adjustment 2013 Determination Notice (Office of Utilities Regulation, 2013). The JPS is only permitted to pass on fuel costs incurred from system losses up to 17.5% of net generation and losses exceeding this amount have to be absorbed by the company. In determining a tariff structure and system loss target (and associated fuel penalties) for the JPS, the decisions of the OUR are intended to provide a financial incentive for the utility company to operate more efficiently. A fuel penalty is imposed on the JPS for failing to meet system loss and heat rate targets. The JPS has incurred increasing net fuel penalties over the last three years 2 (from failing to meet system loss targets), growing from US$13 million in 2010 to US$36.5 million in 2012 and has been charged a net fuel penalty in every month since the system loss target was last reduced in July The retirement and replacement of old and inefficient generating plants is central to efforts of significantly reducing fuel costs which account for nearly two-thirds of the final price of electricity. However, efforts by the JPS to replace 292 megawatts (MW) of older generating plants with a 360 MW combined cycle 4 plant were thwarted after the JPS and the project company, South Jamaica Power Company Limited (SJPC) missed an already extended deadline. The new plants were expected to be between 40 to 50% more efficient than the soon-to-be retired plants. The JPS was granted the right to construct the plant in late 2011 on a build, own, and operate basis. Recently, the project has been revived since the Hong Kong-based Energy World International (EWI) won the bid to construct the plant (Jamaica Gleaner, 2014). On May 5, the Jamaican government revoked the licence on the basis that EWI failed to post an agreed US$ million performance bond. The bidding process has therefore been reopened and completion dates for the project now carry some uncertainty The JPS exceeded heat rate targets (currently 10,200kJ/kWh) in most billing periods between January 2009 and March This excludes November 2012 when force majeure relief was provided due to the impact of Hurricane Sandy. The term combined cycle refers to the combining of multiple thermodynamic cycles to generate power. Combined cycle operation employs a heat recovery steam generator (HRSG) that captures heat from high temperature exhaust gases to produce steam, which is then supplied to a steam turbine to generate additional electric power. 4 5 The Inter-American Development Bank (IDB) was willing to finance 70% of the project, while EWI would provide 30% in equity financing. However, in an to EWI on April 26th, 2014 the IDB rescinded on financing the process on the grounds that the international agency deemed the bidding process and the ultimate selection of EWI to be undertaken in a manner inconsistent with IDB internal procedures and policies.

5 About 93% of Jamaica s power is generated from crude oil (Inter-American Development Bank & Bloomberg New Energy Finance, 2013). The inefficiencies of the JPS-owned generating plants are often blamed for high electricity rates. Crude oil was used to generate only 4.6% of the world s electricity in 2010, down from 20.9% in 1971 (OECD, 2013). The end-user price to customers from electricity generated using residual or distilled fuel oil in the United States, for example, is higher than electricity generated from either natural gas or steam coal (U.S. Department of Energy, 2013). Therefore, price must be a contributing factor to the gradual shift from crude oil in electricity generation. The Ministry of Science, Technology, Energy and Mining (MSTEM) is responsible for, amongst other things, ensuring Jamaica s access to affordable energy supplies; energy security; and the diversification, development, and competitiveness of the energy sector. Fuel and Independent Power Producer 6 (IPP) charges are about 66% of total electricity costs for a typical residential customer consuming 175 kwh/ month. To this end, about 70% of the island s demand (23,000 barrels a day) for crude oil is satisfied by the PetroCaribe deal with Venezuela at a concessionary rate. Without the PetroCaribe agreement Jamaicans would face even higher electricity rates 7. Electricity rates are also measurably affected by the system loss target mandated by the OUR and reductions in these targets have meant that customers actually pay for a smaller proportion of these losses. Considering the inefficient generators and the JPS s reliance on crude oil in electricity generation, failures in policy execution and decision-making on the part of both the GOJ and OUR that have contributed to the JPS using outdated technology and generating plants are indeed a key contributor to Jamaica s high electricity rates. Therefore, the current initiatives being undertaken by the MSTEM to reduce electricity rates can only scratch the surface of what is an underlying limitation of the technology, coupled with the reliance on crude oil for electricity generation. JPS Operating Policy A crucial feature of the Annual Tariff Adjustment Submissions made by the JPS involves policy initiatives proposed to reduce electricity rates. Most recently in response to complaints from the business community about electricity rates the JPS proposed a wholesale tariff for the top 20% of industrial customers representing a 25% discount on the non-fuel tariff. The non-fuel tariff represents roughly 35 to 40% of the electricity bill for industrial customer and the proposed wholesale tariff could therefore reduce rates by around 10%. Concerns were raised by the OUR that the proposal would only be made possible through a cross subsidy 8. Consideration of this proposal could come as early as this year when the tariff structure will next be reviewed. Policy initiatives proposed by the JPS such as the wholesale tariff are subject to approval by the OUR. Strictly speaking, the wholesale tariff would result in lower rates for commercial and industrial customers at the expense of residential customers. The wholesale tariff reinforces the limitations and perhaps, incapability of the JPS to propose, plan, and effect meaningful policy initiatives aimed at reducing electricity rates paid by Jamaicans. It is true, however, that the JPS would have greater autonomy (and need to be held accountable) over its costs of production if the MSTEM procured cheaper sources of fuel and if the company was allowed to upgrade generating plants as seen fit. Therefore, the impact of the JPS s policy decisions on electricity rates is heavily dependent on decisions made by the regulatory agency, the OUR IPPs use private facilities to generate electricity for sale to the JPS, through a long term power purchase agreement (PPA) that has to be approved by the OUR. The PetroCaribe agreement allows beneficiary nations to buy oil at market value but only pay a percentage of the cost up front. The balance can be paid over 25 years at 1% interest. Jamaica therefore benefits from the deferred payments on crude oil purchased from Venezuela. A cross subsidy involves charging higher prices to one group of consumers (in this case residential customers) in order to subsidise lower prices for another group (in this case industrial customers). 5

6 PRICING POLICY: TARIFF STRUCTURE OF THE ELECTRICITY BILL The JPS charges a minimum amount which is independent of consumption, billed as a customer charge. The consumption-dependent portion of the charges for residential customers are: an energy charge ($ per kilowatthour) which covers non-fuel costs that vary with consumption such as the cost of wear and tear of the electricity plant and also additional fixed non-fuel costs not recovered through the customer charge; and a fuel and IPP 9 charge. A foreign exchange rate adjustment is applied to all charges except fuel and IPP to adjust for changes in the exchange rate between Jamaica and the United States. Electricity is billed according to a tiered rate structure where energy consumption over 100 kwh/month is billed at a higher rate than the first 100 kwh. Rate 10 (Residential) 2013 Rates J$ Description Base F/X Rate Billing F/X Rate Energy 1st Energy Next Customer Charge Sub Total F/E Adjust Fuel & IPP Usage kwh rate total , , , Bill Total j$ 6, Source: Jamaica Public Service 6 9 The JPS purchases energy from the Independent Power Producers (IPPs): Jamaica Energy Partners (JEP); Jamaica Private Power Company (JPPC); Jamalco; and Wigton Wind Farm.

7 Energy charges for monthly consumption exceeding 100 kilowatt-hours is roughly 2.5 times more expensive to the residential customer than the first 100 kilowatt-hour 10. Minimising charges for consumption over 100 kilowatt-hours/month is difficult considering that the average 16 cubic ft. refrigerator uses 60 kilowatt-hour/ month if operated uninterruptedly. Average electricity usage for residential customers was approximately 175 kilowatt-hours/month in 2012 which translates to 43% of average residential household electricity consumption being billed at the higher rate. In Antigua and Barbuda; Barbados; the Bahamas; Belize; Grenada; Guyana; St. Kitts and Nevis; and St. Vincent and the Grenadines, a minimum charge is applied in addition to some variation of a tiered energy rate structure. Electricity rates are high in all these countries, in some cases higher than that of Jamaica and tellingly, JPS s electricity bill structure is similar to comparable countries in the Region (see Table 2). selected caricom country composition of electricity bill generation mix MAIN UTILITIES Antigua & Barbuda Minimum, consumption (variable fuel charge) Diesel engines Antigua Public Utilities Authority Bahamas Minimum, fuel surcharge, tiered rate structure (over 800 kwh/ month) Diesel engines and gas turbine Bahamas Electricity Corporation state-owned Energy charge (kwh charge, fuel charge), optional night guard light Steam turbine and diesel engines Grand Bahama Power Company privately owned Barbados Minimum, value added tax, fuel, tiered rate structure (over 150 kwh/month) Residual fuel oil and diesel for steam and gas turbines Barbados Power & Light -privately owned Belize Minimum, tiered rate structure (over 50 kwh) HFO, hydro, bagasse, gas turbine and diesel Belize Electricity Limited nationalised by the Government in June 2011 Grenada Fuel, non-fuel, value added tax, floor area charge (per 50 sq. ft. of floor area) Diesel engines Grenada Electricity Services Ltd. GRENLEC Guyana Fixed, energy, tiered rate structure (over 75 kwh) HFO, diesel and bagasse Guyana Power & Light Inc.-state-owned jamaica Energy, fuel & IPP, minimum, tiered rate structure (over 100 kwh) Wind, hydro, steam turbines, diesel, gas turbines, combined cycle Jamaica Public Service Company privately owned St. Kitts & Nevis Tiered minimum rate, fuel surcharge, tiered rate structure (over 75 kwh/ month) Diesel engines St. Kitts Electricity Department (SKED) state-owned Tiered demand charge, first 50 kwh, next 75 kwh and next 125 kwh = [energy charge+ standing charge], fuel surcharge, solid waste charge, 17% VAT charge Diesel engines, wind Nevis Electricity Company Ltd. (NEVLEC)-state-owned St. Lucia Tiered energy rate, tiered fuel surcharge, VAT (currently 0%), tariff rebate Diesel engines St. Lucia Electricity Services Ltd. (LUCELEC) private/public enterprise 7 10 The Energy charge is J$6.98 (US$0.07) per kilowatt-hour for each of the first 100 kilowatt-hours/month and J$15.96 (US$0.15)/kWh for each kilowatt-hour in excess of 100 kilowatt-hours/month.

8 Most of the recent increases in Jamaica s electricity rates have been due to increases in fuel tariff rates. Since 2009, the average fuel tariff rate has grown by a compound annual growth rate 11 (CAGR) of roughly 10% compared to a CAGR of around 2% in the non-fuel tariff rate. Fuel tariffs take into account the cost of generating electricity using crude oil purchased by the JPS. The costs associated with generating electricity appear therefore to be an important determining factor in why electricity rates are currently so high. A Closer Look at the Energy and Fuel Charges To arrive at a greater appreciation of the final electricity rates charged by the JPS, we take a closer look at how the energy and fuel charges are determined. The energy charge is billed in two parts, for monthly consumption under 100 kwh and for consumption over that amount. The JPS argued in its 2009 Tariff Review application that households should be billed using the principle of marginal willingness to pay 12 based on the assumption that wealthier people consume more electricity. financial viability of the JPS in Jamaica 13. The revenue requirement includes efficient non-fuel operating costs 14, depreciation expenses, taxes, and a fair return on investment. Non-fuel operating costs for the utility company were US$160M in 2012 and are listed as either salaries or other operations and maintenance (O&M) in the company s annual report. Maintenance costs are high since the older plants are costly to maintain. It is reasonable to expect a lower revenue requirement (and energy charge) if maintenance costs are lowered. The fuel rate charged by the JPS is determined by dividing the total cost of fuel purchased from the Petroleum Corporation of Jamaica (PetroJam) by the expected amount of kilowatt-hours used by customers. As a result, the efficiency in which fuel is converted into electricity has a significant impact on the fuel charge per kwh paid by customers. Fuel conversion efficiency has averaged around 34% (see Figure 1), and more efficient generators could lead to reductions in fuel charges from the JPS requiring less fuel to satisfy electricity demand. The approved energy charge is dependent on a non-fuel revenue requirement that maintains the Avg Non-Fuel Tariff J$ Avg Fuel Tariff J$ Customer Charge J$ Avg Non-Fuel Tariff US$ Customer Charge US$ Customer Charge US$ Cost US $ per kwh Cost US $ per kwh Growth Rate % 12.54% The CAGR is the year-over-year growth rate of a number series over a specified period of time. This rate can be thought of as an imaginary number that describes the rate at which the series would have grown if it grew at a steady rate. The marginal willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange for an extra unit of a good or service. The OUR approves JPS s Tariff Submission applications after - amongst other things - considering rates that ensure the company is able to at least recoup operational costs. The expected costs faced by the JPS in the generation, transmission, and distribution of electricity are a significant factor in the tariff rates that are ultimately approved by the OUR. The efficient non-fuel operating cost is determined after establishing JPS s expected non-fuel costs if efficiency targets (system losses and heat rate) are met at the minimum.


10 System Distribution Losses, categorised as either technical or non-technical, can be described as when electric utilities lose some of the power generated, over the transmission and distribution system15. Technical losses are due mainly to heat dissipation in power lines that result from the transmission and distribution of electricity across the system while non-technical losses can be caused by meter errors, billing errors, and electricity theft. In 2011, JPS recorded average system distribution losses of 22.3% (see Figure 2), higher than the average for 27 Latin America and Caribbean (LAC) countries of 14.7% (Latin American Energy Organization, 2011) outperforming only six LAC countries in the survey. JPS Generating Plants, Generation Technology and Technical Losses The generating plants located in Old Harbour, St. Catherine have been in service for over forty (40) years. As mentioned previously, plans are advanced for the retirement and replacement of 292 MW of generating capacity. The reliability of the plants is uncertain in the short-medium term and high maintenance costs further highlights the need for the proposed new plant to become a reality. The JPS mainly produces electricity using steam and slow speed diesel generators. In 2012, JPS-owned steam and slow speed diesel plants accounted for 36% of net generation compared to combined cycle plants generating about 19% with gas turbines and hydro plants producing roughly 4% each. IPPs accounted for roughly 37% of net generation mainly from the slow and medium speed diesel plants used by Jamaica Energy Partners (JEP) and Jamaica Private Power Company (JPPC). Combined cycle technology is recognized internationally as one of the most advanced and efficient means of generating electricity. This technology allows for greater efficiency of conversion, that is, it utilizes less fuel to generate each unit of electricity relative to other generating units. Therefore, there appears to be some potential for reductions in electricity costs coming from a transition from steam-fired plants to those using combined cycle technology. topology, voltages and economic feasibility to be about 7.6% (JPS Annual Tariff Adjustment Submission, 2013). Such a reduction would be contingent on a combination of short, medium and long term strategies, of which 1.5% of the 2.4% reduction in technical losses would depend on medium to long term initiatives. Achieving further reductions in technical losses would require substantial capital expenditure to upgrade the company s electricity generation network. Non-Technical Losses: Are high electricity rates the fault of the customers? Any examination of electricity rates in Jamaica must consider the abnormally high amount of non-technical system losses: mainly caused by electricity theft (socio-economic); to a lesser extent the easy access to the network in some areas (network); and by various deficiencies of the JPS including deficient record keeping, weak internal controls, over adjustments to accounts and weak audit procedures (business). The JPS recorded system losses of roughly 25% in December 2012 of which almost 15% (60% of total system losses) were non-technical. An estimated 6.5% was lost from the 531,382 billed residential customers 16 and a further 6.5% from an estimated 150,000 unmetered households that have illegal electricity connections. A JPS commissioned study revealed three predictive variables for the amount of electricity theft in a country: poverty, the level of violence in the country and the average residential electricity bill compared to GDP per capita (OUR, 2009). Costs incurred by the JPS from electricity theft are factored into the electricity bill since technical losses are lower than the system loss target set by the OUR. Technical losses have remained steady at around 10% for at least five years meaning that at least 7.5% of net generation losses passed on to customers are nontechnical. Therefore, the high electricity rates paid by registered customers of the JPS is partly attributable to the many informal electric connections on the island. Technical losses for December 2012 were roughly 10% of net generation. The JPS estimates optimal technical energy losses based on network configuration, In other words, system losses are the difference between electricity produced (as recorded by the power plants) and electricity sold to customers (as recorded by the customers energy metres, and billed by the utility). These losses were primarily caused by meter and billing errors. 10

11 DISECONOMIES OF SCALE Jamaica faces structural limitations that negatively impact electricity rates related to its size, and the absence of interconnections between Caribbean islands. It would be moot to delve further into the limitations related to Jamaica s lack of interconnections 17 and instead the focus will be on the limitation and cost disadvantage related to size. One of the main structural factors influencing the cost of electricity is the relatively low generating capacity, resulting in the JPS and the IPPs facing diseconomies of scale 18 in generation (Arbelaez and Marzolf, 2011). Diseconomies of scale has a large impact on the cost of power generation in Jamaica and other small islands since transport and infrastructure services are likely to cost more in small markets (Gerner, Hansen and the World Bank, 2011). This limitation, along with high fuel prices, results in the JPS facing high operating costs. Furthermore, operating costs were found to be even higher than in most Caribbean countries and were most similar to the smaller countries with lower demand. However, the integrated cost structure of the JPS makes it difficult to ascertain why its operating costs are higher than those of other Caribbean utility companies facing similar electricity demand. However, higher operating costs in the case of the JPS are likely explained by the requirement of a reserve margin of at least 25%1 as stipulated in JPS s license, high maintenance costs on generating plants, and fuel penalties Gerner, Hansen & the World Bank (2011) argued that interconnections between Jamaica and Haiti are unlikely given current technology. This is the opposite of economies of scale whereby instead of decreasing costs per unit increase in output, firms experience increasing marginal costs when output is increased Lower reserve margins generally drive up costs for consumers, triggering costly shortages when demand peaks, while a higher reserve margin would mean capital cost investment in plants that could sit idle for certain portions of the year.

12 BEST CASE ELECTRICITY RATES FOR JAMAICA Reducing the price of electricity paid by Jamaicans hinges on using newer and more efficient technologies such as combined cycle generation plants, making appropriate fuel choices for better decisions regarding base/peak load generation, making significant reductions in the prevalence of electricity theft, lowering technical losses, and continuing the transition to a billing structure that is truly reflective of JPS s cost structure (increasing fixed charges and reducing variable charges for consumption over 100 kwh/month). The following is a projection of the best case scenario conditions Jamaicans can expect over a 5-year horizon, which guides the estimated electricity costs presented in Table 4: a.i.1. IPPs will supply 200 MW of peak demand to local customers; the winning bidder s proposed plants begin supplying 381 MW by 2016 and JPS will supply the remaining 120 MW. 2. Unmetered consumption is halved to 75,000 households and non-technical losses are reduced from the current level of approximately 16% to 10% of net generation. Technical losses are reduced to 8.8% through a combination of short and medium term strategies (a further 1.2% reduction could come from medium to long term strategies according to the JPS). 3. Improvements in efficiency will logically follow from the replacement of older generating plants and planned reduction efforts. However, gains made in efficiency are mostly offset by further aging of existing JPS and IPP generating plants. Therefore, the selling price from JPS generating plants is projected to remain close to current levels. 4. Average energy demand at peak will increase from 650 MW to 680 MW by 2019 as the population increases and the price of crude oil remains roughly the same.20 Generating Plants Approximate Generating Capacity (MW) Estimated Operating Load at Peak 21 Estimated Cost of generating electricity (US$/kWh) Estimated Cost to JPS 22 (US$/kWh) Estimated Selling Price 23 (US$/kWh) JPS Winning bidder Existing IPPs Total Both the World Bank and the IMF project that crude oil prices could be slightly lower by However, crude oil prices are conservatively estimated to remain at current levels. Estimates for operating loads at peak consumption are based on the premise that the JPS will use the cheapest sources first. Price mark-ups are made by the JPS after transmission and distribution losses (mainly from electricity theft) have been incurred It is estimated that the JPS will add a 25% mark-up on electricity purchased from the winning bidder and IPPs, and electricity generated using its plants. This estimate was derived on the premise that the winning bidder operates the new plants using liquefied natural gas (LNG).

13 CONCLUSION Electricity rates in Jamaica rank near the middle of the group of Caribbean countries, a Region with some of the highest rates in the world. Inefficient generators are the main non-fuel related reason for the high electricity rates followed by costs passed onto customers from electricity theft and JPS s inefficient plants. The billing of customers using a highly consumption-sensitive billing structure contribute to a lesser extent to average rates of J$38/kWh (US$0.35/kWh) for electricity consumption of 175 kwh/month. If system losses are reduced to optimal levels, planned improvements are made to generating plants, and gains are made in JPS s operating efficiency then Jamaicans could be paying J$30/kWh (US$0.27/kWh) for electricity by N.B: Calculations were done for a typical residential customer using 175 kwh/month 13

14 Bibliography (2013, November 24). Act now on energy. Jamaica Gleaner. p. I4. Arbelaez, J. P., & Marzolf, N. C. (2011). Power and Possibility: The Energy Sector in Jamaica (No ). Inter- American Development Bank. Gerner, F., Hansen, M., & World Bank. (2011). Caribbean regional electricity supply options: Toward greater security, renewables and resilience. Washington, D.C: World Bank. Government of Jamaica, Office of Utilities Regulation (2009). Jamaica Public Service Company: Tariff Adjustment for period Determination Notice. Kingston, Jamaica. Government of Jamaica, Office of Utilities Regulation (2013). JPS Annual Tariff Adjustment 2013: Determination Notice. Kingston, Jamaica. Inter-American Development Bank (IDB) & Bloomberg New Energy Finance (BNEF) (2013). ClimateScope Available at Jamaica Gleaner (2014). OUR Considering Energy World International License. January 31. Available at OECD (2013), OECD Factbook 2013: Economic, Environmental and Social Statistics, OECD Publishing. OLADE (Latin American Energy Organization) (2011). Energy Economic Information System (SIEE). Available at pdf The Jamaica Public Service Co. (2013). The Jamaica Public Service Co. Ltd Annual Tariff Adjustment Submission for Kingston, Jamaica. U.S. Department of Energy (2013). Annual energy outlook with projections: 2013 with projections to 2040: U.S Energy Information Administration. 14

15 about Capri The Caribbean Policy Research Institute (CaPRI) is a not-for-profit, public policy think tank based at the University of the West Indies, dedicated to the provision of impartial, evidence-based knowledge to inform economic and social policy decision-making in Jamaica and the wider Caribbean. To read any of our published output in full, please visit Contact us at: or by telephone at (876) or (876)

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