The Tribune

• Ex-CEO: Prices locked ‘at/or below’ 11.5 cents to March 24

• Far cry from up to 163% hikes PM pledges are ‘short-term’

• Pintard: ‘Bahamians paying the price’ on fuel hedging row

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light (BPL) was on target to lock-in fuel costs “through March 2024” that were up to 58 percent less than the skyrocketing increases unveiled by the Government yesterday, documents have revealed.

Whitney Heastie, the state-owned energy monopoly’s former chief executive, told then-fellow BPL Board members in a December 9, 2020, e-mail that the hedging strategy initiated that year via the Inter-American Development Bank (IDB) would provide the foundation for more than three years of relative fuel and overall electricity price stability.

“The hedges approved by the Board were finally executed as per the final orders below,” Mr Heastie wrote in the e-mail that this newspaper is reproducing today (see Page 20B). “Our ‘settled’ price was below the maximum premium price granted to the IDB. These new hedges allow BPL to have a fuel charge at/or below 11.5 cents per kilowatt hour through March 2024.”

Such fuel tariff stability, and expectations that it could last until the 2024 first quarter, are a far cry from the hikes unveiled yesterday by the Davis administration. The present 10.5 cents per kilowatt hour (kWh) fuel charge is set to undergo a series of rolling 4.3 cent quarterly increases over the next 11 months which, for businesses and households consuming over 800 kWh per month, will peak at 27.6 cents - a 163 percent increase - during peak summer demand.

The Heastie e-mail, and other documents seen by Tribune Business, raise serious questions over whether the Davis administration has unnecessarily cost Bahamian households, businesses and the wider economy “tens of millions” of dollars by failing to execute a series of trades that would have sustained the savings generated by its predecessor’s fuel hedging initiative.

It also backs renewed assertions yesterday by Michael Pintard, the Opposition’s leader, that “the bottom has fallen out and the Bahamian people will be paying the price” for the Government’s failure to follow through and maintain the fuel hedging initiative left in place by its predecessor.

The Prime Minister, in announcing BPL’s fuel tariff increases yesterday, urged Bahamian consumers to be patient “and hang on there a little longer” while asserting that “these increases are short-term”. He added that the Government and utility were also seeking to soften the blow for the most vulnerable consumers by implementing rolling quarterly increases of two cents per kWh for those families consuming less than 800 kWh per month.

Besides a rate of fuel tariff increase that is 53.5 percent less than that for commercial customers and larger households, Philip Davis KC added that the Government is expanding the VAT exemption on BPL bills to more customers. The ceiling under which 10 percent VAT will not be levied will rise from $300 to $400 as the administration moves to expand the social safety net ahead of the first rolling fuel charge increase that consumers will see in their November bills.

‘“For a large majority of BPL consumers, who consume less than 800 kWh, the fuel charge is being increased by two cents per kWh, which will result in an increase this quarter of less than $20 per month. If your current monthly bill is $182 or less, you fall into this category,” Mr Davis said, adding that the expanded VAT exemption will “take some of the sting out of the 4.3 cent increases for a great many BPL consumers subject to the increase”.

“The bottom line is that monthly bills will go up over the next several quarters before they begin to come down in 12 to 18 months’,” the Prime Minister said. BPL’s fuel tariff typically accounts for between 50-60 percent of customer bills, with the base rate comprising the remainder.

The utility’s own projections show the fuel tariff falling from its 27.6 cent per kWh peak over the three-months between June 1 and August 31, 2023, to 25 cents between September and November that year for consumers using more than 800 kWh. This is then forecast to fall further to 18 cents between December 1, 2023, and February 28, 2024, but BPL admits that these movements and figures are not guaranteed due to global oil price volatility.

Multiple sources, some speaking on condition of anonymity, told Tribune Business that the sudden - and huge - escalation in BPL’s fuel charge was entirely avoidable if the Davis administration had executed the series of hedging trades left in place by its predecessor to secure additional fuel at prices below market rates that peaked at $127 per oil barrel in March this year.

Shevonn Cambridge, BPL’s chief executive, yesterday affirmed that the fuel hedging strategy inherited from the previous government remains in place. “When it was put in place back in 2020, it was based on 80 percent of the volumes [that were hedged] at that time,” he told the media yesterday. “The hedging strategy was based on declining volumes.... It’s 40 percent of the volumes that are still hedged.”

The December 2020 hedge executed by the IDB covered a total 3.565m barrels of oil for BPL that were priced at $40 each. The ‘settled’ price shown in the e-mail reproduced here shows a series of “settled” premiums received by the IDB for executing the hedge, which was split into three tranches, with these payments less than the original projections.

This newspaper understands that the previous BPL Board had hedged all of the utility’s fuel needs for 2022, 50 percent of its requirements for 2023, and 25 percent of 2024’s needs via the IDB’s upfront hedge. BPL’s fuel needs for 2023 and 2024 were not hedged 100 percent because the utility needed to monitor global oil price movements and respond accordingly, rather than commit to a cost that might exceed future market prices.

As a result, BPL needed to “backfill” the original IDB hedge by purchasing additional volumes to fully meet its fuel needs. This was to be done via a series of trades to obtain lower price fuel, which were ultimately left by the Minnis administration for its successor to execute in September and December 2021. For reasons as yet unclear, multiple contacts said these trades were never executed and the whole fuel hedging strategy unravelled as a result.

“This was predictable. This is no surprise at all,” one source, speaking on condition of anonymity, said of BPL’s announcement yesterday. “They should have done those rolling hedges to backfill those volumes on a quarterly basis, which they [the Government] stopped doing. That’s what they didn’t do.”

Confirming the authenticity of the Heastie e-mail obtained by Tribune Business, they added: “The former Board knew that if they continued with the hedges as needed, the biggest bump [in the fuel tariff] would be from 10.5 cents per kWh to 11.5 cents per kWH. The problem is this government didn’t do it. They didn’t do it in September [2021], they didn’t do it in December. They let the fuel hedging programme die.

“The old Board held it for a year at 10.5 cents per kWh. They knew 10.5 cents was secure for another year because of the savings from that first year; they knew they could get 10.5 cents if they did the rolling hedges. Then, because the price of oil was ticking up in that third year, they were looking at 11.5 cents with that pressure had they continued the hedging.”

BPL’s hedging strategy was design to provide price stability for all Bahamian energy consumers by eliminating the impact of oil price volatility during COVID’s peak. This made electricity a consumption-driven business, enabling households and businesses to both know and control their bills through how much they use.

Asserting that such certainty has now been eliminated, the source added: “That’s why we’re now subject to the volatility of the [global oil] market. Because they didn’t continue doing those rolling hedges, they’ve put the consumer at the mercy of the market again. The former Board wanted to put power in the consumer’s hands; now it’s no longer there. They’re at the whim of the market. If you’re a business, how do you plan?”

Mr Cambridge, during yesterday’s BPL announcement and press conference at the Prime Minister’s Office, said the BPL hedging initiative did not yield the savings anticipated for the utility’s $300m annual fuel bill because the optimal fuel mix was never used.

Explaining that “certain scenarios” did not materialise when the hedging plan was implemented, Mr Cambridge said BPL ended up using more expensive fuels - such as automated diesel oil (ADO) - than originally projected. As a result, the initiative’s “offset was not what was anticipated” in terms of cost reductions and savings.

Tribune Business understands there were problems in getting BPL’s operational managers to align fuel use with what had been hedged. Instead of operating the more efficient, less costly turbines at Clifton Pier that run on heavy fuel oil (HFO), the ADO-consuming engines at Blue Hills were run more frequently than desired. However, Mr Cambridge’s assertion that cost savings failed to materialise was disputed.

Analysis of the rolling fuel charge increases shows that, for Bahamian families consuming 800 kWh or less, they will suffer a 76 percent increase compared to current costs when the 18.5 cent peak is hit between June and August 2023. That is a time which coincides with maximum demand and the greatest usage in terms of consumption. 

As for businesses and households that use over 800 kWh, fuel charges are set to increase by 138 percent, 163 percent and 138 percent - more than doubling compared to the present 10.5 kWh rate - during the periods of March 1to May 31, 2023; June 1 to August 31, 2023, and September 1 to November 30, 2023.

Consumers and businesses are being asked to absorb such huge increases in BPL’s fuel costs, and their overall electricity bill, at a time when they are still struggling to rebound from the COVID-19 pandemic and its continued economic fall-out. The magnitude of the hikes is thus threatening to put a damper on the Bahamian economy’s recovery prospects and momentum, at least in the short-term.

“When the fuel charge was hedged at 10.5 cents, people started paying their bills because they could afford to pay them,” one source said. “You’re now going to have a situation where people are unable to pay their bills, so the delinquency rate will increase significantly, collection efforts will decrease significantly in efficiency, BPL’s cash flow will go down and Bahamian citizens and businesses will be put at the mercy of the global oil markets.

“This is what happens when new governments don’t look at the good other administrations have done. You can’t assume that everything somebody else did was bad.”

Mr Pintard, meanwhile, added: “The Bahamian people will now have to pay the bill for the significant blunder at BPL by the Davis administration with respect to the fuel hedging that was put in place by the previous FNM administration.

“Based on the announcement by the Government and the press statement released by BPL today, consumers in The Bahamas will now see an increase in electricity bills from the hedge price of 10.5 cents per kWh to a high of 27.6 cents per kWh as projected. Based on these figures, this represents an increase of 163 percent over the 10.5 cents per kWh that was enjoyed by all business and residential consumes over the past two-and-a-half years.”