The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

New Providence will still have to effectively subsidise the Family Islands even after the Bahamas Electricity Corporation (BEC) is split into two, with the latter’s existing power costs already some 26 per cent higher.

Simon Townend, a key adviser to the Government on energy sector reform, yesterday disclosed that the winning bidder(s) for BEC would have to enter into two power purchase agreements (PPAs) - one for New Providence, and one for the Family Islands.

The KPMG (Bahamas) partner and head of its corporate advisory practice in the Caribbean, Mr Townend effectively confirmed that the Family Islands would continue to be run at a loss post-restructuring and partial privatisation.

He likened the Family Islands PPA to a “universal service style of arrangement”, the main objective being to reduce the costs incurred in supplying these islands through improved generation efficiency.

Confirming that BEC’s existing “unified tariff”, where New Providence and Family Island customers are charged the same rate, despite energy costs in the latter being higher, would be maintained post-restructuring, Mr Townend said the profits would still have to be generated on New Providence.

“The Family Islands PPA is more of a universal service style of arrangement,” he explained. “The bidders will be asked to bring related operating costs down, but they will not get equity returns.

“Their returns from the Family Islands will be based on cost returns to Nassau. The intent is still a unified tariff for the Bahamas, but hopefully the Family Island costs going into that cost will be reduced by better cost management of the assets.”

Clarifying this in a later interview with Tribune Business, Mr Townend said: “The issue with the Family Islands is not that they are making a loss, but that they can be more efficient and reduce that cost through more efficient management of what they do. The PPA for the Family Islands will be a cost pass through, with the transmission company factoring it into its unified tariff,”

The BEC restructuring proposes splitting the Corporation into two, with separate generation and transmission and distribution businesses ultimately being created. The generation business will sell the electricity it produces to the latter via a PPA.

Family Island electricity costs are already 53 cents per kilowatt hour (kWH), compared to 42 cents per KWH in New Providence, and the goal is to both reduce these and narrow the spread between them.

The difference between the two, though, and the fact the winning BEC bidders will not make a profit in the Family Islands, is likely to renew calls for the Government to revisit its decision to postpone any decisions on approving renewable energy projects until 2014.

BEC has just 28,000 of its 106,000-plus customers in the Family Islands, ranging from 8,379 in Abaco to just 20 in Long Cay, and renewable providers have argued that they can supply most or all of these locations’ energy needs.

“Renewable energy right now is pretty non-existent as part of the power supply in the Bahamas,” Mr Townend conceded.

Yet he said residential self-generation was “very much on the Government’s agenda and has been factored into the reform process. A major issue is the legal, regulatory and technical grid [issues[] with respect to renewable power”.

BEC’s Family Islands unit accounts for the largest share of the Corporation’s staff at almost 29 per cent, or 294 out of 1,023, with 232 in field operations (transmission and distribution); 214 in energy support (generation); 121 in customer service; and 60 or 7 per cent in administration.

Mr Townend said these staff would have to ultimately be split between the businesses, and a key focus would be on ensuring staff costs did not increase. He hinted that redundancies might be on the cards post-restructuring.

Mr Townend, meanwhile, said that while the Government would retain 100 per cent ownership of the transmission/distribution company, it had yet to determine the size of the equity stake it would retain in the generation join venture.

“The Government intends to retain an interest, and the quantum of that interest has not been specified, but will be determined by negotiation with the preferred bidder,” Mr Townend said.

“It will be determined by the level of investment, whether equity or debt, and the power generation price. All these things factor into what the ownership of the company will be. But the Government will have appropriate protection.”

Mr Townend told Tribune Business that the Government had made no “pre-determination” on the generation company equity stake it would retain as it did not want to “tie bidders’ hands”.

Setting this in advance would influence the level of investment, and structuring, a bidder would make.

Mr Townend added that energy regulatory reform was being run in parallel to the BEC bidding process, although no decision had been made on whether to entrust this responsibility to the Utilities Regulation & Competition Authority (URCA) from the get-go.

“Definitely URCA is an option being considered,” Mr Townend told Tribune Business,” but the Government has to make a decision on who the regulator will be and what capacity is required. That is a very active discussion with the legal advisers.”

Indicating that a standalone regulator, separate from URCA, was also an option, Mr Townend added: “URCA was set up to be able to manage other utility sectors, and has the infrastructure in place.

“What we don’t have at the moment is any energy sector expertise. One way or another, that energy sector expertise has to be sourced.”

Mr Townend said the decision to split BEC into two would allow for more efficiency and competition, while ensuring that attention was also paid to fixing BEC’s transmission and distribution business.