The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Electricity Corporation’s (BEC) profit margins had been wiped out as far back as 2010, the Inter-American Development Bank (IDB) has revealed.

The IDB, in its October bulletin on the Caribbean, disclosed that apart from having 0 per cent profit margins in 2010, the state-owned electricity monopoly accounted for more than one-third of the Government’s ‘contingent liabilities’ between 2010-2012.

These findings were contained in a 2012 report submitted to the Government by Washington-based consultants, Castalia Strategic Advisors, which has performed similar work on the Bahamian water sector.

The contents of Castalia’s report have never been made public until this IDB document was released, and give a further insight into why the Government is now so eager to move rapidly on energy reform, particularly deregulation and liberalisation of the sector.

“Profit margins for the company [BEC] have declined since 2000, at 13.6 per cent, to 5.5 per cent in 2004 to 0 per cent in 2010,” the IDB report said of Castalia’s findings.

“Moreover, government transfers to the BEC constitute an important contingent liability, registering $224.9 million in transfers in 2012, $198.3 million in 2011, and $206.7 million in 2010.

“This liability accounts for roughly 36.8 per cent of total contingent liabilities over the three-year period. The Corporation is the highest explicit contingent liability, followed by the Bahamas Mortgage Corporation.”

Contingent liabilities refer to debt that has to be guaranteed by the Government, meaning that it is added to the national debt.

BEC’s one-third share of these liabilities helps explain why the Government is keen to offload the burden of refinancing BEC’s $300 million debt pile on to the winning bidder(s) in the ongoing tender exercise that aims to split the Corporation into two.

If the Government can get away without offering a sovereign guarantee, it will be able to shed between $200-$300 million from the national debt without costing itself a cent.

The Castalia report also examined the impact of BEC’s relatively high tariff structure.

“Among other utilities in the region, the BEC has one of the highest tariffs, which have increased much faster than have most others in the region,” the IDB report said.

Despite BEC’s $0.40 per kilowatt hour (kWh) tariff for residential consumers in 2012 being the third highest in the Caribbean, behind only Bermuda and the Turks & Caicos Islands, the Castalia report noted that the Corporation was still losing millions of dollars annually.

And when it came to average hotel tariffs, BEC’s $0.44 per kWh rate was second highest in the region, with only Turks & Caicos higher.

“BEC’s operational costs are high,” the IDB report said. “An official report by Castalia Strategic Advisors on the electricity sector in the Bahamas indicates that the average tariff increased by 44 per cent (from $0.28/kwh to $0.40/kWh) for residential customers, and by 76 per cent (from $0.25 kWh to $0.44/kWh) for non-residential customers between 2009 and 2012.”

Apart from high generation and fuel costs, the IDB said the other challenges plaguing BEC were “poor operating efficiency, inefficient energy consumption by households, businesses, and governments, and limited development of renewable energy plans”.

It added: “Consumers bear these high costs by paying high tariffs.”

BEC’s financial woes first became apparent in 2006 and 2007, when it suffered net losses totalling $2.916 million and $11.733 million - an unusual position for any monopoly to be in.

These losses gathered pace in 2008 and 2009, hitting $19.654 million and $26.424 million, respectively, before a small $201,000 profit was eked out in 2010. No financials have been published since then, despite three further financial years having subsequently closed.

The former Ingraham administration blamed BEC’s financial state on the first Christie government’s decision to cut its base tariff rate (the portion of the bill that determined the Corporation’s cash flow and profits).

It argued that a series of one-off transactions, such as the sale of BEC’s equity stake in Cable Bahamas, helped to ‘mask’ the Corporation’s deteriorating financial health for several years.

The IDB report noted that the Bahamas spends around 12 per cent of its export earnings on purchasing fuel imports every year.

The IDB added that three-quarters of BEC’s customers, some 74,000, out of a total 100,000 were located in Nassau. The Corporation had total installed generation capacity of 438 Mega Watts (MW) spread across the country.