The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Government officials yesterday argued that the Bahamas Electricity Corporation (BEC) is “incapable of reform” without restructuring its legacy debt, and pledged that the plan will not increase light bills.

Senior officials intimately involved with the Christie administration’s energy reform plans revealed that the “$500 million and counting” Rate Reduction Bond (RRB) issue would simply replace BEC’s inefficient financial structure at a lower cost.

One adviser, speaking on condition of anonymity because they were unauthorised to speak to the media, explained that Bahamian business and residential consumers were already paying for BEC’s costly debt finances via their monthly bills.

“Yes, this is a new charge, but not a new cost,” the official told Tribune Business of the Rate Reduction Bond (RRB). “One misconception that people have is that this is a new charge.

“It’s a new charge because it’s attached to the bill, but it’s replacing already built-in costs of service for BEC. The existing debt costs built into BEC are very inefficient, and there are also a lot of hidden costs in terms of the way BEC is financed.”

While payments to service these bonds will show up as a new ‘line item’ on electricity bills, the Government believes the lower debt servicing costs could help reduce energy prices.

The Government yesterday unveiled a three-pronged package of legislation designed to facilitate much-needed energy reforms, which the Bahamian private sector and consumer have been clamouring for since the millennium arrived.

The Electricity Rate Reduction Bond Bill will provide the legal basis and infrastructure to refinance BEC’s legacy debt and liabilities via the issuance of debt securities to local and international investors.

The Bill calls for the creation of a Special Purpose Vehicle (SPV), called Bahamas Rate Reduction Bond Ltd, to be created to take - and hold - this debt off both the Government’s and BEC’s balance sheet.

It will then ‘securitise’ this debt via the Rate Reduction Bonds’ issuance, selling them to investors and using the proceeds to pay off BEC’s legacy debt and other liabilities.

Investor monies will be secured, and payments of interest/principal generated, from a proportion of the revenues earned by Bahamas Power & Light (BPL). And those revenues, in turn, will come from a percentage of customer bills allocated to pay the Rate Reduction Bonds.

“This reform and restructuring process is intended as part of the overall plan to eventually reduce electricirty charges to the consumer,” the Electricity Rate Reduction Bond Bill’s objects and reasons state.

It added that investor monies will be “secured by a rate reduction bond fee derived from BPL revenue streams, and included in BPL customer billings”.

“The sole purpose of the bonds is to generate proceeds to be used for the payment and satisfaction of specified debts of [BEC] and BPL, and to fund the electricity sector reform and restructuring of the Corporation, including the initial establishment and operations of BPL,” the Bill added.

BPL is the new entity which, managed by PowerSecure, will take over operation of BEC’s existing generation and transmission and distribution assets. BEC will retain ownership of the real estate, which BPL will lease for a “peppercorn rent”.

“Without refinancing in this way, and providing new capital for the company [Bahamas Power & Light] to start life with no debt on its balance sheet, none of the reforms can happen. BEC would be incapable of reform,” the official told Tribune Business.

“BEC is so debt ridden and can’t get a credit rating. It’s been unable to borrow money to invest in capital projects and maintenance overhauls to the extent it should have done.

“We have a very inefficient financial structure that is built into a Corporation that is losing money. BEC is losing $20-$30 million right now. That’s unsustainable.”

The official said the Rate Reduction Bond charge that will show up in customer bills cannot be determined until the issue is priced and placed in the capital markets.

They added that the new BPL Board, headed by Royal Bank of Canada (RBC) chief, Nathaniel Beneby, was currently “evaluating bids” and set to select the investment bank to place the Rate Reduction Bond “imminently”.

The official said there were also “a lot of hidden costs” in the way BEC is currently financed, citing the employee pension fund’s ‘unfunded liabilities’ as one of them.

The BEC staff pension plan had a $48.658 million deficit at end-September 2013, meaning that it lacks enough assets to pay out 100 per cent of what is due to beneficiaries.

The official said this created a “compounding problem of having to catch up”, which imposed a built-in financing cost at BEC - something that ultimately costs the Government and Bahamian taxpayer.

However, not everyone is sold on the merits of the Rate Reduction Bond. K P Turnquest, the Opposition’s deputy leader, expressed concern it would add another cost to electricity bills, and run “counter” to the main goal of reducing costs.

“This represents another debt or expense to the Bahamian people. While it may be an investment vehicle for those lucky enough to invest, there will be a surcharge on everyone’s light bill to pay for it,” Mr Turnquest told Tribune Business of the bond proposal.

“It is a significant concern. It goes counter to what we’re trying to do. We have a similar debate in Grand Bahama with respect to the rate increase the Power Company is requesting.

“They’re making the argument that the upfront investment in fixed costs will help them realise savings on the back end, so they balance out. That remains to be seen, especially when the price of fuel goes up.”

Grand Bahama Power Company is seeking an increase in its base tariff, but is arguing that this will be more than offset by a reduction in fuel costs, leading to a drop in most consumers’ bills.

Deputy Prime Minister Philip Davis, in his address to the House of Assembly yesterday, said the Rate Reduction Bonds will also pay the “initial costs of environmental remediation” associated with BEC-related pollution.

This payment, though, will be capped at $20 million and include “ancillary and associated costs” to be determined by the Government.

“The structure of the bonds, which is well tested in other markets, is also such that we expect the bonds to attain an excellent credit rating, with a long-term repayment profile attractive to institutional investors, allowing for a much lower interest cost than would otherwise be possible,” Mr Davis said.

“Further, the bonds will be without recourse to the Government, BEC or BPL, being a stand alone instrument secured purely on a portion of the tariff to customers. I take this opportunity to note that this is not new debt; it is primarily a refinancing of existing, highly inefficient debt and liabilities of BEC, which is costing BEC not only high rates of interest today, but is also restricting BEC from undertaking the capital investment it needs to make.

“It is not a new cost to the customer, as today we already pay for BEC’s highly inefficient debt structure and inability to invest.”