The Tribune

* Consumers to see new bill item in early 2021

* Fuel price certainty extended to end-2023

* Will be slightly higher than first hedgin

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light's (BPL) chairman yesterday said it has extended fuel cost certainty for all consumers until end-2023 to help ease the extra charge that will be added to their bills in the New Year.

Dr Donovan Moxey told Tribune Business the state-owned utility had extended its fuel hedging strategy by a further 23 months through to the beginning of 2024 to help mitigate the impact from the National Utility Investment Charge (NUIC) that all customers will first see on their light bills in early 2021.

This charge will repay the $535m Rate Reduction Bond (RRB) that BPL is aiming to place with investors by end-January 2021 in a mammoth refinancing that aims to take out its legacy debt and provide funds to upgrade its transmission and distribution (T&D) infrastructure.

Dr Moxey confirmed that the NUIC charge will likely appear on customer bills within "30 to 45 days" of the bond being placed with international and local investors, with the fuel hedging extension designed to lock-in price stability and certainty for all over the next three years.

"You have to remember that bringing price stability is key for us, and reducing the cost to consumers in anticipation of a new charge for the Rate Reduction Bond is very important for us. We wanted to minimise the impact for consumers," Dr Moxey told this newspaper.

"That had always been a part of our strategy when we knew we were going to raise the bond; to do everything we could to minimise the impact on consumers' bills. We are working to close the bond by the end of January next year, and if everything goes well and smoothly that should be when the bond is closed."

Asked when the NUIC charge would appear as an additional charge on customer bills, Dr Moxey replied: "I would imagine within 30-45 days [of closing] it will be attached to consumer bills." That places the timeline at the end of February/mid-March for when the charge will first be seen by consumers provided the $535m bond is placed on schedule.

The BPL chair said "all the signs have been coming back very positively" from the capital markets and investors as to their appetite for the utility's bonds, but he acknowledged that critical reforms to the laws underpinning the issue have yet to be brought before and passed by Parliament.

Many observers will also likely question the wisdom of adding another charge to BPL customer bills, and thereby further increasing already-high energy costs, at a time when Bahamian businesses and consumers alike are struggling to rebound from the economic devastation inflicted by COVID-19.

Such a move, they will argue, could depress the economy even more and further delay its recovery, especially since BPL's own financial woes - when combined with the capital market environment post-COVID-19 and the Government's creditworthiness downgrades - could result in the bond issue requiring higher interest rates to make it attractive to investors.

When the NUIC was first talked about, it was estimated that the charge would be equivalent to 15 percent of a person's existing consumption although that will depend on the rate and terms BPL can obtain. Desmond Bannister, minister of works, previously pledged to consumers that the additional charge will not result in their overall monthly energy costs increasing over the medium to long-term.

He added that the new charge will be offset by reduced fuel costs and efficiency gains, produced by BPL’s new Wartsila and General Electric (GE) engines on New Providence, such that the impact on overall bills will be “cost neutral”.

BPL’s entire turnaround plan, and the provision of reliable, lower cost energy to its business and residential consumers, depends on placing this bond issue. It has been structured to keep the $535m debt that will be incurred off the state’s balance sheet and eliminated previous loan guarantees made on the utility’s behalf.

Dr Moxey, meanwhile, explained that BPL's latest fuel hedge - conducted with help from the Ministry of Finance and Inter-American Development (IDB) - would extend the initial 18-month price lock-in by a further 23 months or almost two years to end-2023.

The fuel charge component of customer bills is presently locked at 10.5 cents per kilowatt hour (KWh) until January 2022, but the BPL chairman revealed the price of this latest hedge will be slightly higher than that because it was executed after global oil prices had risen to over $40 per barrel.

The initial hedge was made when oil prices were in the $30 per barrel range, and Dr Moxey said of the second effort: "We're very comfortable with the pricing we've locked in. It won't keep at 10.5 cents per KWh. It will rise slightly." He declined to say by how much.

The second hedge, though, gives businesses and households electricity rate certainty and stability into the medium and long-term at a time when their finances are under huge strain due to the economic crisis created by COVID-19.

BPL's move, in theory, puts control of the monthly electricity bill back in consumers' hands. With rates including the base tariff fixed, and no longer vulnerable to global oil price fluctuations, Bahamian energy costs will be determined by each business and households' management of their consumption - effectively making energy a volume business.

While consumers will be the main direct beneficiaries, BPL's reduced fuel costs will also help reduce the drain on the $2bn-plus external reserves at a time when The Bahamas needs to preserve every cent of foreign currency it can get while tourism-related inflows recover.

BPL's annual fuel bill is one of the most significant drains on the foreign reserves, which are vital to maintaining the Bahamian dollar's one:one parity with the US dollar. The hedge will thus ease some of the anticipated pressure on external reserves that are projected to decline to around $1bn by year-end 2020 as import demand outweigh severely diminished foreign currency inflows.

BPL should receive little to no benefit from its hedging strategy, given that the fuel charge is a 'pass through' to the end-user that is supposed to be covered 100 percent by consumers. The latter, and the wider economy and its competitiveness, should be the main beneficiaries of locking-in long-term prices.

Marlon Johnson, the Ministry of Finance's acting financial secretary, told Tribune Business that the latest BPL hedge will give Bahamians protection against volatility and fluctuations in global oil prices, which are expected to increase as global economic activity rebounds post-COVID-19

And the IDB, in a statement, said the latest hedge will "allow the Government to take advantage of low oil prices in the international markets and protect itself against abrupt oil price movements, ultimately offering consumers protection against unexpected increases in energy costs".

"It also protects the Government’s budget resources by allowing it to implement better financial risk management over the next three-and-a-half years, with a series of Asian Call Options purchased by the government from the bank on approximately 7.2m barrels of crude oil."