The Tribune

• Bahamians to ‘bear brunt’ of oil price surge

• Concern electricity costs will start soaring

• Pintard challenges hedge ‘cancellation’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fears were raised yesterday that Bahamas Power & Light (BPL) customers could suffer a $200m-plus hit if the fuel hedging strategy that the Davis administration met in place was not renewed.

Multiple well-placed sources, speaking to Tribune Business on condition of anonymity, warned that Bahamian households and businesses could face a massive increase in their electricity bills over the next two years if current global crude oil prices hold around yesterday’s $113-$114 per barrel mark.

BPL’s fuel charge, which is based on global oil prices, is passed on 100 percent to its customers, and this newspaper was told that all Bahamians are likely now at the mercy of volatile commodities markets - rocked even further during this past week due to Russia’s invasion of Ukraine - due to the Government’s failure to follow through and execute on the strategy left for them.

This newspaper was told the hedging strategy left in place would have addressed all BPL’s 2022 fuel “needs”, with 1.6m barrels of oil “hedged” at a price of $40 - almost 65 percent less than prevailing market prices - for the period from February 1, 2022, to October 31, 2022. A contact said savings for February alone would have amounted to almost $8m compared to market prices.

For the subsequent 12 months, some 1.45m barrels were hedged at $40 until end-October 2022 and, for the period November 1, 2023, to March 2024, another 430,000 barrels were included in the hedge.

Had this structure been maintained and executed, one source said, it would have generated collective savings for BPL’s consumers of $134m over the next two years based on a $93 per barrel global oil price.

But, amid increasing uncertainty over whether the Davis administration has actually followed through on this, they added that, if oil prices stick at $110 per barrel, this could add a total $205m to The Bahamas’ energy costs at a critical time in the country’s post-COVID recovery.

Michael Pintard, the Free National Movement’s (FNM) leader, yesterday demanded that the Davis administration “come clean” and identify “who made the ill-advised decision to essentially cancel” the BPL fuel hedging strategy that it inherited after being elected to office on September 16, 2021.

In a statement, he suggested that the Ministry of Finance was to blame for the strategy’s non-continuation, and asserted that the mechanism had saved BPL’s customers a collective $55m on their fuel charges between June 2020 and January 2022.

Sources spoken to during Tribune Business’ inquiries backed the savings stated by Mr Pintard, and added that the failures to execute the quarterly hedges that came due in September and December 2021 now threaten to cost Bahamian businesses and consumers dearly in their struggle to rebound from COVID-19’s devastation.

Asserting that there were predictions last September, well before Russia’s conflict with Ukraine emerged as an issue, that global oil prices would breach the $100 mark by March 2022, they argued that it is now almost impossible for BPL and the Government to obtain a good fuel hedging deal beyond June 2022 because the markets are reeling from events in eastern Europe.

And, outside of fuel hedging, they argued there is little the Government can do to ease BPL’s fuel charge, which typically accounts for 50-60 percent of customer bills. They explained that it would be a breach of the Electricity Act 2016, which was passed into law by the former Christie administration, led by then-deputy prime minister Philip Davis, for the Government to intervene by subsidising fuel prices.

The Act, they explained, while mandating that BPL calculate its fuel charges accurately, and that these by reviewed by the Utilities Regulation and Competition Authority (URCA), stipulates that all costs must be passed to the consumer. “There’s nothing the Government can do,” one sourced added. “If they do, they will be in violation of the fuel pass through.

“These guys have painted themselves into a significant corner, and I don’t know how they are going to get out of it because of bad, ill-advised decisions that were made. It’s been nothing but a disservice to the Bahamian people. There’s no way to correct this. Bahamians are going to have to bear the brunt of it.

“It’s one of those things that, if you don’t do certain things in a certain time, there is no way to go back and fix it. It’s unfortunate what has happened, and extremely unfortunate for the Bahamian people. Trying to hedge now given what is going on in Ukraine, you’ll never get a good deal. The commodities markets are too uncertain.”

Alfred Sears QC, minister of works and public utilities, could not be reached for comment before press time despite numerous phone calls being made and messages sent. Clint Watson, the Prime Minister’s press secretary, contacted in Belize at the CARICOM summit, was provided with details of this newspaper’s inquiries at his request but did not respond before press time.

Simon Wilson, the Ministry of Finance’s financial secretary, declined to be drawn into a political row with the FNM on the basis that he is a civil servant and therefore apolitical. However, he reiterated that himself and the Ministry of Finance both support fuel hedging, and pledged to work with BPL on implementing any strategy that would result in predictable, stable electricity costs.

“For BPL, I support fuel hedging,” he said. “We are here at the ministry to assist them. If they ask us for assistance, we are here to facilitate that. We all want stable fuel prices, we all want lower energy costs.”

However, Tribune Business sources backed Mr Pintard in suggesting that the Davis administration’s “reticence” to continue the fuel hedging initiative may cost Bahamian consumers and the wider economy dearly.

They argued that, following the general election, Ministry of Finance officials were sceptical of the hedging strategy left in place, and queried whether the structure would generate optimal results. It was also suggested that the Davis administration viewed it as “a subsidy for the large hotels” and “a subsidy for rich people” even though all Bahamians - rich and poor - are impacted by BPL.

Mr Sears’ comments on November 23, 2021, picked up on by Mr Pintard yesterday, suggested there was some truth to this as he said the Government was discussing whether the scope of BPL’s fuel hedging should be “narrowed” to assist only “vulnerable” households.

This newspaper, meanwhile, was told that, under the Minnis administration, that BPL’s fuel hedging initiative was structured as a options where, if global oil prices went lower than the hedge, the state-owned energy monopoly simply bought at market costs.’

“It’s no easy thing to do,” one source said of BPL’s fuel hedge. “If you get it wrong, you can easily lose money. With BPL’s finances in the drain, there was no easy way to get a credit line.” As a result, the former administration elected to work with the Inter-American Development Bank (IDB), which has a unit with expertise in setting up fuel hedging structures.

BPL and the Government were also able to “piggy back” on the latter’s existing lines of credit with the IDB to “back stop” the hedge. Tribune Business understands that BPL had been seeking to hedge its fuel costs, in a bid to deliver stable, consistent energy prices, as part of the proposed 25-year Power Purchase Agreement (PPA) with Shell North America.

The utility established a hedging committee, and strategy and rules to govern the practice. Deloitte & Touche, the accounting firm now hired by the Davis administration to determine BPL’s approach to fuel hedging, was employed as a consultant under the former government to look at fuel prices, determine the hedge deals available and the fuel types involved.

Once the then-BPL Board approved the hedging recommendation, it was sent to the Ministry of Finance and IDB for their approval, before going to the Minnis Cabinet for final sign-off. The hedging strategy was reviewed on a quarterly basis.

However, with the last hedging strategy executed on June 2021, this newspaper was told that the next quarterly review and sign-off - scheduled for September 2021 - became caught up in the election held that month and subsequent transition to the Davis administration. No approvals for the September and December were forthcoming.

Tribune Business was told that BPL’s outgoing Board “advised the new Board of what hedging was about, and that it needed to be reviewed quarterly and executed as necessary”. They added that Mr Sears was also briefed on the matter, but the delay in acting “meant that by the time BPL had agreed a price on the extension the price had moved”.

“BPL had these layered contracts,” another added. “Some of those started to expire, and because nothing happened in September and December, there was no way to backstop it. Once those contracts expire, there is nothing to backstop them with.”

It was also suggested that BPL’s now-aborted plan to raise its fuel charge by 30 percent, or 3.2 cents per kilowatt hour to 13.7 cents, reflects the fact that excess reserves previously built up by favourable hedging positions may have been depleted to a negative position. The utility now needs to bring this account back into balance, hence the proposed increase that was rejected.

Mr Pintard, meanwhile, called for the Davis administration to provide a full explanation for why BPL’s planned fuel charge increase was pulled at the last minute. Referring to the hedging strategy, he said: “Why did the Prime Minister allow the Ministry of Finance to overrule the decision by the Board and executive of BPL, and no doubt the minister, that the hedging programme be continued?

“This must be explained, especially in the face of rising fuel costs, which must ultimately be passed on to consumers. Who was it that made the ill-advised decision to essentially cancel the programme, resulting in a comedy of errors that has embarrassed the minister and the administration?”

The Opposition leader continued: “We call on the administration to come clean and explain to the Bahamian public the fate of the unprecedented fuel hedging programme left in place at BPL by the FNM administration, which has been definitively demonstrated to have saved Bahamians and the public purse about $55m to-date as projected when the programme was initially put in place.

“The Davis administration must come clean and tell the Bahamian public if the usual quarterly hedging trades were executed after the last trade that was conducted in June 2021 by the FNM administration. If subsequent hedging transactions were not executed by BPL and the Ministry of Finance, who gave the order to cancel these hedge transactions and on whose authority was this order given?

“By July 2021, the average residential customer bills were down by 24 percent versus June 2018 due mostly to the sustained reduction in the fuel cost underpinned by the fuel hedging programme. BPL reported that from August 2020 to July 2021, customers and the Public Treasury saved $15m as a result of the fuel hedge programme.

“In fact, BPL executives were confident that if the current trend continued, the company could project savings of about $50m to customers and the Public Treasury from August 2021 to January 2022.”