The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Regulators will demand “a comprehensive report” from Bahamas Power & Light (BPL) on the effectiveness of a fuel hedging strategy that has been the subject of much recent controversy.

The Utilities Regulation and Competition Authority (URCA), unveiling its 2021 annual report and plan for this year, said that while on the surface it appeared the initiative introduced by the former Minnis administration had achieved its goals thus far there was a need “to ensure transparency and accountability” on the issue.

“In July 2020, BPL commenced its fuel hedging programme which has resulted in the application of a fuel charge of 10.5 cents per kilowatt hour (kWh) from commencement to date,” URCA said. The actual fuel charge amendment was gazzetted on June 26, 2020.

“It is URCA’s understanding that the current hedged fuel price will remain in place until June 2022, when it is subject to adjustment in accordance with current fuel prices and an agreed adjustment mechanism. It is noted that the goals of the hedge were not solely financial, but also economic as it was viewed as a means of stabilising the fuel charge component of electricity bills during a period of economic uncertainty and heightened reliance on electricity supply services.”

The regulator continued: “While URCA has monitored the variance between hedged fuel price and an extrapolated fuel price utilising pre-hedge indicators, and prima facie it appears that the hedge has been beneficial thus far, URCA will request a comprehensive report from BPL in accordance with its licence obligation, Condition 24.

“It is within URCA’s remit to ensure transparency and accountability to the regulator, customers and stakeholders concerning the effectiveness of the hedge and the fuel consumption efficiencies of BPL’s operations.” URCA’s report promise comes amid ongoing questions as to the status of BPL’s fuel hedging initiative, which was inherited by the Davis administration when it took office in September 2021.

No clear answers have been provided to questions over whether BPL executed the September and December 2021 option trades to keep the hedging structure in place, and what this might have cost the cash-strapped utility’s customers by forcing it to by fuel at higher ‘open market’ prices amid rising global oil costs. Alfred Sears, minister of works and utilities, has said the fuel hedging strategy remains in place but no details have been provided.

URCA’s report, meanwhile, indicates that businesses and households will likely see both the fuel cost component and overall electricity bills increase come July/August 2022, for this is when BPL must put in place a new fuel hedging strategy or decide to discontinue it. Even if it puts a new structure in place, BPL will almost certainly be paying a higher cost for its fuel due to the surge in global prices to around $100 per barrel.

Michael Pintard, the Opposition’s leader, who has raised multiple questions surrounding BPL’s fuel hedge, doubled down on several queries yesterday after URCA stated its position. Arguing that Mr Sears has been “both and forth, flip flopping” on the issue, he called on the minister and BPL Board to confirm whether the September and December trades were executed.

The FNM leader also asked Mr Sears to explain how he could say the fuel hedging programme was still in place if the trades were not executed or, in the event a new structure was implemented, what the rate and lock-in period was. Asking the Government to confirm if the failure to execute in September and December cost BPL some $50m, or provide the correct figure, Mr Pintard also returned to BPL’s “over and under account”.

The way the “over and under account” operates is set out in the Bahamas Electricity Corporation (Amendment) Regulations 2020. These reforms established BPL’s fuel hedging strategy, which sets a target price that is based on the costs and quantities of the various fuels it expects to use. If it runs its more efficient engines for longer than anticipated, and burns lower volumes of cheaper fuel, then the utility enjoys savings that accumulate as reserves in this account.

The “over and under account” was created to monitor fuel price movements over the hedge’s year-long period. It is allowed to fluctuate by 5 percent either side of the fixed price at which BPL purchases fuel, and if it exceeds those limits then the fuel charge - presently standing at 10.5 cents per kilowatt hour (KwH) - has to be adjusted.

If BPL’s fuel costs are more than 5 percent below the price it pays for fuel, then the excess savings have to be passed on to the customer. But if fuel costs exceed that purchase price by more than 5 percent, then BPL has to also pass these extra costs on to consumers. There are concerns it may now be in non-compliance with this aspect of the regulations if it (or taxpayers via the Government) are absorbing millions of dollars in increased fuel costs.

Mr Pintard yesterday queried if BPL had breached that 5 percent margin, and what authority it had relied upon to do so. He also called on the Government to report the current status of the “over and under” account.