The Tribune

• Comes one day after PM blasted strategy as ‘gamble’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light (BPL) yesterday signalled its intent to re-enter the fuel hedging market just one day after the Prime Minister sought to discredit how the strategy was employed by the former administration.

The state-owned utility, in a statement, disclosed it is “in the process” of agreeing a new contract that will hedge - or lock-in - a set price for an additional 15 percent of its fuel needs now that global oil prices have eased somewhat from the highs they struck some 12 months go following Russia’s invasion of Ukraine.

BPL said this would add to the 56 percent of its fuel supply that is already hedged, potentially taking the total amount to 71 percent, although few specifics were provided. Shevonn Cambridge, BPL’s chief executive, could not be reached and did not respond to Tribune Business messages seeking answers on when the proposed hedge will be sealed, its likely terms or the timeline/duration it will cover.

However, the utility described as “far more prudent” its decision to pursue a new hedging arrangement now given that global oil prices have eased. Electricity suppliers typically initiate fuel hedging strategies when per barrel oil costs are low, exploiting market softness to lock-in prices they believe will offer consumers tariff predictability and stability, shielding all parties from future volatility and price spikes.

While global oil prices have dropped somewhat since the Ukraine invasion’s start, standing at $77.19 per barrel on the West Texas Intermediate index, and at $83.66 on Brent crude, they remain significantly higher than the $40-$50 per barrel cost that the Minnis administration was able to exploit in mid-2020 when world energy demand plummeted due to the lockdowns associated with the COVID-19 pandemic.

Still, BPL said: “Not only have fuel prices declined to a point where hedging gains are far more favourable, but the organisation’s finances have stabilised due to the successful completion of [two] loan agreements and the implementation of the glide path fuel cost recovery scheme.” The latter refers to the phased-in fuel charge hikes that will this summer peak at 163 percent above October 2022 levels for consumers using over 800 kilowatt (KW) hours per month.

“It looks like BPL is bringing hedging back into the mix for price stability,” one energy industry source said of its statement. “Once they see oil prices come down, they can raise the percentage of fuel they hedge. They’ve now come back and realised hedging is the best strategy for price stability, which contrasts with the statement that hedging is a gamble. They’re getting back into hedging, and contrasting what the Prime Minister is saying that it’s a bet.”

Mr Davis, during Monday’s House of Assembly hostilities with Opposition leader, Michael Pintard, sought to justify his administration’s decision not to authorise trades that would have supported BPL’s hedging strategy by acquiring more cut-price oil at a “strike price” of $50 per barrel. He argued that it was “a reasonable decision” to focus scarce financial resources into paying down BPL’s multi-million arrears owed to vendors and $246m loan that was coming due.

“Let’s remember what a hedge is. It’s a bet, a gamble,” the Prime Minister asserted. While it was designed to lock-in fuel prices in advance, so that electricity consumers enjoy price stability and predictability, he cited the example of a Florida utility that lost billions over a ten-year period after spot market oil prices declined below the price at which it had hedged.

Mr Davis also implied that executing the September 2021 trades would have been of little use in protecting Bahamian businesses and households from the oil price spike produced by Russia’s invasion of Ukraine in February 2022. This was because the hedge they were tied to “only covered a period beginning in July 2022”.

However, the energy industry source said of yesterday’s BPL statement: “What they’re saying to The Bahamas is they’re going to continue hedging because it gives us price stability. They’re saying hedging makes sense, so we’re going to do it again.” They agreed with BPL’s analysis that to seek a new hedge in early 2022 would have been “bad timing” due to the global oil price spike, as it would have been unable to lock-in a favourable price.

BPL said global oil prices were projected to ease further, helping to increase hedging’s potential benefits. It added that entering a new hedge in early 2022 may also have “derailed” or delayed negotiations over two new loan arrangements, which have now been completed.

Bahamian businesses and households will face an average fuel charge of 20 cents per kilowatt hour (KWh) in their electricity bills during 2023, BPL confirmed, as it seeks to recover fuel costs that were not 100 percent passed on to consumers as required by law between December 2021 and October 2022.

It admitted that this was almost double, or 100 percent higher, than the 10.5 cents per KWh attained when the fuel hedge was initially put in place, but argued that this was “still lower compared to utilities of similar size and characteristics in our region”.

Meanwhile, the Opposition yesterday showed no sign of letting up on the fuel hedging controversy. Mr Pintard, in a statement, reiterated that “the lion’s share” of the $150m in unpaid BPL bills disclosed in the Fiscal Strategy Report was tied directly to the Davis administration’s decision not to execute the hedge-supporting trades for more cheaper fuel in September 2021 and December 2021.

“The public has sufficient reason to believe that is related to the decision around the hedge or failure to act,” the FNM leader told Tribune Business of the $150m arrears. “There was sufficient reason to believe ballooning of this exposure to Shell had to do with the decision they made and failed to make. We gave reason to believe this is related to the decision they made.

“They got adequate advice on a timely basis, refused to accept the advice and their failure to do so has resulted in a huge cost to the Bahamian people that they must pay to BPL, pay the subventions to the Government. The regular citizen and business’s costs also went up because of higher electricity costs. Once they realised their ill-advised decision would be a mark on their credibility and good governance, they went into conceal and denial mode.”

BPL’s confirmed $90m debt to Shell is likely to have been accrued because BPL it held its fuel charge at the hedged 10.5 cents per KWh price even after the trades to secure extra cut-price volumes were not executed. This resulted in BPL having to buy increasing fuel volumes at higher global market spot prices, and the 10.5 cents was insufficient to cover its fuel costs.

Government officials last October conceded that it had cost taxpayers “tens of millions of dollars” to hold the utility’s fuel charge at 10.5 cents per KWh. With the Government prevented from providing direct subsidies, the higher BPL fuel charges are required to reimburse the Government for paying-off Shell’s debts and effectively keeping the lights on.

Mr Pintard, in his statement, said Mr Davis’ Monday comments in the House of Assembly represented a further shifting in the Government’s narrative. He argued that the Prime Minister had confirmed for the first time he was briefed on the September 2021 trades, and that the Cabinet had decided against executing them.

This, the Opposition leader pointed out, came after Mr Davis told the House of Assembly on October 26, 2022: ““I received no advice, received no recommendations and saw no papers in that respect. It never reached my desk. It never happened.”

Mr Pintard added: “The Prime Minister mentioned that the $150m in contingent liabilities that the Government took on from BPL was related to bills this administration inherited from the former administration. The FNM contends that this statement is wholly inaccurate....

“The Prime Minister has provided no documentation and no evidence to support his contention that this $150m in contingent liabilities was the fault of the former administration in part or in whole.... We demand that they lay all the related documentation on the table of the House of Assembly to substantiate his allegation but, more importantly, to demonstrate that he is prepared to live up to his commitment to accountable and transparent governance.”

The move drew support from the local business community, with Robert Carron saying he supported the government’s efforts to resolve the issue, and said so should every Bahamian.

He said that under the Chicago Convention on International Civil Aviation “each signatory recognises that every other signatory (including The Bahamas) has complete and exclusive sovereignty over the airspace above its land and seas”.

He also suggested that renaming the airspace in the region as “Miami Oceanic” had led to some confusion for airlines.