The Tribune

• IDB labelled fuel hedge ‘highly effective’

• Pintard: PM, Sears ‘cannot run from it’

• Businesses, households ‘paying the price’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light (BPL) has gone from “dramatic savings” on its fuel costs that have been hailed by the Inter-American Development Bank (IDB) to sky-high electricity bills in just three years.

The multilateral lender, recalling what was, in a recently-released paper branded the fuel hedging initiative that was launched under the former Minnis administration as “highly effective” just as Bahamian businesses and households grapple with energy rates that have increased by 71 percent in just nine months.

IDB management, in a document responding to an independent assessment on the effectiveness of its 2018-2022 Bahamas country strategy, said it was unfair to determine that it made “no contribution” to supporting fiscal consolidation due to its work with state-owned enterprises (SOEs) such as BPL and the Water & Sewerage Corporation.

“Management would like to note that state-owned enterprises’ (SOEs) financial performance is critical to overall fiscal performance,” the IDB said. “The water programme with the Water and Sewerage Corporation successfully lowered the expenses of this SOE. Similarly, consideration should also be given to the electricity utility, Bahamas Power and Light (BPL).

“Although the Bank did not work directly on subsidies, the support given to the energy transition via renewable energy is expected to improve longer-term financial sustainability. In addition, the bank supported the utility company through a highly effective oil hedge programme that significantly reduced the cost of fuel and brought predictability to these costs.

“In 2020, this oil hedge programme was the first-ever executed by the bank linked to two loans for the Government of The Bahamas, and it was executed at a propitious time for oil prices, thus driving dramatic savings.” Those “dramatic savings”, though, have long since evaporated with BPL consumers having seen their all-in electricity rates increase from 24 cents per kilowatt hour (kWh) in October 2022 to 41 cents per kWh now.

The Davis administration has yet to comment on the economic or social fall-out from such a rapid and sharp cost increase, although it did warn Bahamian households and businesses back in October that this was coming when it unveiled BPL’s ‘glide path’ strategy for addressing previously under-recovered fuel costs totalling at least $90m, based on figures provided by Alfred Sears, minister of works and utilities.

Michael Pintard, the Opposition’s leader, yesterday told Tribune Business that the soaring energy bills were evidence that the Government “made a great error” in failing to execute trades to acquire extra low-cost fuel for BPL - and sustain the same hedging strategy praised by the IDB - shortly after being elected to office in September 2021.

“None of them are paying the price; it’s the average consumer and business community that are paying the price, and now we have business persons complaining about the adverse impact on their businesses,” Mr Pintard said. “This is squarely at the feet of the Prime Minister and Alfred Sears.

“These increases being experienced by the public are a direct result of their failure to take good advice, to consult and look at the data which would have showed significant savings. They cannot run from it.” Tribune Business was previously told that, confronted with a cash-strapped Public Treasury, the Davis administration elected to use scarce financing to help repay a BPL loan that was coming due in February 2022 rather than invest $40m-$50m in buying low-cost fuel.

The IDB was especially well-placed to assess the effectiveness of BPL’s fuel hedging given the central role it played in the initiative. For it was its executives that explored the oil market for cut-price fuel purchases, identified and recommended potential deals to BPL and the Government, and executed the trades to acquire the fuel once authorised to do so.

And, with the Government and BPL themselves unable to provide or obtain the necessary credit lines required to back fuel hedging, they instead piggy-backed on the IDB’s ‘AAA’ credit rating and two of the multilateral lender’s existing loans to The Bahamas.

Mauricio Claver-Carone, the IDB’s former president, in a March 2022 roundtable discussion with Caribbean media, said the savings generated by BPL’s fuel hedging initiative were “starting to look even more attractive” given that oil prices were then at $130-$131 per barrel as a result of Russia’s invasion of Ukraine the previous month.

“What we did in The Bahamas, for the first time, is an energy hedging instrument. The hedge is done by these instruments. We’ve learned a lot from it,” Mr Claver-Carone said. “I won’t speak to whether any country has maximised it, but the impact for The Bahamas is that it has been able to mitigate the impact of [rising] energy prices thanks to that.”

Tribune Business sources, familiar with BPL’s fuel hedging initiative, said the IDB had viewed it as “a benchmark or example” for smaller Caribbean nations to follow and adopt to mitigate their own energy costs, and had been hoping to roll it out through the rest of the region.

Mr Pintard, meanwhile, said BPL’s fuel hedging had also employed as a consultant Tony Lopez, who had helped Grand Bahama Power Company implement a similar scheme - which remains in place today - when he was its chief financial officer.

Speaking of the present administration, he added: “In cancelling it they were going against the advice of the IDB, the advice of Tony Lopez, and the data that showed it had already saved approximately $25m and stood to save $50m if the programme had continued.

“It was clearly justified because, again, it was developed in conjunction with the IDB, a trusted partner of both administrations. At a minimum, the Government was duty-bound to ask the IDB, and ask Tony Lopez who had assisted Grand Bahama Power, what were their impressions of its impact?

“The Government appears not to have consulted a trusted partner to gain advice if they had any concern with what was provided by the former Board and management. Failure to take advantage of the hedge has left us exposed to fluctuations in pricing on the global markets. Where we are now is a direct result of their failure to take good advice, and also their failure to look at the data showing the success of the programme and their failure to consult trusted partners.”

Whitney Heastie, BPL’s former chief executive, in a six-page October 18, 2021, letter to Mr Sears setting out the rationale for the fuel hedging initiative, said: “Up through September 2021, BPL and its customers have benefited by a reduced $30m fuel cost over the past 13 months.

“It is estimated that by January 2022 the savings amount will be $55m. This reduction in fuel oil prices through hedging has also reduced the demand for US dollars from the foreign reserves of the country.” The failure to execute the trades to secure increased cut-price fuel volumes that would have supported BPL’s fuel hedging strategy has triggered a series of events leading to this summer’s soaring energy bills for businesses and households.

With fuel hedging, utilities such as BPL typically do not lock-in a price that secures 100 percent of their needs. This is done to minimise risk, cost and exposure in case they find themselves on the wrong side of an unexpected oil price move. As an example, they may hedge 80 percent of their fuel needs for the first year, 50 percent in the second and 30 percent in the third.

The Davis administration elected not to execute the trades that would have secured the extra cut-price oil volumes necessary to cover 100 percent of BPL’s fuel needs. However, they also held BPL’s fuel charge at the original 10.5 cents per kWh for a further 12 months until October 2022 even though - without the extra hedged volumes - the actual fuel costs were considerably more.

The Government effectively subsidised BPL to ensure this price could be maintained, which is something that the regulations accompanying the Electricity Act prevent it from doing, as fuel costs are supposed to be 100 percent passed through to the consumer.

Now the Government and, by extension, BPL’s fuel supplier, Shell, need to reclaim under-recovered fuel costs of at least $90m, and this is what has caused the electricity monopoly’s bills to spike well in excess of market costs. This ultimately represents a major wealth transfer from Bahamian businesses and households to the oil companies.