By NEIL HARTNELL
Tribune Business Editor
A Joaquin-style hurricane would likely impose $28 million worth of repair costs on Grand Bahama Power Company (GBPC), with its top executive defending the ‘storm insurance’ charge it plans to levy on customer bills.
Paul Miller, its managing director, told Tribune Business that GBPC’s self-insurance ‘charge’ would be equivalent to just an extra $30 per year for 85 per cent of its residential customers.
He added that it was now common for energy utilities in storm-hit areas to establish a Hurricane Self-Insurance Fund, given that they - like GBPC - were unable to obtain insurance coverage for their transmission and distribution assets.
Mr Miller said GBPC’s Fund was a “proactive” effort to prepare for the worst-case storm scenarios, ensuring it had financial reserves to effect multi-million repairs - which might be delayed if it had to seek funding.
He explained that it would also help to prevent GBPC from having to seek an emergency, post-hurricane rate increase from the Grand Bahama Port Authority (GBPA), its regulator, to reclaim repair costs.
“It is a small amount based on energy usage,” Mr Miller said of the $0.003 per kilowatt hour (Kwh) charge that will be levied upon customer bills to finance the Self-Insurance Fund.
He conceded that GBPC had amended its original proposal, which sought to levy a ‘flat fee’ on all customers, to a charge that was based upon energy consumption.
“In our original filing, we had come out with a flat rate per customer fee for residential, commercial and large customers,” Mr Miller told Tribune Business.
“With the feedback from one of the stakeholder sessions we held, we came to the realisation that we had had a lot of discussion on the hurricane charge, and felt a better way this can be levied was one that was reflective of customer energy usage.
“This seems to make more sense, and is more equitable across different customer classes.”
Mr Miller implied that the up-front accumulation of financing via the insurance charge would prevent any sudden financial impact on consumers from GBPC having to seek an emergency rate rise post-storm to finance repairs.
However, the charge is not without its critics. The Grand Bahama Chamber of Commerce, in its response to GBPC’s 2016-2018 tariff proposal, argued that the utility should finance the Self-Insurance Fund from its profits rather than burden already hard-pressed consumers with a further levy on their light bills.
“We agree that a form of insurance to mitigate any catastrophic losses which may result from a force majeure is prudent from a risk management and business perspective,” the Chamber statement said.
“We suggest that the self-insurance programme being proposed be funded solely from the GBPC’s profits. This may be achieved by the establishment of a ‘sinking fund’, whereby each year a specific dollar amount is appropriated by Board resolution from the GBPC’s retained earnings.”
Mr Miller, though, rejected this, arguing that it was established practice worldwide for the energy industry to finance self-insurance funds from consumer levies.
He explained that the need for such charges had arisen from the greater frequency and power of hurricanes, which had resulted in insurers refusing to provide coverage for utilities in storm-hit nations because they felt the loss risk was too great.
“It became very difficult to buy insurance for a hurricane event to the point, now, where we can’t buy insurance to cover our transmission and distribution assets,” Mr Miller told Tribune Business.
“It’s become more commonplace for utilities where this type of situation exists to set up self-insurance funds, and fund that with funds from the customer.
“It is typical to pass this type of cost back to our customers.... We feel this is the least impact on the consumer.”
Mr Miller said studies commissioned by the GBPC had highlighted the need for such a self-insurance mechanism, as they had estimated that a Category Four hurricane similar to Hurricane Joaquin would inflict $28 million worth of damage on its infrastructure if Grand Bahama was hit.
“The studies indicate that a Category Four hurricane like Joaquin, if that were to hit Grand Bahama, that would create upward of $28 million in damages to be recovered,” Mr Miller told Tribune Business.
“That’s why we said: ‘Let’s be prudent here, start at $1 million and see what the Port Authority rules on that’.”
He stressed that the impact on light bill costs would be minimal, with 85 per cent of GBPC’s residential customer base seeing just a $30 increase that is spread out over and entire year. “High-end” residential users will see a “close to” $100 increase.
Mr Miller said hurricanes Frances, Jeanne and Wilma inflicted a collective $15 million worth of damage on GBPC’s energy assets when they struck Grand Bahama in 2004.
“If a Four came through, there’s no question in our minds it could easily double that,” he reiterated to Tribune Business. “It’s certainly very realistic. We hope it never happens.”
Mr Miller said the Self-Insurance Fund would be established as a trust-type structure, with neither GBPC or the Port Authority able to access it.
He explained that it would be managed and administered “by an independent third party”, and underpinned by a “full legal and administrative framework” to give it formal standing.
GBPC, Mr Miller added, would set up the Self-Insurance Fund in accordance with established international practices.
“We’re not going to be creating something from scratch,” he said. “It’s already in place.”