The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet Minister yesterday admitted that the Government had “put the brakes on” Bahamas Power & Light’s (BPL) proposed base rate increase, as fresh doubts emerged over the energy monopoly’s planned $600 million refinancing.

V Alfred Gray, minister of agriculture and fisheries, told the House of Assembly that the Government believed it was “not the right time” for an increase in energy costs, given the state of the economy and fact light bills were relatively low at present.

“The Government stopped that process as it felt it was not the right time to have any increase after light bills have been going down,” Mr Gray revealed during his contribution to the 2016-2017 Budget debate.

“That’s what we want. They need to keep it going down, not up.”

He added of BPL and its manager, PowerSecure: “I know they wanted to do it [the base rate increase]. The Government put the brakes on it, as the Government does not believe that should be happening at this time.”

Mr Gray said Prime Minister Perry Christie had not received enough praise for his “power of conviction to say to the Board of Directors: ‘Not now. Sorry, it’s not happening right now’.”

Mr Gray, though, displayed a somewhat tenuous knowledge of the Government’s recently-enacted energy reforms, frequently referring to BPL as BEC, and mixing the two entities up.

The Bahamas Electricity Corporation (BEC) is now the parent of BPL, which is the operator for all its electricity assets. And Mr Gray also seemed confused when he referred to PowerSecure, BPL’s manager, co-mingling its name with references to BPL and BEC.

Some observers might also argue that Mr Gray and the Christie administration have a ‘tenuous grip’ on energy economics and BPL/BEC’s near bankrupt state, which was further highlighted by the company’s confirmation that it had implemented a two-hour ‘rolling blackout’ across New Providence yesterday, with generation capacity unable to meet demand.

The proposed increase to the ‘base rate’ portion of customers’ BPL bills, which is supposed to cover its operating expenses, and generate cash flow and profit, was said to be intended to finance investment in equipment and infrastructure upgrades - exactly what is required to deal with the frequent outages and ‘blackouts’.

Bahamian households and businesses will seemingly have to endure the BEC legacy ‘status quo’ of outages and blackouts for months to come, as a result of the Government “putting the brakes on”, and the consistent $20-$30 million annual losses that are fuelling the lack of maintenance and upkeep.

Meanwhile, light bills have reduced due to factors outside BPL/BEC’s control, namely the dramatic drop in global oil prices, which are starting to increase again.

With global oil prices still at relatively low levels, some observers believe now is the ‘best’ time for a BPL base rate increase, and some are likely to view the Government’s refusal as influenced by the upcoming general election, given the negative impact it would have on voters.

Dionisio D’Aguilar, a former BEC Board member under the last Ingraham administration, told Tribune Business this week that a BPL ‘base rate’ increase was “probably inevitable” given the utility’s dire operational and financial position.

“The Government is going to have to let BPL operate as an ongoing concern that is making enough money to pay its expenses, upkeep its equipment, do routine maintenance and make a profit,” Mr D’Aguilar said.

“If BPL has to raise rates by a certain amount to get to that point, and the Government is worried about the impact on poor people, the Government should subsidise the poor people. It has nothing to do with BPL. The light bill is the light bill.”

While acknowledging that BPL needed to “justify” any rate increase, Mr D’Aguilar reiterated: “The Government needs to get out of the business of telling BPL how to operate.”

The ‘base rate’ episode raises further questions about how political interference at BPL and how much autonomy PowerSecure really possesses.

Tribune Business understands, though, that the management agreement between the Government and PowerSecure reserved the right for the Christie administration “to determine” all “fees, rates and charges” associated with BPL.

Mr Gray’s admission came as financial analysts yesterday expressed misgivings over the structure of the proposed $600 million Rate Reduction Bond (RRB), which will refinance BEC’s legacy bond and bank debt, plus pension and environmental liabilities, and any severance costs.

Speaking on condition of anonymity, they said potential investors - both Bahamian and foreign - are being offered too little compensation for the risk involved in investing in the RRB.

Tribune Business has seen documents showing that the Government intends to offer investors in the $100-$150 million Bahamian dollar component an interest coupon “equivalent” to the 4.75 per cent Bahamian Prime rate, which is almost two percentage points lower than what is paid to BEC’s existing bondholders.

Deepak Bhatnagar, BPL’s executive director and a key adviser to the Prime Minister, told a March 10, 2016, meeting of existing bondholders about the Government’s RRB plans.

Confirming that it would be a total $600 million placement in the Bahamas, the UK, the US and Canada, the meeting minutes said: “Mr Bhatnagar advised that the new Rate Reduction Bonds are likely to be for a term of not less than 25 years.

“The Bahamian dollar bonds will be at a rate equivalent to the Prime rate, and the US dollar bonds will be tied to the Bahamas’ sovereign bonds.”

Tribune Business understands that arranging, and placing, the RRB has involved far more work than the Government originally planned, and that it has only recently asked Bahamas-based investment houses to submit proposals to act as the issue’s financial adviser/placement agent.

However, one financial analyst said the 4.75 per cent Bahamian Prime coupon was not enough to compensate investors for the risk created by BEC’s bankrupt financial state and operating woes.

They explained, speaking on condition of anonymity, that investors were being asked to ‘take a punt’ on PowerSecure being able to resolve BPL’s multiple problems, which is by no means guaranteed.

RRB investors are guaranteed the ‘first share’ of BPL’s revenues by the law passed to facilitate the issue, but the analyst said energy bills would likely have to rise to pay the associated debt servicing costs.

This, they argued, would only exacerbate the difficulties many households and businesses are already experiencing in paying their utility bills, resulting in further cut-offs and BPL’s cash flow shrinking even more as accounts receivables rise.

“The fundamentals have to be fixed and/or in the process of being fixed before a bond will work,” an investment banker told Tribune Business.

“Most people realise that 90 per cent of the problem (cost, reliability, efficiency) with BEC is generation. If the cost doesn’t come down and stay down, there is no real long-term solution that helps the people and allows a rate reduction bond to flourish.”

They added: “For a rate reduction bond to work, generation equipment and fuel mix has to be fixed. The bond can’t realistically be funded unless there is certainty that the rates are down when it is funded, and will continue to stay down relative to where BEC has historically been price wise.

“Additionally, for a rate reduction bond to work, BEC has to be out of the generation business. They are in the position they are today for a variety of reasons but one of the biggest is that politics priorities prevail and drives maintenance.

“When BEC says, for example, they need to spend an extra $40 million this year on maintenance ,and that it will require a rate increase, the Government says no because it will unsettle voters. You cannot run a generation business that way. “

Until the RRB takes care of BEC’s legacy debt, BPL and PowerSecure’s hands are tied financially in terms of turning the energy monopoly around, and obtaining new financing - estimated at $450 million - to overhaul its infrastructure.

Some believe BPL was seeking the ‘base rate’ rise because it cannot afford to wait for the RRB, and/or because it needs the extra revenue to make the bond attractive to investors.

“We’ve got to believe they’re between a rock and a hard place,” Mr D’Aguilar told Tribune Business. “You can’t effect a lot of the necessary changes without money.

“The devil will be in the details, and some people will likely moan about a rate increase, but there’s a lot of legacy debt that has to be paid off.”

The ongoing power outages, meanwhile, will also raise questions about what BPL is doing about acquiring rental generation capacity to boost its power output.