The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Energy regulators have renewed their pledge to ensure Bahamas Power & Light (BPL) does not make consumers pay for its "failures" through an opaque, inflated fuel charge on their bills.

The Utilities Regulation and Competition Authority (URCA), in its just-released 2021 draft annual plan, nevertheless praised the state-owned utility for introducing a fuel hedging initiative to stabilise the fuel charge and give businesses and households certainty over this component of their bills.

Suggesting that BPL had "substantially adopted" the recommendations it provided over its fuel hedging plans, URCA added that the advice it also provided over the upcoming $535m Rate Reduction Bond (RRB) placement should be "revisited" given that much has changed since the issue was first proposed due to COVID-19.

Acknowledging that it is barred by law from regulating BPL's tariff pricing until 2021, due to the "holiday" provided in the Electricity Act passed under the former Christie administration when it was seeking to hire Power Secure as the energy monopoly's manager, URCA said it would resume its assessment of its fuel charge next year to ensure it truly is a "cost recovery" mechanism.

"URCA is proposing to revisit the original intent of this project.... in 2021," it said, "given that the need remains to ensure that the fuel charge mechanism utilised by all licensees accurately reflects the actual cost of fuel used by the licensee in providing electricity to its customers, and reflects the fair and efficient costs of fuel used and does not pass on costs resulting from failures by a licensee to manage its electricity system properly."

The “fuel charge” portion of BPL bills is designed as a pass-through, meaning that the utility passes on to consumers the full costs associated with purchasing the fuel used to generate electricity. It is supposed to be a ‘cost recovery’ mechanism, meaning that BPL earns no profits from the fuel charge.

However, there have long been suspicions that BPL uses the “fuel charge” to disguise inefficiencies elsewhere in its operations, and wraps other items into this levy that further burden Bahamian businesses and households besides the pure costs of fuel.

URCA, reiterating its drive for greater transparency and clarity over how the fuel charge is calculated, reiterated: "URCA considers it necessary to ensure that there is clear regulatory oversight of the fuel charge approach wherever it is employed in The Bahamas. Therefore, URCA had proposed to develop a comprehensive methodology for the derivation and application of fuel charges within the sector.

"Unfortunately, the vagaries of 2020 [COVID-19- resulted in a diversion, which resulted in URCA providing some consultation advice with regard to the fuel charge as the Government and BPL had to adapt to address electricity supply affordability rapidly and, by extension, accessibility in the height of the pandemic."

This meant BPL's fuel price hedging initiative, which has just been extended from 18 months to 41 months in a bid to give customers certainty over the fuel charge component of their bills through to end-2023.

"On April 17, 2020, BPL made a presentation to URCA on a proposed hedging initiative that they were considering in an effort to capitalise on the then-relatively low market price for the fuels utilised for power production. The presentation addressed their proposed policy, methodology, and anticipated targets," URCA recalled.

"URCA notes that while the authority to approve the composition of the Fuel Adjustment Charge (FAC) and other tariff-related matters ordinarily falls within the purview of energy sector regulators, URCA is statute-barred from doing so with regard to BPL until 2021 by virtue of a tariff holiday enacted by section 20 of the Electricity Act.

"Notwithstanding the above, URCA was consulted on the hedging initiative and subsequent FAC amendments, and its advice is considered to have been fairly persuasive as signified by the substantial adoption of the technical and economic recommendations provided.

"BPL announced the commencement of its hedging programme in July 2020, which was accompanied by the application of the targeted FAC to its billings." Fuel hedging, in theory, puts control of the monthly electricity bill back in consumers' hands.

With the base tariff and fuel charge both fixed, and the latter no longer vulnerable to global oil price fluctuations, Bahamian energy costs will be determined by each business and household's management of their consumption - effectively making energy a volume business.

While consumers will be the main direct beneficiaries, BPL's reduced fuel costs will also help reduce the drain on the $2bn-plus external reserves at a time when The Bahamas needs to preserve every cent of foreign currency it can get while tourism-related inflows recover.

BPL itself should receive little to no benefit from its hedging strategy, given that the fuel charge is a 'pass through' to the end-user that is supposed to be covered 100 percent by consumers. The latter, and the wider economy and its competitiveness, should be the main beneficiaries of locking-in long-term prices.

URCA, meanwhile, called for its advice on the imminent $535m Rate Reduction Bond issue to be "revisited" because it was now outdated due to the placement being pushed back because of COVID-19.

"In January 2020, a compendium of Rate Reduction Bond (RRB) documents were submitted for URCA’s regulatory review and possible approvals," it added.

"The [energy regulation] department was given, and successfully met, an aggressive timeline in which to turnaround its assessment of the RRB documents, which included the Rate Reduction Bond legislation and the proposed bond fee calculation methodology.

"It is noted that the bond offering was subsequently delayed due to the onset of the unfavourable prevailing economic conditions as a result of the COVID-19 pandemic. Further, as these conditions have materially changed the technical and economic dynamics of the electricity sector, it is anticipated that the advice given in January 2020 may be dated and should be revisited prior to any restart of this initiative."