The Tribune

BY NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The pain inflicted on Bahamian businesses and consumers by up to 163 percent hikes in BPL’s fuel charges failed to achieve the Government’s goal of wiping out the utility’s fuel arrears as a near-$38m unpaid bill remained.

The Utilities Regulation and Competition Authority’s (URCA), in an eight-page summary on the probe it commissioned into Bahamas Power & Light’s (BPL) so-called 2022-2024 ‘glide path’ strategy, which was implemented to recoup under-recovered fuel costs, reveals that it missed the Davis administration’s main objective of eradicating unpaid arrears that peaked at close to $120m in February 2023.

The report also affirmed that the burden imposed on BPL customers, namely Bahamian businesses and consumers, to pay-off the utility’s past due fuel bills to its supplier, Shell, “became onerous”. And this impact “was magnified” because the Davis administration and BPL elected to impose the peak hike - an up to 163 percent increase in the latter’s fuel charge compared to October 2022 levels - between June and August 2023, when summer consumption was at its highest.

URCA’s summary also backed the former Minnis administration by asserting that BPL’s first fuel hedging strategy, implemented in 2020 during the COVID-19 pandemic when oil prices were relatively low due to subdued global demand, generated “a net benefit to BPL consumers”.

This somewhat contradicts the narrative employed by Jobeth Coleby-Davis, minister of energy, utilities and aviation, during the last parliamentary term when she argued that the Minnis administration’s hedge failed - and produced no savings - because BPL had to rely on more expensive automated diesel oil (ADO) fuel as opposed to the cheaper heavy fuel oil (HFO) on which the strategy was based.

While the greater-than-expected use of ADO fuel reduced the anticipated cost savings from the Minnis administration’s hedge, BPL’s former chief executive, Shevonne Cambridge, subsequently said it was “in the money”. However, the summary report released by URCA also defends the Davis administration’s decision in late 2021 and early 2022 not to execute further trades to purchase low-cost oil that would have supported the hedge due to the discrepancy between ADO and HFO prices.

The electricity regulator, in an analysis of the findings, said BPL’s ‘glide path’ strategy was ultimately flawed - and did not wipe out the utility’s arrears - because it failed to match customer charges and billings with the actual cost and what it was paying Shell. It added that splitting BPL’s customer base into two groups, those who consumed more or less than 800 kilowatt hours (KWh) per month, resulted in businesses paying more and “subsidising residential customers”.

Pledging to “take regulatory action” based on the findings from the review of events between late 2022 and early 2024, URCA said it will enact “new fuel charge regulations” that deal with issues including how revenues generated from this portion of customer bills are used. The “timing of when fuel charges will be passed through” to BPL consumers will also be addressed to prevent a repeat of early 2023’s near-$120m fuel arrears.

Other issues that URCA is promising to address involve “changes to the costs” that factor into the fuel charge’s calculation; how this charge is passed on to consumers to “smooth out recovery”; and the use of incentives/imposition of penalties “regarding the efficient procurement and use of fuel”. It noted that BPL has to submit a full tariff submission to it by next year, including fuel charges, which are set to take effect in 2027.

URCA cited the Electricity Act 2024’s section 73, which deals with confidentiality and mandates that it “not be required to publish or otherwise divulge information that in the view of URCA is commercially confidential” for why the consultant’s full report on BPL’s ‘glide path’ strategy has not been published. It added that the goal of its probe was to “ensure BPL delivers value for money for consumers and operates with a framework” that sustain’s its operations in compliance with law and regulations.

URCA acknowledged that, at the time BPL implemented and unveiled its ‘glide path’ of fuel charge hikes, it had publicly said it was “satisfied” that the utility “had made an adequate case for the rate increases”. However, it moved to revisit the situation to ensure BPL was operating efficiently and that consumers were being charged correctly.

Unveiling the efficiency-related findings, URCA said BPL did not always use its most efficient generation units first so as to minimise electricity costs for Bahamians. “URCA conducted an audit of BPL’s efficiency,” it added. “It found BPL did not consistently follow its ‘merit order’ approach where the most efficient units are generally intended to be used first to meet the demand for electricity.

“Following a strict ‘merit order’ approach would have helped minimise fuel costs. However, there were extenuating factors such as generator demand response and reliability requirements. In the summer, when demand for electricity is highest, BPL is forced to run its less efficient machines to maintain supply to its customers. It was concluded that BPL’s actions reflected a compromise required to maintain reliable service.”

As for the charges imposed on Bahamian businesses and households during the ‘glide path’ strategy, URCA said BPL reduced the fuel tariff from its peak for commercial customers in September 2023 and all users come December 2023. However, splitting its customer base into two - based on the 800 KWh threshold - meant that businesses and heavy users paid a higher rate and effectively shouldered the bulk of covering BPL’s unpaid fuel arrears.

“As a result, the average unit costs experienced by each rate class diverged from each other upon ‘glide path implementation. The consequence of this was that commercial customers subsidised residential customers,” URCA said.

“While BPL did increase the fuel charge rate in accordance with its glide path, it did not meet its objectives in recovering its current and accumulated fuel costs. At no point during the study period did BPL’s billed fuel adjustment charges reflect the actual cost of fuel. At the end of the glide path period, March 2024, the cumulative remaining under-recovered fuel balance was reported by the independent consultant to be approximately $37.6m.”

Tribune Business sources yesterday suggested this outcome was not surprising, and described the ‘glide path’ as a flawed strategy. The unravelling of BPL’s hedge meant it was forced to buy fuel at spot or current market rates, and these would have been impossible to predict. As a result, the exact tariffs needed to cover both BPL’s existing fuel costs as well as the arrears could not have been calculated, leading to only around $80m of the latter being paid off over the 18 months.

“URCA conducted town hall meetings in Exuma, Long Island, Abaco and other islands to, among other things, discuss the impact of the glide path charges on customers,” the regulator added.

“It found the increased electricity usage in the summer months, coupled with the peak in fuel charges, led to widespread consumer complaints of high electricity bills. Due to the timing of the charge, the burden placed on customers was magnified and became onerous.

“In summary, URCA’s ex-post review found that while BPL’s glide path responded to real fuel cost pressures, the approach did not consistently align billed fuel charges with actual fuel costs and created distributional impacts across customer classes. The review also underscored that reliability constraints and operational realities can drive higher fuel use during peak periods, reinforcing the need for a clearer, more predictable framework for fuel cost recovery.”

However, the URCA summary appears to have avoided the trickiest and most politically-sensitive questions surrounding the BPL fuel hedge controversy, which created multiple House of Assembly rows during the Davis administration’s first term in office. Its report is likely to revive and reignite this debate, plus the multiple questions that remain unanswered.

Tribune Business previously reported that the BPL ‘glide path’ initiative violated the then-Electricity Act and accompanying regulations in at least two instances. In the run-up to the ‘glide path’s’ implementation, the state-owned energy monopoly seemingly breached regulations introduced in 2020 that mandated it pass 100 percent of incurred fuel costs on to consumers via fuel charge portion of their bill.

For the period from November 2021 to October 2022, BPL seemingly failed to do this by keeping its fuel tariff at a constant 10.5 cents per kilowatt hour (KWh) even though its fuel hedge was unwinding because the first Davis administration had elected not to carry out the trades required to source more low-cost oil/fuel to support this price. As the hedge unwound, BPL’s rising fuel costs were not passed to customers.

And, in the second instance, several sources suggested there was no legal or lawful basis for BPL to segment clients into two groups based on whether they consumed less or more than 800 KWh per month and charge them different fuel tariffs based on this. They explained that the then-Electricity Act and regulations only allowed BPL to charge the same rate for all customers on the fuel charge portion of the bill.

URCA’s eight-page summary does not address any of the legality issues surrounding BPL’s ‘glide path’ strategy. And nor did it address the events, and decisions, that led to BPL’s near-$120m arrears with Shell and the exploding cost of electricity that was imposed on Bahamians over an 18-month period - and which wiped out less 75 percent of the unpaid bill.

URCA’s report shows that BPL started to fall into arrears with its fuel bill in February/March 2022 - contradicting assertions by Mrs Coleby-Davis and the Davis administration that these began to accumulate under its Minnis predecessor. The arrears steadily increased, hitting more than $60m by July 2022 and then reaching close to $120m between November 2022 and February 2023, before dropping to just under $40m for the last four ‘glide path’ months to March 2024.

BPL’s arrears spiked after the Davis administration elected not to execute the trades that would have secured extra cut-price oil volumes in late 2021, shortly after it took office. When they hedge, utilities such as BPL typically do not lock-in a price that secures 100 percent of their needs. 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.

These trades that the Davis administration elected not to execute would have filled in the missing percentages of BPL’s fuel needs. However, it argued that it had to prioritise repayment of a $246m BPL loan that was falling due in early 2022, with no funds allocated for this purpose, and thus there was nothing available to finance further hedged fuel purchases.

Backing the Minnis administration’s initial hedge, URCA’s report also appeared to endorse its successor’s decision not to execute the additional trades. “The fuel hedge that began in 2020 saved BPL customers a significant amount during the 2022 price spike,” it found.

“But there were legitimate reasons not to layer in additional hedge positions in 2021 and early 2022 due to automotive diesel oil’s (ADO) separation from Brent crude oil (an accepted price benchmark), which was the hedged commodity, and concerns about buying into a rising market. Over the course of the study period, the hedge produced a net benefit to BPL customers.”

The URCA report, though, did not address how the impact from the Davis administration’s decision not to execute the trades was magnified and worsened. BPL’s Board and management, in around February/March 2022, issued a statement disclosing that the fuel charge would rise from its existing 10.5 cents per kilowatt hour (KWh) in a bid to get ahead of the hedge’s unravelling and cover the true cost of fuel.

However, this move was immediately blocked and voided by the Government, which ordered BPL to keep the fuel charge at 10.5 cents per KWh for a further seven to eight months until October 2022. This meant BPL was not covering its full fuel cost, sparking the $120m arrears build-up, ‘glide path’ strategy and imposition of soaring energy costs on Bahamian businesses and households.