Thursday, December 5, 2019

Barbados: Consumers will not pay for fuel hedging

Barbados Today:-The island’s sole power company has failed in its attempt to have consumers pay for its fuel hedging, an arrangement that would allow the company to establish a fixed cost for 80 per cent to 90 per cent of its heavy fuel oil (HFO) consumption volumes for an undisclosed period.

The Fair Trading Commission (FTC) Thursday announced it had denied an application from Barbados Light & Power Company Limited (BL&P) to apply the results and costs of fuel hedging to the Fuel Clause Adjustment (FCA), the mechanism designed to recover the cost of fuel used in the generation of electricity.

“Due to the risks associated with fuel hedging, the BL&P should not be allowed to pass the cost of hedging and associated gains or losses onto the consumers of Barbados,” stated a release from the FTC announcing it had denied the application.

In addition, it said, BL&P had not provided enough evidence to suggest that the Barbadian public was willing to pay for the reduced volatility in fuel prices.

The power company had applied to the commission on March 29, 2016 for permission to apply the administrative losses or gains and costs of a fuel hedging programme to the calculation of the Fuel Clause Adjustment.

The annual administrative cost was estimated at $600,000, with BL&P’s parent company Emera Energy Services identified as the hedge administrator.

Following consideration of BL&P’s case and submissions from five intervenors, the Commission, headed by Chairman Jefferson Cumberbatch and including Commissioners Monique Taitt, Dawood Pandor and Philmore Alleyne, determined it could be too costly for consumers.

“While hedging has proved to be beneficial in reducing volatility, it also comes with significant risks. Additionally, despite this ability to reduce volatility, the existence of a hedge programme could result in higher overall costs of electricity. This exposes the BL&P to the possibility of incurring accumulated losses, which would ultimately be passed on to the customer in the form of higher bills,” the FTC said in its 31-page decision published on its website.

Concern raised by intervenors CARITEL, Tony Gibbs and Andrew Hart included hedging risk and strategy, related administrative costs, the efficiency of the BL&P’s plant and a lack of transparency in the BL&P’s proposal to utilize Emera Energy Services as the hedge administrator.

The other intervenors were the Division of Energy and Telecommunications, whose submission related to the geopolitical perspective of the oil market, and CIBC FirstCaribbean, which collaborated with BL&P on the development of the application and supported the fuel hedging programme, according to the FTC.

On the issue of transparency, the FTC said while BL&P had provided some evidence to support its choice of Emera Energy Services as the hedge administrator, it “did not provide a clear governance structure that enabled the Commission to determine that there would be sufficient transparency and accountability” in the hedge programme operation, nor did it submit a hedging policy that would allow the FTC to assess its prudence in managing the programme.    

The FTC also determined that BL&P did not provide sufficient evidence to show how applying the results and costs of fuel hedging to the FCA would reduce any negative impact on the consumer.

It recommended “a robust, preventative maintenance programme” to improve efficiency and control the cost consumers pay for electricity

“The Commission has found that the BL&P has not addressed this option as a complement to a fuel hedging programme,” the consumer protection, fair competition and utility regulatory body said.

“The Commission is conscious of the risks associated with fuel hedging and does not agree that the BL&P should be allowed to pass the cost of hedging and associated gains or losses onto the consumers of Barbados.

“The BL&P’s application to apply the results and costs of fuel hedging to the FCA is hereby denied,” it concluded.

This was the second attempt by BL&P to hedge its oil purchase. The first application in 2014 was rejected due to a lack of supporting information.

The electricity company uses approximately 250,000 tons of fuel each year at an estimated cost of $205 million, with the projected fuel prices to the end of 2016 estimated at $200 million. Seventy-five percent of the total cost of fuel is attributed to HFO, with the remainder distributed between aviation jet fuel and diesel.


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