By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas Power & Light (BPL) yesterday rejected accusations that the Davis administration had cancelled its fuel hedging initiative even though it was not producing the desired financial savings.

The state-owned energy supplier, in a statement breaking its and the Government’s five-day silence on the controversy, asserted that the hedging structure the new government met in place was “not producing the results expected” because BPL’s generation woes meant “the optimal fuel mix” was not being used.

The statement, issued in the name of Pedro Rolle, BPL’s chairman, then sought to blame the former Board and Minnis administration by suggesting these issues were known before the September 2021 general election.

And it also attempted to blame the “diminished” hedging results for BPL being “near insolvency” when the Davis administration came to office. It is unclear, though, how any fuel hedging woes can be responsible for the utility’s perilous financial position when fuel costs are a 100 percent “pass through” and paid entirely by BPL’s business and residential customers.

Mr Rolle, in a statement that raised more questions than answers, said: “Contrary to statements made in the press by the Leader of the Opposition, the Government of The Bahamas has not cancelled the BPL fuel hedge arrangement which it has met in place.

“The current agreement remains in action but is not producing the results expected, as the effectiveness of the current hedge arrangement is directly related to the mix of fuel, which existed before the current administration took office.

“However, because of issues with power generation, the optimal fuel mix has not been adhered to and the effectiveness of the hedge arrangement has diminished.” No details, figures or other evidence was issued to back-up such assertions.

Mr Rolle’s statement then went on to argue that the projected savings from the fuel hedge over the next two years had been “greatly exaggerated” by the media. “It was clear from before the change in the political administration last that the savings the company expected would not follow,” it said, seeking to blame the Minnis administration.

“The net effect of this is when the Government assumed office in September 2021, BPL was near insolvency. Clearly this position had nothing to do with any decision of this administration, but it better reflects the stewardship of the previous government.

“Transitioning to a lower cost fuel for generation, and increasing renewable energy in the generation mix, would lead to a lower cost of energy in a climate-friendly manner. The Government is working actively on providing real solutions in these two areas.”

However, the solutions identified in the latter paragraph are long-term cures that will do little to save BPL customers from higher energy prices that have been further fuelled by Russia’s invasion of Ukraine. West Texas Intermediate and Brent crude, the two main oil indices, were trading at $126.3 and $131.3 per barrel, respectively, as this newspaper went to press last night.

And well-placed Tribune Business sources, speaking on condition of anonymity, described BPL’s statement as “technical mumbo jumbo” that was designed to deflect attention from what they described as the real issues surrounding the utility’s hedging initiative.

Rather than focus on whether the hedging initiative had been cancelled or not, they argued that the key question was whether BPL and the Government executed the necessary trades to secure the hedge in September and December 2021 as the structure had to be maintained on a quarterly basis.

Amid suggestions that this answer was negative, Tribune Business was informed that BPL, had it executed the necessary transactions in September, could have obtained oil at $50 per barrel and hedged market prices that were around $70-$75 per barrel.

This newspaper reported last week how BPL’s hedging strategy had to be reviewed on a quarterly basis, and signed-off by the Ministry of Finance, IDB and the Cabinet. Failing to renew and execute the hedge on time created a cascading effect, or chain reaction, that threatened to unravel the entire structure.

“BPL had these layered contracts,” one contact added. “Some of those started to expire, and because nothing happened in September and December, there was no way to backstop it. Once those contracts expire, there is nothing to backstop them with.”

As a result, the prospect of BPL customers enjoying 10.5 cents per kilowatt hour (kWh) fuel charges on their electricity bills through to June 2022 is now looking somewhat bleak. BPL’s aborted release last week had sought to raise the fuel charge by 30 percent or 3.5 cents per kWh to 13.5 cents.

One source questioned why the concerns surrounding the hedge’s failure to “produce the expected savings” were only being raised now, and were not included in the aborted BPL statement of Monday last.

“I was told that the new Board were definitely on board, and signed off on the hedge,” they added. “But they didn’t make the deal in September and December; they did not strike the hedged price when they were advised to. They delayed taking action. That’s the part they have got to sit down and answer.”

Ministry of Finance concerns were again said to have played a key role in missing the September and December deadlines. It is understood that the ministry wanted to segment the hedge such that businesses paid more, and residential customers less, viewing the current structure as a subsidy to the wealthy even though all benefit from lower fuel charges. As as a consumption-based charge it is also impossible to discriminate between consumer classes.

Further questions surround whether a draft Cabinet paper on the BPL fuel hedge, said to have been crafted in late September or early October, ever made its way before the Government’s highest decision-making body.

“The fuel cost is a pass through, and it doesn’t take you six months to realise the hedge is not working,” one source said of yesterday’s BPL statement. “The new Board has been in for some time. Why it is only sounding the alarm now? It’s very odd they are now just coming out and saying this when they should have had sight of it from a while back.”

As for the “optimal fuel mix”, BPL’s hedging strategy set a target price that was based on the costs and quantities of the various fuels it expected to use. If it ran its more efficient engines for longer than anticipated, and burnt lower volumes of cheaper fuel, then the utility enjoyed savings that “accumulated” as reserves in what was known as an “over and under account”.

The failure to execute the September and December hedges, one source suggested, had forced BPL to buy more of its fuel on the ‘spot’ market at higher prices than if it had hedged. As a result, it had been forced to use the reserves in its “over and under account” to cover the difference, and these monies were likely depleted.

It was this situation, they added, that was likely to have forced BPL into its sudden announcement of a 30 percent hike in the fuel charge on electricity bills from March 1. That, though, was blocked by Mr Sears and his Cabinet colleagues, fearful about the impact increased energy costs will have on businesses and households still struggling to recover from COVID-19.

Mr Rolle could not be reached for comment last night, and both himself and Alfred Sears, minister of works and utilities, who has Cabinet responsibility for BPL, have not responded to TTribune Business phone calls and messages seeking comment over the past few days.