With Bahamian consumers locked into paying a fuel surcharge of 10.5 cents for the next 18 months after Bahamas Power and Light (BPL) successfully completed its first hedging transaction, its Chief Executive Officer Whitney Heastie yesterday defended its timing.
With global crude oil prices dipping to historic lows earlier this year, at the onset of the COVID-19 pandemic, many have questioned why BPL waited until now to execute hedging.
But while BPL’s plan was always to begin hedging this past spring, Heastie said things were just too uncertain in March when the COVID-19 pandemic hit The Bahamas.
“Someone can easily come back and ask the question, well why did you not hedge in March? That’s a very good question. There are a lot of factors to that. The board of directors did approve a hedge policy and a hedge strategy prior to COVID-19. What happened with COVID-19 is that the world got turned upside down and to hedge, there are a couple things you must know. You need to know the volume of fuel that you want to go out and hedge. Is it a barrel, is it ten thousand, is it a hundred thousand barrels? And you need to know what the sales are that you’re going to receive in terms of kilowatt hour sales, because the fuel charge is based on the cost of that fuel divided by the amount of kilowatt hour sales that you make,” Heastie said yesterday during a press conference at BPL’s Baillou Hill Road headquarters.
“No one knew when COVID-19 came around what the volume of fuel that was going to be needed for the foreseeable future in March, no one knew what the sales were going to be for the foreseeable future because of COVID-19. The country got shut down just as every other country around the world. So, to go out and hedge in March would be just very, very dangerous for a company. So, we took March, we took April, we took May to really understand what our fuel consumption would be, what our sales forecasts would be and then make some intelligent projections going forward that we can intelligently hedge.
“Knowing that as we’re hedging today, 200,000 barrels a month for the next 18 months to make 3.6 million barrels over the next 18 months, that there’s a degree of certainty that not only we will consume those barrels of oil but we will have the sales to offset the cost of that fuel. And so, whereas hedging is a great idea, why we haven’t done it prior to this board, I don’t know that there was a strategic plan as this board has put in. Why we haven’t done it before July 9, well COVID-19 really put us in a world of uncertainty and we needed to have some level of certainty to make sure that what we were doing was in the best interest of this utility and the consumer base at large.”
The Inter-American Development Bank (IDB) facilitated the hedging transaction on July 9, successfully closing the transaction, which would set the fuel charge for BPL customers at about 10.5 cents per kilowatt hour (c/kWh) from July 2020 through January 2022.
The fuel surcharge is subject to review after 12 months.
Bahamians will begin to see the changes in their August BPL bills.
Heastie emphasized that the hedging does not necessarily translate to the lowest fuel surcharge, but, instead, provides “stability and predictability” for consumers.
“The facility of hedging allows us not only predictability in pricing but stability in pricing. What it does not do – and I think customers need to understand this – is to guarantee the absolute lowest cost or lowest price. We want folks to understand predictability and stability. So, in lowering the price, we can lock in a price,” he said.
“Some would say, why did you lock in at $40 [per barrel]? Well, can you tell me when it’s going to be $30? No, I can’t. Can you tell me when it’s going to go to $50? No, I can’t. So, lock in where we are, so that we’ll know what we’re having and we can say it’s stable.”
BPL has stressed that the hedging exercise would translate to 30 percent savings to customers.
Fuel cost volatility, over the past five years, has seen rates for Bahamian consumers as high as 27 c/kwh and as low as 9 c/kwh.
Heastie said this hedge action will bring stability and predictability to fuel costs in a manner never seen before in The Bahamas.