BL&P makes third bid to set up fuel hedging scheme

The Barbados Light & Power plant on Spring Garden, St Michael.

The Barbados Light & Power Company Ltd. (BL&P) is making another attempt to implement a fuel hedging scheme that could go either way for customers – they could either benefit or end up paying slightly more for electricity some months.

In a recent notice, the Fair Trading Commission (FTC) said it was seeking input from the public on the BL&P’s application. The deadline for comments is 4 p.m. on Friday, December 4.

The BL&P is seeking approval for implementation of a fuel hedging programme and to apply the results and costs of hedging to the calculation of the Fuel Clause Adjustment (FCA).

Fuel hedging is a mechanism used by companies
to manage risks and reduce exposure to volatility and increases in fuel prices. The FCA is a mechanism designed to recover the cost of fuel oil used in the generation of electricity. It adjusts the price that customers pay for each kilowatt hour (kWh) of electricity, as the cost of the fuel used to generate electricity rises and falls. The FCA therefore reflects changes in the price of fuel on the international market.

The FCA for the month of November is 22.5850 cents per kWh, as it has been since July this year. In June it was 19.6391 cents/kWh.

The utility company is proposing that the fuel hedging will protect customers from variations in their electricity bills due to volatility in oil prices. It said the benefits or costs of hedging would be passed on to the consumer, and it would not enter a hedge programme otherwise.

The FTC noted that with the Barbados National Oil Company Limited (BNOCL) being the sole company authorised to import fuel, without its cooperation the BL&P would be unable to undertake any physical fuel hedging.

“The utility has indicated that while it pursues the opportunity to enter into a physical hedge, it intends to implement a financial hedge programme, with the goal of achieving fuel price certainty for up to 90 per cent of its heavy fuel oil volumes.

“Using this methodology, any gains or losses that result from the fuel hedge contracts will be included in the calculation of the monthly FCA. The aim of this fuel hedge programme is to take advantage of the current favourable fuel price environment and to reduce the fluctuations in the fuel component of customers’ bills,” the FTC said in its consultation paper.

Currently, the price of Brent Crude Oil is averaging just over US$40 per barrel, down from the average US$67 per barrel at the beginning of the year.

Should the BL&P be granted permission for a hedging programme, the administrative costs associated with its implementation is estimated to be about $720 000 for the year.

The costs of hedging relate to the cost of buying the hedge instruments and the costs related to investment management, which will have several functions.

It is expected that this cost alone will result in a change in the FCA rates, “even if minimally”, according to the FTC.

While there is also the possibility of a hedging programme preventing consumers from benefiting from falling oil prices, the FTC noted that the FCA has been relatively low and, based on outlook, fuel prices were expected to remain down into next year.

In a situation where the hedge price is lower than the market price for fuel, the consumer would expect to pay less. However, if the market price happens to go lower than the hedging price, then the consumer would likely pay more, which would be calculated in the FCA.

The BL&P uses approximately 250 000 tons of fuel each year, and last year the cost of fossil fuel purchased was $266 million.

In February 2015 and March 2016, the BL&P had submitted applications to the Commission, seeking permission to pass
on the results and costs of its proposed fuel hedging programme to consumers.

Those were rejected. In the first instance, it was due to a lack of information, and in the second instance it was due to insufficient evidence to substantiate the BL&P’s assertion that the Barbadian public was willing to pay for the reduced volatility in fuel prices.

As a result, the FTC had disagreed that the associated costs and results should be passed on to consumers.

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