The Fair Trading Commission (FTC) released a statement on Thursday, December 29, saying it had denied the Barbados Light & Power Company Limited’s (BL&P) application to apply financial hedging to the Fuel Clause Adjustment (FCA).
This column, as you may have noticed, is not a big a fan of the FTC, as it often makes rulings which err on the side of ultra-conservatism and are not pro-consumer.
I refer to its recent rulings on renewable energy, which have effectively put a lid on the expansion of a fast-growing energy sub-sector, and instead gave all the advantage to the said BL&P.
So it was good to end the year with at least one pro-consumer ruling from the FTC.
Let me just paraphrase a bit more of the ruling on the BL&P’s attempt to hedge its financial bets on oil, before I make a few more comments.
The Commission said it had found that while implementing a hedging strategy could reduce the volatility of fuel prices – that is, the variation, both up and down, in the trading price of oil – that potential reduction was often accompanied by a high risk of hedge losses.
The Commission also cited what it said was the BL&P’s “lack of vital evidence to support its application, such as a detailed hedging strategy and proof that the average Barbadian consumer would be willing to bear the costs associated with a reduction in volatility”.
The Commission added that it was “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 Commission also noted that “a robust, preventative maintenance programme, which accounts for planned, scheduled and forced outages, could control the cost consumers pay for electricity”. However, it said, the BL&P had not addressed this option as a complement to a fuel hedging programme.
Looking at other hedging programmes, the commission noted that American Airlines ceased hedging in 2014 and was able to enjoy cheaper fuel costs than its competitors, while Southwest Airlines had in the past seen positive results from its hedging programme, enjoying a US$1.3 billion hedge gain in 2008. Over the next few years, however, said the commission, the company routinely lost money on its hedges, and expected to lose US$2 billion this year.
The Commission said allowing BL&P to adopt hedging could result in higher overall costs of electricity, because it would expose the BL&P to potentially incurring losses which “ultimately would be passed on to the customer in the form of higher bills” as the FCA was a “pass through” charge. Any such losses would be in addition to the upfront administrative costs which would also be borne by the consumer.
Okay, I could bore you with more but I think you have the general idea. This is how it got through my mental filter: The BL&P wants to buy an insurance policy against rising oil prices from one of its sister companies (another member of the Emera group). This would lock in oil prices at certain amounts so that if the prices went up, BL&P would be able to buy at the contracted price. Its sister company would then take any losses incurred in buying that oil at a higher price and selling it to BL&P under the contract at the lower agreed price.
But, and this is a notable one, the FCA would go up a bit because we the consumer would have to pay a bit more for oil to lock in that price. Hence, higher electric bills.
But it does not seem to work the other way, and this is what may have tipped the scales against the application: If the price of oil were to fall again and remain there for a good while, we the consumers would not, repeat, not, get the benefit of that lower price. Neither would the BL&P, as it would be contracted to pay that same agreed price to its sister company. But there’s more: When the sums are done, it would be noted how much the BL&P could have saved and therefore the hedge bet’s cost would eventually be passed on to the consumer.
No downside and upside, just two downsides.
So here’s to the Fair Trading Commission. Let’s hope it now does something to breathe new life into renewable energy.
Happy new year!
