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WAPA Board Approves Fuel Hedge Plan

July 28, 2006 – The V.I. Water and Power Authority Board voted Thursday to approve a fuel hedging program in hopes of stabilizing fuel costs that affect the price of electricity and water for consumers.
The program would establish a hedge instrument known as a "costless collar," which sets an anticipated cap price and floor price for fuel. When the cost of fuel exceeds the high price, the fuel hedging program would kick in and WAPA would not have to pay anything above the cap price.
However, when the price of fuel falls below the floor price, the authority would not benefit from the reduced price.
The cap and floor would be determined by consultants who would make regular evaluations of fuel prices as well as predictions of future fuel prices. The cap and floor could be adjusted as often as every three months depending on current fuel costs.
WAPA has been considering this program for more than a year and has contracted consultants to guide them through the process. One of these consultants, Wayne Penello of Energy Associates told board members that WAPA uses 2 million barrels a year from Hovensa at a discounted price that is adjusted each month to reflect the price of fuel. Depending on the current fuel price, WAPA could pay as much as $225 million or as low as $105 million a year for fuel.
Penello said the authority would benefit by stabilizing cash flows and improving its budget effectiveness. The hedging program would be on a three year trial period, said Penello
"Without a hedging program all the fluctuation in oil prices would first have to be absorbed by WAPA and then by the customer," said WAPA Executive Director Alberto Bruno Vega.
Calling the hedging program "an insurance," Bruno Vega said hedging provides a "safety net" if the price of oil rises above the cap. He said considering the rising costs of oil he is in favor of the program even though there is a risk that if the price goes below the floor price WAPA would lose the profits it would normally receive.
"Fuel prices go up fast and come down slow," Bruno Vega said. "The hedge would reduce the volatility of the fuel cost."
Major banks are being considered as potential providers or "counter parties," and those being considered are BNP Paribas, Citigroup, Morgan Stanley and Shell Oil Company.
If the cost of fuel goes below the floor and payments have to be made to the counter parties, WAPA has five days in which to make the payment.
Voting to approve the program were Chairman Daryl Lynch, Cheryl Boynes Jackson, Yolander Deterville, Alphonso Franklin and Ira Hobson. The program has to be approved by the Public Services Commission before it can be instituted.

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