Feb. 23, 2007 — The V.I. Water and Power Authority says the first fuel-hedging transaction, which will most likely happen next week, will not immediately reduce residents' electric bills.
Speaking during a governing-board meeting Friday, WAPA Chief Financial Officer Nellon Bowry explained that the authority would have to make more than one transaction before customers begin to realize any cost savings.
However, the launching of the fuel-hedging program, which has been in the works for at least the past year, is a significant step for the authority. Ultimately, it could prove an effective means of stabilizing high fuel rates, reducing WAPA's deferred fuel costs and improving the utility's cash flow.
According to WAPA officials, in the long run the program seeks to reduce the "volatility" of the price of oil, which is subject to fluctuations in the fuel market. The program allows WAPA to set an anticipated cap and floor price for fuel — meaning that the utility will not have to pay more than a particular per-barrel price if rates increase.
If the price of oil dips below the set floor price, however, WAPA would have to cover the difference and pay penalties to its providers — financial institutions such as Morgan Stanley and Citigroup.
In November, WAPA got the go-ahead from the Public Services Commission to run the program on a six-month trial basis, hedging not more 360,000 barrels of oil. (See "PSC Authorizes Fuel-Hedging Program for WAPA.")
WAPA will conduct a smaller transaction, hedging 90,000 barrels of oil over a three-month period from June to April, Bowry said. For the trial basis, WAPA's Hedging Committee has authorized two cap-and-floor scenarios: one sets a cap of $71 and a floor of $50, while the other sets a cap of $66 and a floor of $50.
Fuel prices will "most likely" remain within the $50- $71 range over the designated three-month period, said WAPA Chief Operating Officer Glenn Rothgeb after Friday's meeting.
"It's about $60 per barrel today," he said. "So if the price stays within the set range, there will be zero impact on our fuel prices." However, Rothgeb added, if the market improves and fuel prices increase, the authority will eventually begin to save money.
In order to keep the program up and running, the WAPA board unanimously voted to extend for one year a contract with Risked Revenue Energy Associates, the authority's hedging consultant. The PSC will reevaluate the program within six months of the first transaction.
In talking about some of the utility's other planned cost-saving initiatives, Bowry said that WAPA will soon have the financing in place to purchase and install a waste-heat-recovery boiler on St. Croix.
Over the past few months, WAPA Executive Director Alberto Bruno-Vega has said that the integration of another boiler on the big island would save customers $13-$15 million annually.
The authority is "proceeding on schedule" with the financing process, which should be finished by April, Bowry said. The authority plans to issue $52 million worth of "new" bonds, in addition to refinancing a portion of a 1998 series bond issue, he explained, in order to complete the installation process, pay for a series of capital-improvement projects and pay down an existing line of credit.
The boiler is expected to be operational by June 2008, Bowry said.
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