Oct. 15, 2005 — At times it is suggested that HOVENSA L.L.C.'s price of the fuel oils that it supplies to WAPA is the root cause of the comparatively high, and increasing, electric power rates paid by Virgin Islands residents. In fact, by virtue of a provision in a 20-year contract executed by the Government of the Virgin Islands, HOVENSA and its owners in 1998, WAPA receives "below market prices" on fuel oils it purchases from HOVENSA. As a result, HOVENSA has supplied fuel oils to WAPA for several years at a price equal to the company's average landed cost per barrel of low sulfur crude oil used in the processing units in the month of sale, without adding the cost of refining the crude into fuel oils.
During last calendar year, the Authority saved $27 million, based on the price that the Authority paid for fuel oil supplied by HOVENSA compared to the price for which bulk sales of the same grades of fuel oils were being made in the New York Harbor, one of the largest markets in the world for petroleum products. These savings are equal to 30 percent of WAPA's total fuel cost in 2004. No other utility in the U.S. is able to purchase its fuel oil at a price as low as the price paid to HOVENSA by WAPA.
Despite the comparatively low prices that WAPA pays HOVENSA for fuel oil, WAPA has high electric rates due in part to the fact that fuel oil is one of the most expensive sources of energy used to produce electric power. According to statistics of the Energy Information Administration of the U.S. Department of Energy (the EIA), only 3 percent of electric power in the nation is produced using fuel oil as the source of energy. Utilities began switching from fuel oil to coal after petroleum prices rose sharply due to the OPEC oil embargo in 1973. Further price increases in 1979 and 1980 after the Iranian revolution prompted more utilities to switch from fuel oil to coal. As a result, today approximately 51 percent of all electric power in the U.S. is produced using coal as the source of energy.
In 2004, the average cost of coal was $1.36 per million British Thermal Units (BTU) compared to $5.20 per million BTU for fuel oil. In other words, the cost of the quantity of fuel oil required to produce a million BTU is almost four times higher than the cost of the quantity of coal required to produce the same amount of energy. (Source: The EIA.)
WAPA's largest single operating expense is the cost of its fuel oil. In 2004, WAPA paid HOVENSA approximately $90 million for fuel oils, excluding the cost of delivery. If WAPA had instead purchased coal to produce the same amount of energy to produce power and water, WAPA would have paid approximately $24 million – $66 million less! Another alternative to fuel oil is petroleum coke, which is similar in appearance and physical properties to coal and has a cost that is commercially competitive with coal. The average cost of petroleum coke in 2004 was $0.80 per million BTU. HOVENSA produces petroleum coke.
It is time for WAPA to analyze the economics of converting to coal or petroleum coke as the primary energy source for its water and power production. The switch to either of these alternative fossil fuels would require a significant investment in new equipment by WAPA, but it also would result in a substantial reduction in WAPA's annual cost of fuel.
Editor's notes: Alex A. Moorhead is the vice president of Government Affairs and Community Relations and the secretary for HOVENSA L.L.C.
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