Oct. 29, 2007 — At its monthly meeting Monday on St. Croix the V.I. Water and Power Authority decided to pursue a full-scale hedging program to reduce the risk of extremely high oil prices.
After last year's high oil prices, WAPA entered into a trial oil-price hedging plan. Under the plan, a hedge fund agrees to pay the difference if oil prices rise above an agreed high-collar point. But if oil prices drop below the low-collar point, WAPA would pay the hedge fund the amount it saves. A low-price benchmark and a high-price benchmark form a "collar" around the price of oil. WAPA sets the high benchmark and the hedge fund chooses the lower collar. There is no charge, and the hedge fund is betting prices will go below the lower collar, making the fund money.
That trial plan was limited in size to 360,000 barrels of oil. WAPA buys and burns about two million barrels of oil a year. With oil prices above $90 per barrel, and WAPA relying entirely on oil to generate electricity, insulating WAPA and ratepayers from further price increases is a high priority.
Nellon Bowry, WAPA's acting executive director, asked for and received the authority to go to the Public Services Commission (PSC) and request the full-fledged hedging program.
"We have been through the pilot phase and have in fact hedged the entire 360,000 barrels," Bowry said. "We have accomplished what we set out to accomplish — that is, determining how the process works. In fact we have had three or four separate hedging transactions. Now, hedging 360,000 out of 2.4 million barrels doesn't buy us that much security. Prices are jumping up almost daily, so it is more important now than ever to hedge."
While the hedge collar is costless, WAPA needs resources on hand to finance costs on a short-term basis, said Wayne Penello, a risk-assessment consultant hired by WAPA.
"It's not a balance-sheet expense but a cash-flow issue," he said.
If oil prices fall below the lower collar, he explained, WAPA has to pay the hedge fund right away. WAPA will eventually get the money back by passing the fuel cost on to ratepayers through the levelized energy-adjustment clause (LEAC). But there is a lag between spending the money and getting it back. WAPA needs about $9 million in available cash to finance a full-scale hedging program, Penello said. Banco Popular and FirstBankVI are "indicating a willingness to provide such a facility" by means of a letter of credit WAPA could draw on, Bowry added.
Since the PSC turned down WAPA's request to increase the LEAC in June and again in August, WAPA has spent about $5 million a month more than they are taking in. Raising the LEAC and entering into a full-scale hedging program are vital, Penello said.
The WAPA board voted to direct Bowry to petition the PSC to allow the hedging program and increase the LEAC. It also authorized Bowry to negotiate a $9 million letter of credit with a banking institution to ensure WAPA can meet its payment obligations under the hedging program.
The board also authorized several projects and expenditures at Monday's meeting. These included $1 million to install new water lines in the Williams Delight Villas on St. Croix. The funding for this comes from a legislative appropriation.
Also approved were: $228,000 for a backup power generator for the St. Thomas WAPA administration building; $390,000 to purchase 12 SUVs for meter reading and four Ford F-series trucks; $250,000 to the PSC to pay the regulator's special assessment on the utility; $225,000 for new computer hardware and software; and $650,000 for project-management assistance to help oversee the $34 million waste-heat recovery generator being built right now on St. Croix. When complete, that generator will save ratepayers tens of millions of dollars a year.
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