Stagnant Rates Leave WAPA at Risk of Running Out of Fuel, Officials Say

Nov. 13, 2007 — After operating on the same levelized energy-adjustment clause (LEAC) rate for almost the past year, the V.I. Water and Power Authority will soon find it hard to purchase the fuel needed to keep the utility up and running, officials said during an emergency board meeting Tuesday.
In hopes of solving the problem, WAPA's governing board authorized its officials to petition the Public Services Commission for a LEAC increase on both the water and electric sides. If approved, it would be effective at the beginning of December. The proposed electric rate would jump from $0.192759 per kilowatt hour to $0.278505 per kilowatt hour.
After the meeting, WAPA officials said they have been getting around recent spikes in fuel prices by cutting back on their purchases and dipping into their contingency stock, which is set aside for emergency use during hurricane season.
"We usually keep about 14 days worth of fuel in our inventory supply at all times," explained Nellon Bowry, WAPA's interim executive director. "Lately, we've cut that down to seven days' worth, and have reduced our shipments from Hovensa. That's going to allow us to save about $3 million. In terms of using our contingency fuel, we usually don't start using that until December, after hurricane season. This year, we're going to have to tap into it a little early."
Come January, the utility may not have enough money to make any fuel purchases, he added, stressing the importance of the PSC's approval of the new LEAC petition. WAPA paid $65 per barrel of fuel last January, according to a recent news release from the authority. That cost will hit about $82 per barrel this month, with a forecasted price of nearly $89 per barrel over the next two months. Prices are expected to top off at about $95 per barrel during the first six months of 2008.
If the proposed electric rate is approved, customers' monthly bills will increase from the current $139.01 to $188.88 — a nearly 31 percent jump for households using an average of 500 kilowatt hours. Commercial customers using an average of 1,200 kilowatt hours will see a 28.1 percent increase in their bills, while large power users will see a 33-percent increase.
On the water side, the LEAC rate would increase 5.3 percent, from $7.58 per every thousand gallons to $8.82, bringing customers bills up from $56.75 to $59.73.
Board members unanimously approved the proposal, which they said would be one effective solution to WAPA's continuing cash-flow problems. Some, such as board member Noel Loftus, pointed out that the utility will continue to be short on operating funds over the next three months, and are anticipating a $3.9 shortfall this month, a $4.2 million shortfall next month and a $12 million shortfall in January.
WAPA's last LEAC proposal was shot down by PSC members during a meeting in August, a move utility officials had said would cost them an additional $8.9 million in deferred fuel costs. In denying the request, the PSC also went against recommendations put forth by its own advisors, Georgetown Consulting Group, whose representatives suggested that LEAC rates on the electric side climb by about 2.1 cents per kilowatt hour. (See "PSC Nixes New LEAC Hike, OKs Summer Cut in Ferry Service.")
Hoping to counteract the effect of the proposed LEAC rates, board members also authorized the utility to petition the PSC to continue, for three years, a fuel-hedging program launched earlier this year. Over the three years, WAPA would hedge 75 percent of its annual fuel supply, or about 1.8 million barrels of oil.
WAPA executed its first hedge earlier this year after receiving authorization from the PSC to set up a pilot program, hedging not more than 360,000 barrels of oil over a six-month period. Ultimately, 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 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.
Present during Tuesday's meeting were board members Brenda Benjamin, Alphonso Franklin, Loftus, Robert Mathes, St. Claire N. Williams and Juanita Young.
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