ATTORNEY GENERAL AND MINISTER OF LEGAL AFFAIRS
OF THE COMMONWEALTH OF THE BAHAMAS
SENATOR THE HON. Z. C. ALLYSON MAYNARD-GIBSON, QC
Bahamian Energy: Affordable, Accessible, Reliable, Sustainable.
December 9, 2015
THE ELECTRICITY BILL, 2015
THE ELECTRICITY RATE REDUCTION BOND BILL, 2015
UTILITIES REGULATION & COMPETITION AUTHORITY BILL, 2015 BILL
Madam President,
In May 2015, from this very Chamber, I introduced our Government’s budget plan to build a Stronger Bahamas, for a safe, prosperous and modern future.
On that day, Madam President, with a sobre, non-partisan approach, we outlined a framework to ensure that each and every citizen of our beloved archipelago would benefit from policies that improve their security, enhance their economic opportunities, and modernize the nation we’ve all worked to bring fully into the 21st century.
Since then, Madam President, we have been hard at work –delivering on the reforms required to make this vision a reality.
Great strides have indeed been made.
From the implementation of our Swift Justice initiative, to the introduction of the VAT, to unprecedented public consultations under the auspices of both our Stronger Bahamas framework and our long-range National Development Plan, to the pursuit of historic health policy that will soon see us introduce a system that dramatically improves access to vital health services, nothing has deterred us from delivering on the promise of a safe, prosperous and modern future.
Today marks another major milestone in our ambitious national journey towards a Stronger Bahamas.
Madam President, I rejoice at the opportunity to rise now in support of our Government’s National Energy Policy. Our plan will make electricity more affordable, accessible, reliable and sustainable than ever before.
It is made possible today by the introduction of its key legislative underpinnings, the Electricity Bill 2015, the Rate Reduction Bond Bill and the URCA Amendment Bill, 2015.
In August of 2013, the Rt. Hon Prime Minister announced the vision of the Government for the energy sector.
The Government of The Bahamas, in fulfillment of its commitment in the Charter for Governance, began the process by which the Government would, in the Rt. Hon. Prime Minister’s words “realign BEC, and to create efficiencies which will allow for significant reductions in the cost of energy, increased energy security, environmental responsibility, reliability, and increased competitiveness as a country.”
He went on to state that the “cost of electricity throughout The Bahamas was simply too high, causing untold hardship to families, making the country un-competitive in many business areas, and stunting economic development. The cost of importing fuel is also a massive drain on our country’s resources.”
Today we are debating energy reform for the benefit of all within our borders. We believe that the passage of these Bills will be the right step towards making Bahamian Energy: Affordable, Accessible, Reliable, Sustainable.
The Electricity Bill 2015 seeks to facilitate reform of the electricity sector by providing a modernized electricity supply regime and one which is consistent with international best practices.
In that regard, one of the key features of the regime is the separation of electricity regulatory functions and operational functions, currently performed by The Bahamas Electricity Corporation (“BEC”).
Instead, through this regime the regulatory functions and oversight of this sector will be transferred to the Utilities Regulation and Competition Authority (“URCA”) while BEC’s operations of generating and transmitting electricity will be transferred to a wholly owned subsidiary of BEC, namely The Bahamas Power and Light Company Limited (“BPL”), a company incorporated in September of this year specifically for this purpose.
The Electricity Bill, therefore, introduces a new structure whereby BPL will operate as a financially strong and vibrant business, with a solid credit rating and reduce the strain on foreign currency reserves through significant fuel cost savings.
This will be in keeping with the Government’s overall national energy policy which includes, among other items
contemplates an energy sector that:
(a) provides affordable energy supplies to all consumers with the capacity to meet the long-term growth in the demand for energy;
(b) contributes to the international competitiveness of the productive sectors of the economy and fosters economic development resulting in job creation and expansion in the private sector; and
(c) is focused on the modernization and expansion of the energy infrastructure (e.g. generation, transmission and distribution systems) to ensure safety, affordability, reliability and competitive advantage
For too long, Bahamians have struggled with the cost, reliability, accessibility and sustainability of energy supply. It is as though we have forgotten the vital importance that light, power, heat, and cool air have on our sense of security, prosperity and productivity.
We must put ourselves in the shoes of our brothers and sisters:
How many times will a young woman walking home from her job or her classes look fearfully over her shoulder, or hurry her steps when the street lamps suddenly fail her?
What is the cost to the family who cannot afford their BEC bill, and must choose between the “essentials” on the one hand and the availability of electricity, cable or internet access on the other hand?
Can our sense of belonging to a modern world last much longer when a tropical storm can literally rob us of our power and energy?
We must ensure that energy in The Bahamas is, now and forever, affordable, accessible, reliable and environmentally sustainable.
This legislative package makes these objectives a reality.
AFFORDABILITY
Madam President, the Government spent time to assure that we got it right. Our world class independent expert advisors were asked to devise a framework and plan that would deliver unprecedented savings to Bahamian consumers.
Over time, the business plan that Power Secure will manage on behalf of BPL is designed to generate 59% savings to Bahamian electricity consumers – from the current level of 44 cents per kilowatt hour to 26 cents per kilowatt hour.
To put it another way, once this legislation is passed and a business plan fully implemented, Bahamian citizens and businesses can look forward to their electricity bills being cut by more than half!
The stimulative effect of such savings cannot be underestimated. For middle class families in The Bahamas, it means more disposable income to invest in their children’s educations, to start entrepreneurial projects, to spend on other priorities, or to save.
For companies, it means more revenue to re-invest in employees, innovation and competitiveness.
In the longer term, our plan – because it empowers URCA to allow other licensees into the market – will reinvigorate competition in Bahamian energy, further driving costs down.
Madam President, this legislative plan also allows us to plan and sustain a more responsible and affordable financial stewardship of the electricity utility by the Government of the Commonwealth of The Bahamas on behalf all its citizens.
There have been many questions about the rate reduction bond. I shall address some of them.
What is a rate reduction bond?
A rate reduction bond (RRB) is the securitization of a cash flow stream generated by a charge included in the tariff to utility consumers. The bond holders have a first non by passable charge on the first few cents of the tariff which are used to pay off the bond, usually over a long period of time up to 25 years.
The Government did not invent the concept of these bonds, nor did it come up with the name.
These bonds have been commonly used in the electrical utility sector, especially in the United States, including utility companies in New York, New Hampshire, Connecticut, and California, to name just a few. The bonds have been proven to be successful in energy sector reform, and a very efficient form of financing.
Why is it called a Rate Reduction Bond?
Simply put, without a refinancing of the existing liabilities of BEC, energy reform and the restructuring of BEC would not be possible. Without the restructuring of BEC, we will not be able to reduce rates to the customer. It will cost money to bring rates down as we need to invest in new equipment.
Why is GOB using a RRB?
Currently BEC has approximately $450 million in debts, pension fund liabilities and other liabilities, of which $246 million is guaranteed by the Government and this $246 million appears as a liability of the Government in our national debt figures.
BEC also needs significant new funding to invest in better maintenance practices and new equipment and technologies.
The current debt is very inefficient, and the “direct” and “indirect” cost of this inefficient debt already weighs heavily on BEC.
The existing “direct” financing cost is very expensive and the debt has a very short term in which it has to be repaid and/or refinanced at additional cost.
The “indirect” costs are numerous. These include, but are not limited to, the fact that:
- BEC cannot borrow more money in its current state. It therefore is unable to invest what it needs to maintain and invest, as well as introduce new technologies which would allow it to be more efficient;
- BEC cannot obtain a good credit rating. Because of this its debt is more expensive and it has little leverage to negotiate the best possible prices with suppliers;
- The inability to fully fund its pension liabilities has an indirect cost that compounds upon itself year on year, as the fund is not earning the returns it will need in the long term – therefore the amount required increases each year by an amount greater than the cost of debt.
The Rate Reduction Bond issuance is expected to provide:
- the ability to refinance BEC’s legacy debt without a Government guarantee (reducing the national debt by $246 million);
- the ability to lock in a long-term cost of funds at a favorable rate, thus reducing debt service charges ; and
- an increase in BPL’s borrowing power
Is a RRB a disguised electricity rate increase?
No it is not a disguised electricity rate increase. Today BEC already has approximately $450 million in liabilities that need to be repaid. These liabilities already have a very high cost to BEC, and these costs are already included directly and indirectly in BEC’s existing expenses and net losses.
So the cost of servicing the Rate Reduction Bond is a refinancing, at a lower annual cost, of liabilities and expenses that BEC already has, as well as some funds for investment in new equipment.
So, while there is a specific fee allowed for in the Rate Reduction Bond Bill, which is necessary to create the security that bondholders will require to invest in the bond, the RRB cost does not represent an increase in the cost of delivering service by BEC. In fact it is designed to do just the opposite – to free up cashflow for investment and place the new Bahamas Power & Light on a solid financial foundation for the future, thereby reducing BEC’s overall cost of service.
In a family or business context this is similar to a refinancing which puts the family or business in a stronger position; enables it to eventually be debt free; enables it to pay debts and to have money to expand business or do family things like home renovations or maintenance. Banks charge a fee for refinancing and there is a fee for the Bond.
ACCESSIBILITY
Madam President, adoption of the URCA Amendment Act, 2015 is crucial to our success. By empowering an arm’s length regulator to ensure that the activities of Bahamas Electricity Corporation, Bahamas Power and Light, and Power Secure align with our Government’s policy objectives, we have also ensured a breakthrough in the accessibility of energy throughout our Archipelago.
Wherever one may live or run a business the need for affordable, reliable accessible and sustainable electricity is the same.
For this reason, we also wish for the regulator, URCA, to act in a manner that ensures that all interested parties in The Bahamas have access not only to sound electricity services; but to policy and regulatory efforts to shape our energy future.
URCA’s functions as regulator in the electricity sector will mirror, in many respects URCA’s role in respect of the electronic communications sector will apply to this sector as well.
Namely, URCA will engage in consultative processes which will allow persons “with significant interest a reasonable opportunity to comment on proposed regulatory and other measures which in the opinion of URCA are of public significance” (See section 41 of the Electricity Bill). These would include inter alia, any change to the national energy policy, change in tariff rates and any changes to the regulations, technical rules and standard issued by URCA (See section 42 of the Electricity Bill).
Additionally, URCA’s approval will be needed for any change in control of the licensees. (See Part XII of the Bill).
Further, the decisions of URCA will be appealable to the Utilities Appeal Tribunal, as is the case now in the electronic communications sector. However, the public should be assured that they can challenge and appeal decisions of the licensees to the UAT as well.
Of particular note is that any person aggrieved by the refusal of a public electricity supplier to grant a permit for residential renewable energy generation connection and tie in to the grid, is appealable to the UAT. (See section 27 (12) of the Bill.) The foregoing is all in an effort to ensure that the sector, its licensing, its regulation and the fee rates are tariffs are open and transparent.
The Bill provides for payment of fees to URCA but this is consistent with its current regime under Part XVI of the Communications Act, relative to the Electronic Communications Sector. Note too that the fees are to be charged on an objective, non-discriminatory, transparent and proportionate basis and published by URCA.
The Bill also addresses certain fines, penalties and offences under Part XV thereof. In the event that the Bill does not provide for the penalty, a maximum fine of $20,000 applies.
RELIABILITY
Madam President, few initiatives have ever been so thorough and deliberate as the restructuring of our electricity utilities.
From the beginning, our most important principle has been to establish a framework in which the best qualified experts in power generation and energy supply will be charged with assuring the quality, predictability and reliability of our energy supply.
For this reason, we underwent an extensive period of consultation and development, starting in August 2013 and culminating with the introduction of this transformative legislation.
World class experts were consulted. Indeed, I have already acknowledged the role of KPMG, DNV Kema and Hogan & Lovells.
More impressively, Madam President, a number of the world’s leading electricity companies, including Inter Energy, BGUC, China Construction and Genting and Power Secure, were invited to bid on a contract that would see BEC and its new subsidiary Bahamas Power and Lighting, hand over management of our utility to the most seasoned, independent, private sector professionals.
We are extremely proud of and comforted by the partnership we entered with Power Secure in April 2015, when they emerged as the best qualified bidder for the job. With over 1,000 employees worldwide, almost $300 Million in global revenue and contracts of approximately half a billion dollars, they have the scale, resilience and expertise required to ensure our electricity utilities reach consumers 24/7, rain, storm or shine.
Indeed, one of the capabilities that set Power Secure aside is its expertise in storm restoration and – as we will discuss shortly – its vast experience with renewable energy sources such as solar technology.
If I may, I should also like to pay tribute to the creativity of our Government and the entrepreneurial spirit of Power Secure in establishing our partnership agreement.
As you know, it has been both a point of national urgency and sound economic management for our Government to act as a cautious, responsible steward of our public finances. We have turned the corner on years of unmanageable deficits by being hawkish in our oversight of public spending.
In that spirit, we cannot overstate the importance of the fee and incentive structure that Bahamas Power and Light has negotiated with Power Secure.
To those who ask what guarantee of quality, reliability and affordability can we actually expect, I say this: Power Secure has agreed to a management fee of $2M USD per year to operate our utilities on behalf of The Bahamas. This is a modest charge, and one that falls well within our financial capacity.
The rest of their fee is entirely contingent on their ability to meet the affordability, accessibility, reliability and sustainability standards required of our National Energy Policy.
In other words, we have entered a partnership of shared risk, in which the true rewards to our private sector partner are only available if they can demonstrate equally valuable rewards to our consumers.
We are confident that we will succeed, precisely because the contract with Power Secure is designed to encourage and assure success.
SUSTAINABILITY
Madam President, I would like to comment on the last, but not the least important of our policy objectives.
Last week, the Government of The Bahamas joined the global community of nations in Paris, for COP 21, the latest UN meeting on Climate Change.
Never before has there been a greater feeling of urgency by the international community to take decisive action against global warming, and for the protection of our environment.
The Bahamas must – and in fact has assured its global partners that it will – do its part to limit the rise in global warming.
Indeed, it is increasingly clear – as UN Secretary General Ban Ki Moon and US President Barack Obama have so eloquently put it in the past few weeks – that neither safety, nor prosperity, nor modernization can be sustained in this day and age at the expense of the environment.
Our planet, our oceans, our rivers, our beaches and our forests are our collective beating heart. When they are weakened or sick, so too are we. When they are endangered, we become less safe. When they are impoverished, we become less prosperous. When they erode, so too does our capacity for innovation and imagination.
The legislative package we introduce today anticipates this need through the bills’ Renewable Energy and Liberalization of Electricity Sector Independent Power Producers (IPPs) provisions.
Under these provisions, URCA is specifically mandated to promote and approve energy efficiency programmes by public electricity suppliers and consumers. Further, every public electricity supplier is required to submit to URCA a consumer protection plan which URCA must publish prior to approving and URCA must monitor and enforce the consumer protection conditions contained in the licences it grants.
In particular, section 25 of the Bill requires all public electricity suppliers to increase the proportion of renewable energy capacity in the generation mix over the specified period and paves the way for the introduction of Independent Power Producers into the electricity sector.
Under this section, all Licensees must formulate and submit for URCA’s approval a renewable electricity plan and report annually to URCA on the accomplishments of the plan.
At this time, I would like to publically express, on behalf of the Government, our gratitude to the following persons who have consented to serve on the Board of BPL. Each are eminently qualified and brings a wealth of experience to the Board of BPL:
(a) Mr Nathaniel Beneby Jr. – President of RBC Bahamas Limited who serves as the Director and Chairman of BPL/BEC;
(b) Ms Donna Smith – Counsel and attorney at law engaged by the Government of The Bahamas who serves as a Director and the Deputy Chair of BPL/BEC ;
(c) Mr Deepak Bhatnaghar – [ ]who serves as the Executive Director of BPL;
(d) Patricia Hermanns – Former President and Chief Executive Office of Family Guardian who serves as a director of BPL;
(e) Mr Andrew Rogers – [ ] Director of BPL;
(f) Ms Daphne Simmons- [ ]Director of BPL;
Madam President, a safe, prosperous and modern Bahamas can best be built on the backbone of an affordable, accessible, reliable and sustainable energy supply.
For this reason, I urge all Senators today to cast a vote in favour of the transformational legislation I am introducing today.
ADDRESSING CONCERNS
In asking for the support of my colleagues on the other side of the Chamber, I understand that I must also be mindful of some of the concerns they have expressed, and that we share with them.
There are two such concerns I would like to address before concluding.
Potential Layoffs
Some Bahamians have recently remarked that the legislative package we are considering today could have a negative effect, in that it may allow for the layoff of a number of employees currently working for The Bahamas Electricity Corporation.
I understand these concerns, as does every member of the Government of The Bahamas. In everything that we do, we are determined to ensure that we deliver on our promise of a Stronger Bahamas, first and foremost through employment, education and entrepreneurship.
To do so, we take a holistic look at our economy, and apply policies designed to stimulate growth and encourage employment throughout the country.
The same is true in this case. Madam President, I mentioned at the outset that the stimulative effects of our plan should not be under estimated.
My Honourable colleagues will recall that the business plan being proposed by Power Secure on behalf of BPL aims to slash Bahamian electricity bills by more than half; 59%,fact.
We expect this to be as true for individual consumers as it will be for businesses.
That being said, we are confident that the investments and spending stimulated by such significant savings will over time help to offset potential job losses.
In the meantime, however, our Government continues to recognize the importance of protecting the well-being of any employee who may be affected by the changes. For this reason, we will continue to work with the Union in making provisions for fair severance packages, and will be working in close collaboration with the National Insurance Board to make sure that the needs of any affected employees are met.
Grand Bahama’s Status
There has been some debate as to why URCA would now have oversight within the Port Area.
I wish to address that question. One of the particular mandates of the Government in the restructuring of the energy sector is reduce the costs of doing business in The Bahamas, particularly for domestic and international investors.
The Government also noted that since last year, concerned citizens in Grand Bahama have been seeking to have the Grand Bahama Power Company lower the cost of power on Grand Bahama.
It was only a few days ago that the Coalition of Concerned Citizens in Grand Bahama, headed by Rev Eddie Victor stated that:
“Currently, people are still living without electricity and this island’s citizens and businesses should not have to continue to bear unsustainably high electricity costs as enough is enough! Officially the Coalition of Concerned Citizens has launched a petition drive to lower the cost of electricity on Grand Bahama.
The goal of the petition drive is to secure 15,000 signatures and present this petition to the Grand Bahama Power Company(GBPC), Grand Bahama Port Authority (GBPA) Regulators, Minister of Grand Bahama Dr. Michael Darville and Prime Minister of the Commonwealth of The Bahamas Hon. Perry G. Christie,” According to Rev. Victor the petition calls for inter alia structural change to the present tariff to reduce electricity and fuel surcharge rates.1
There is also the Tribune Article of September 9 2015 which headline read “Protestors Say Businesses are suffering – with no room for a power rate Hike” which pictured the Coalition of Concerned Citizens in front of a closed business.
However, the Government is pleased to note in the Business Section of the Tribune on 3 December 2015, that Grand Bahama residents have been given a time frame within which to respond to new power rates proposed by the Grand Bahama Power Company (“GBPC”). Moreover, the GBPC proposal is a “small increase in the ‘base rate’…however, this will be offset by a corresponding decline in fuel costs, which are assessed as a pass through to the consumer.” 2
The Government is convinced it is necessary for the entire Bahamas to be regulated such that the tariffs are supervised and regulated by an independent authority. URCA’s oversight is not intended nor anticipated to conflict with the Grand Bahama Port Authority, Limited’s licensing process for the Port Area.
That being said, section 23 (4) and the Second Schedule of the Bill (Savings and Transitional) provides for a smooth transition and avoids disruption of services by requiring URCA within 90 days of the coming into operation of the Act to grant public electricity supplier licences to BPL and the Grand Bahama Power Company respectively.
CLOSING
I started this intervention with a reference to the extensive public dialogue and consultations we have undertaken this year through both our Stronger Bahamas initiative and our longer-term National Development Plan exercise.
Through these conversations, we have learned a great deal about our country, and our fellow citizens. Bahamians have a clear view about what we want for our country and thank God we are not afraid to express that view.
The message is always consistent. We must build a safe, prosperous and modern Bahamas by investing in justice, crime prevention and law enforcement; in economic development; and in social policy priorities, such as education and health, which enhance our safety and prosperity. Bahamians want us to accelerate our nation’s progress against these priorities through decisive action on elements of our economic and social infrastructure which have historically held us back.
Chief among these is the high cost, ineffective delivery, unreliable coverage and unsustainable source of our power.
Bahamians are rallying with enthusiasm around the improvements we have carefully planned because they understand that affordable, accessible, reliable and sustainable energy will accelerate our journey to building a Stronger Bahamas for a safe, prosperous and modern future.
Merry Christmas…
Energy sector reform
Q&A
December 2015
Why do we need a complete reform and restructuring of BEC?
BEC currently has:
- an extremely high cost of service
- significant power reliability and quality issues
- highly inefficient fuel mix and more than ½ of customer bill is fuel
- many assets in very poor condition and disparate system design
- extremely high system losses (15% compared to 4-7% best practice)
- very low customer satisfaction
- very inefficient staffing structure, numbers, and low productivity
- very high CO2 emissions and no renewable assets
- $20-30 million per annum continuing net losses
- a lack of capital for projects, including remediation of current challenges
- not been able to obtain a credit rating and cannot borrow more
- a $246 million Government guarantee supporting its debt
- an imported fuel and oil consumption of over US$300 million per annum resulting in foreign reserves depletion
BEC is in an unsustainable state and significant new investment required to bring down the cost of power
Will my electricity bill decrease and by how much?
The Business plan prepared by PowerSecure targets for electricity rates to decrease by up to 40% over the next 5 years and on a sustainable long term basis
Indeed, the entire reform process is about decreasing electricity bills to the customer as well as:
- Increasing reliability and quality of power
- Increasing energy security (we are now heavily dependent on fossil fuel imports)
- Improving customer service
- Delivering environmental responsibility
- Creating a financially stable and healthy power company that can afford to continue to maintain and invest in new equipment as required without Government guarantees
- To make the new power company, Bahamas Power & Light, an employer of choice that Bahamians are proud to work for
‘
Customers will be aware that our electricity bills currently have two main charges plus VAT
1. A Basic Rate fixed charge of 10.95 cents (up to 200 kWh per month), 11.95 cents (between 201-800 kWh per month) and 14.95 cents per kWh (over 800 kWh per month); and
2. A variable fuel charge which covers all of the costs associated with fuel – in September 2015 this charge was 11.42 cents per kWh. In 2014, this charge was more than 25 cents per kWh
It has been said that under the last administration the Basic Rate was 10 cents per kWh. It is, in large part, the inadequacy of this Basic Rate that causes BEC to lose up to $30 million per annum. Why? Simply put, it is costing BEC far more to run its operations than it is in fact billing the customers. This is then compounded from a cash flow perspective by some customers not paying all or part of their bills. It is further compounded by the fact that BEC is not operating nearly as efficiently as best in class peers elsewhere in the region and the world.
Because BEC is losing money each year, it cannot borrow more money without further Government guarantees. It also cannot invest in new equipment and has insufficient funds to properly maintain its operations.
This is clearly an unsustainable situation.
It should be noted that with crude oil prices having dropped to $39.97 per barrel as of Friday December 5, 2015, the impact of this has been highly beneficial to customers. As such, customers will note their bills having reduced from over 40 cents per KwH in 2014, to approximately 25 cents per KwH last month
However, with fuel cost simply a pass through on customer bills, we should not let this fortunate oil price decrease lull us into a false sense of security. The volume of fuel used is still extremely high and inefficient and needs to be significantly reduced. Also the fuel mix is far too heavily weighted to the most expensive fuels. And the overall efficiency of operating BEC can be dramatically increased and non fuel costs significantly reduced as well.
So, if fuel prices were to stay at their current levels, there is no reason we should not strive to reduce the cost to the customer to below 20 cents per KwH
When will it decrease?
There is no magic wand that can be waved to solve BEC’s problems overnight
It will take time to refurbish assets, bring in new technologies and systems, install more efficient equipment, and improve operating practices
As such, bills are expected to decrease gradually over the next 18 months
The largest decrease is expected after 18 months to 2 years once new much more efficient equipment is installed and up and running.
What will cause it to decrease?
There are savings to be gained along the entire BEC supply chain. Initiatives to achieve these savings include:
- bringing certain existing assets up to service standards, improving reliability and capacity
- dramatically improving fuel mix and engine efficiency
- using economically sound temporary solutions until permanent solutions come online
- introducing new highly efficient dual fuel engines with lower CO2 impact
- streamlining and improving customer experience
- integrating higher efficiency, economically viable renewable energy (solar), especially in the Family Islands where the additional cost of transporting fuel on top of the fuel price itself is significant
- reducing system losses to industry accepted norms
- introducing modern operations and maintenance practices, increasing availability of the more efficient engines
- implementing modern integrated control systems using proven technology
- restructuring the organization, processes, and functions with continuing training
- using hedging strategies to reduce volatility of the fuel charge
- increasing safety, both via training initiatives and asset improvements
What is a rate reduction bond?
A rate reduction bond (RRB) is the securitization of a cashflow stream generated by a charge included in the tariff to utility consumers. The bond holders have a first non bypassable charge on the first few cents of the tariff which are used to pay off the bond, usually over a long period of time up to 25 years.
The Government did not invent the concept of these bonds, nor did it come up with the name.
These bonds have been commonly used in the electrical utility sector, especially in the United States, including utility companies in New York, Hew Hampshire, Connecticut, and California, to name just a few. The bonds have been proven to be successful in energy sector reform, and a very efficient form of financing.
Why is it called a Rate Reduction Bond? Simply put, without a refinancing of the existing liabilities of BEC, energy reform and the restructuring of BEC would not be possible. Without the restructuring of BEC, we will not be able to reduce rates to the customer. It will cost money to bring rates down as we need to invest in new equipment.
Why is GOB using a RRB?
Currently BEC has approximately $450 million in debts, pension fund liabilities and other liabilities, of which $246 million is guaranteed by the Government and this $246 million appears as a liability of the Government in our national debt figures.
BEC also needs significant new funding to invest in better maintenance practices and new equipment and technologies.
The current debt is very inefficient, and the “direct” and “indirect” cost of this inefficient debt already weighs heavily on BEC.
The existing “direct” financing cost is very expensive and the debt has a very short term in which it has to be repaid and/or refinanced at additional cost.
The “indirect” costs are numerous. These include, but are not limited to, the facts that:
- BEC cannot borrow more money in its current state. It therefore is unable to invest what it needs to maintain and invest, as well as introduce new technologies which would allow it to be more efficient;
- BEC cannot obtain a good credit rating. Because of this its debt is more expensive and it has little leverage to negotiate the best possible prices with suppliers;
- The inability to fully fund its pension liabilities has an indirect cost that compounds upon itself year on year, as the fund is not earning the returns it will need in the long term – therefore the amount required increases each year by an amount greater than the cost of debt.
The Rate Reduction Bond issuance is expected to provide:
- the ability to refinance BEC’s legacy debt without a Government guarantee (reducing the national debt by $246 million);
- the ability to lock in a long-term cost of funds at a favorable rate, thus reducing debt service charges ; and
- an increase in BPL’s borrowing power
Is a RRB a disguised electricity rate increase?
Today BEC already has approximately $450 million in liabilities that need to be repaid. These liabilities already have a very high cost to BEC, and these costs are already included directly and indirectly in BEC’s existing expenses and net losses.
So the cost of servicing the Rate Reduction Bond is a refinancing, at a lower annual cost, of liabilities and expenses that BEC already has, as well as some funds for investment in new equipment.
Therefore in our electricity bills, there is already a cost of financing included. The fact that BEC does not currently bill its customers for its full costs of operating (which is clearly an unsustainable practice) does’nt mean that the customer will not have to, one day, pay for these liabilities. Who else is going to pay for them?
So, while there is a specific fee allowed for in the Rate Reduction Bond Bill, which is necessary to create the security that bondholders will require to invest in the bond, the RRB cost does not represent an increase in the cost of delivering service by BEC. In fact it is designed to do just the opposite – to free up cashflow for investment and place the new Bahamas Power & Light on a solid financial foundation for the future, thereby reducing BEC’s overall cost of service.
Will the RRB cause me to incur extra expense?
One has to look at the cost of the entire BEC operations and the whole bill.
While there will be a new charge for the Rate Reduction Bond fee which will be included in the Basic Rate once the bonds are issued, the result is to refinance existing expensive debt, and allow for new investment, in turn allowing BEC to be more efficient across the breadth of its operations. In turn, BEC’s entire cost structure is expected to reduce, on a sustainable unsubsidized basis.
Who is Power Secure?
PowerSecure is a New York Stock Exchange American listed energy company which is headquartered in Wake Forest, North Carolina. It works across a wide spectrum of the energy supply chain including
- Distributed Generation. With 1,500 generating units across the United States providing over 1 Gigawatt of power (1,000 Mega Watts), it has been measured as having the highest reliability percentage in the industry;
- Utility Infrastructure. PowerSecure serves utilities and large industrial and federal customers with a full line of capabilities, including transmission and distribution system construction and maintenance, substation design and construction, lighting upgrades and emergency storm restoration;
- Utility engineering and consulting. Through its PowerServices business, it has comprehensive experience in electrical and civil engineering for generation, substation, transmission and distribution facilities;
- Utility scale solar. PowerSecure is one of the foremost installers of utility scale solar systems in the United States, currently with more than $200 million in solar projects under construction.
- Energy Efficiency – PowerSecure has a substantial energy efficiency division.
Powersecure has:
- close to $400 million in revenues; and
- over 1,000 staff
How was Power Secure chosen
PowerSecure was chosen as the preferred bidder for the management contract for the new Bahamas Power & Light after several rounds of bidding, as well as due diligence on PowerSecure, its facilities and people.
A Government task force was established, led by Mr. Deepak Bhatnagar, to manage this process, advised by:
- KPMG, who have a very strong presence in The Bahamas and an international presence in 155 countries, with 162,000 people. KPMG brought experienced local and international energy sector personnel to the project;
- DNV GL, one of the world’s largest technical and engineering advisory firms to the energy sector in the world with offices in 100 countries;
- Hogan Lovells law firm who have one of the largest Energy and Natural Resources sector teams of any law firm in the world, with over 400 lawyers working for sector clients throughout their global network of over 45 offices;
- The office of the Attorney General who dedicated significant resource to not only the new energy sector legislation, but also to the agreements with PowerSecure.
- The General Manager of BEC, Mr. Kevin Basden and certain other senior BEC personnel.
- Many staff of BEC who actively participated and supported the business planning exercise undertaken by PowerSecure.
PowerSecure will be remunerated for its management services via the combination of a base management fee, and a maximum incentive fee up to 150% of the base fee.
The incentive fee will be calculated based on PowerSecure improving significantly a number of Key Performance Indicators including:
- Non-fuel cost of service
- Fuel cost per unit (efficiency) and fuel volatility
- Renewables in the energy mix, and progress against national energy policy
- Average duration of outages
- Average frequency of outages
- Customer satisfaction
- and other measures.
Is this arrangement similar to NAD?
Like NAD:
- The new power company, Bahamas Power & Light, will be 100% owned by the Government;
- A private management company is to be appointed under a 5 year initial term to transform BPL into a best in class electrical utility;
- The manager will appoint 5 of its own executives. All other staff will be Bahamian, and within 3 years, if not right away, at least 3 of these will be Bahamian;
- The fee is based on a combination of base and performance fee; and
- It is designed to be self –funding and a sustainable, stand-alone business enterprise.
How will it benefit me?
A successful execution of the plan is expected to result in:
- Affordable, lower rates for households and businesses
- A reliable power system with less system outages of reduced frequency
- A well maintained, well planned, modern electricity system
- A better environment, with a more environmentally responsible utility, and increased use of renewable energy sources; and
- A healthier more vibrant economy, with lower costs of doing business, a positive impact on economic development and increased foreign exchange reserves.
Are Bahamians being trained?
An essential part of increasing the productivity and knowhow of the BPL workforce will be training in a variety of skill sets. There are many areas where training will be enhanced, for instance it is intended that linesman receive training in live line work, which allows for line maintenance and repair without power outages.
Will Bahamians be laid off?
There has to be a reorganization of BPL into a different corporate structure.
As part of this, and with the introduction of new equipment, processes and technologies, it is expected that there will be some adjustments in the staffing complement. There will also be new areas of opportunity for staff.
Any such adjustments will be discussed with the Unions and all other stakeholders well in advance.
There is no plan for any mass layoffs of the scale suggested by the Opposition.