June 15, 2006 – Consultants for the Public Services Commission said Thursday that many of the V.I. Water and Power Authority's financial woes are of their own making and have been going on unabated for years — and that ratepayers shouldn't have to cover those costs.
Their findings were presented during a workshop called by the PSC to review the levelized energy adjustment clause (LEAC) and other related matters.
Larry Gawlik and Jim Madan of Georgetown Consultants told the two commissioners in attendance — Joseph Boschulte and chairwoman Alecia Wells — that they probably should allow the authority to continue with its automatic increase due to end July 1, but only on condition that the PSC closely monitor WAPA's compliance with the commission's orders.
However, the consultants said the rate increase should not be the roughly $0.25 per kilowatt hour WAPA was asking for in July – a 26.1 percent increase over June — but more like $0.23 per kwh, a 19.6 percent increase.
Throughout the three-hour meeting, the consultants repeated that it was not fair that consumers should have to pay for WAPA's inefficiencies.
But the catch-22 that they also pointed out was if the authority were penalized financially it would exacerbate WAPA's serious cash-flow problems and could even lead to insolvency for the utility.
Madan said insolvency and the ensuing restructuring might not be the worst thing to happen. He said in other areas of the country where restructuring was required, those companies were now functioning. "Everybody who predicted a disaster was proven wrong," Madan said.
The consultants pointed out that WAPA has one of, if not the highest, utility rates under the U.S. flag at $322 per 1,000 kwh. Next in line at $243 was Hawaii. Guam follows at $165.
WAPA is also at the bottom of the efficiency scale, when compared to other island systems.
WAPA's efficiency rate – using heat rates as the measure of how efficiently heat is being converted to electricity, no matter what kind of fuel is being used – is 22.6 percent. Guam's rate is 35.9 percent, Bermuda 37.5 percent and the Cayman Islands 47.9 percent.
Also high on the list of things ratepayers shouldn't have to foot the bill for are line losses, which are astronomical and in large part due to theft.
Alberto Bruno-Vega, WAPA executive director, said of 65 cases he had sent (mostly as a result of an audit requested by WAPA and conducted in 2004 by the V.I. Inspector General's office) to the Attorney General's office, not one had been prosecuted. As for the efficiency rates, Bruno-Vega said it wasn't fair to compare WAPA to places that were only producing electricity, while WAPA produces both water and power.
The high costs and inefficiencies stem from WAPA's exclusive use of foreign oil, its aging equipment, theft and mismanagement, according to the consultants.
Some of the remedies include stopping the line losses through repairs and prosecution, diversifying its fuel, hiring outside management teams to assist with plant operations and developing demand-side programs that encourage consumers to cut consumption.
However, in their presentation the consultants said, "with average consumption per residential customer at only 500 kilowatt hours, present usage represents basic needs for cooking, refrigerator, hot water, laundry and ceiling fans."
Fuel hedging – a financial scheme in which the seller agrees to sell fuel within a certain range for a given amount of time taking the risk that the price could rise – is the other hope WAPA has of reducing costs.
Justin Moorhead of Seslia Securities is putting together a hedge plan for the utility that will be presented to the PSC next month.
Madan lamented that fact that the authority had not entered into a fuel-hedging plan four years ago when it was recommended. "It's better to buy when the costs are in rapid rise," he said, instead of when they have already risen astronomically. He said the delay has cost ratepayers tens of millions of dollars.
He said some market experts are predicting the cost of fuel will go down, but others see it rising further. He said a good hedge plan could still be of some help.
But the biggest and quickest savior on the horizon is the Heat Recovery Steam Generator that WAPA borrowed $12 million to buy a few years ago. It is estimated to save $30 million a year. Unfortunately, the generator will cost roughly $29 million now.
The consultants are recommending that the authority arrange financing as soon as possible that can be paid back in less than 12 months, given the savings it will provide.
They also recommended that only "prudent" costs be included in the LEAC, an increase that kicks in – at least until June 30 – when the cost of a barrel of oil rises more than $1.75.
Gawlik said it is normal for regulatory bodies such as the PSC to routinely review the rates of regulated utilities for reasonableness and to frequently disallow imprudent costs.
In a meeting held Wednesday in preparation for Thursday's presentation, WAPA and the consultants agreed to work together to complete a study begun three years ago that is designed to detail how best WAPA can get out of the financial straits it is in and to implement the plans.
WAPA felt the study was complete, but the Georgetown Consultants disagreed. One reason: When the study was begun, oil was $30 a barrel. It is now more than $70 per barrel.
Madan said the standard of performance he and Gawlik have set for WAPA is the same as that set by WAPA's own consultants. "They haven't met it," he said. "Another way of looking at it is gross negligence."
Under questioning by commissioner Boschulte about WAPA's efficiency level, Bruno-Vega said, "We could always improve."
Madan implored the PSC to do the job they were mandated to do: protect the public interest. "The bills are so high, you need to provide any relief you can," he said.
Boschulte and chairwoman Wells were the only commissioners in attendance at the meeting designed to cover the complicated issues surrounding the LEAC prior to the commission meeting where the decision about the LEAC automatic increase must be made.
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