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PSC Authorizes Fuel-Hedging Program for WAPA

Nov. 20, 2006 — Water and Power Authority officials got the go-ahead Monday to begin implementation of a fuel-hedging program for the territory.
While WAPA representatives said they had hoped initially to execute the program for three years, Public Services Commission board members unanimously approved a stipulation that allows the program to run on a six-month trial basis.
The stipulation, jointly recommended by WAPA and Georgetown Consulting Group, technical advisors to the PSC, states that once the program is executed, WAPA is authorized to hedge not more than 30 percent of the fuel it consumes during the six-month period. According to WAPA consultant Justin Moorhead, this equates to approximately 360,000 barrels of oil.
The fuel-hedging program sets a cap and floor price for fuel, Moorhead explained after Monday's PSC meeting: "We're reducing the volatility of the price of oil. Oil prices are totally subject to fluctuations in the market and, more than likely, the price is going to go up instead of down. So, with this program, we're basically purchasing a cap so we won't have to pay above a particular price for fuel."
If the price of oil dips below the cap, WAPA will not benefit from the reduced price, Moorhead said. Instead the utility would have to pay penalties to its potential providers — financial institutions such as Morgan Stanley and Citigroup.
Since the payments have to be made within five days, the stipulation includes what Moorhead called a "self-financing line of credit," where WAPA would be authorized to use $1 million from its self-insurance reserve fund.
WAPA anticipates conducting two fuel-hedging transactions during the six-month period, which adds up to approximately $800,000, Moorhead said during the meeting. "We rounded up to $1 million," he explained to PSC board members. "So that's how we came up with that particular number."
The money will be recouped through the Levelized Energy Adjustment Clause (LEAC), Moorhead said. "Of course, we would have to replace that money within 30 days," he said.
The proposal's effect on ratepayers would be "less than $1 a month," according to Georgetown principal Jamshed K. Madan.
"A piece of that would depend on the price of fuel, which can't be determined at this time," Madan said. "If the price of fuel stays within a certain range, or goes above the cap, then we don't have to pay penalties. If it goes below the cap, then we do."
Additional costs accrued by various consultants, advisors and other staff involved in the fuel-hedging program may impact a "person's bill a few cents a month," Madan said.
Georgetown recommended the financing proposal despite concerns expressed by commission members, Madan said, taking into account WAPA's "current cash-flow problems."
"I know you're concerned that the self-insurance reserve fund is very important," he said. "So in the long-term, we agree that it's not a good source of funding. However, money is coming in from the LEAC on a daily basis, and there will be more financing options available within the next 90 days. After the six months is up, WAPA has the burden of coming to you and asking you to authorize the continuation of the program using those alternate means."
The utility currently has no other funding source, WAPA Chief Financial Officer Nellon Bowry added, given that it is "already paying $25 million out of pocket" for expenses.
"We all recognize that there are some legitimate concerns about the program," he said. "But we'll never know unless we do it. And after six months, we'll come back, make a presentation and you'll decide whether it's worth it to keep pursuing the program."
While the PSC board voted to execute the program on a six-month trial basis, it also stipulated that the LEAC not be used to pay for "fuel consultants, advisors or legal costs."
Present during Monday's meeting were board members Joseph Boschulte, Verne C. David, Donald "Ducks" Cole, M. Thomas Jackson, Alecia Wells and Raymond Williams.
Board member Sirri Hamad was absent.
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