Thursday, November 11, 2010

Grand Bahama Power co. $30-$40m spend's regulatory block

By NEIL HARTNELL

Tribune Business Editor

Grand Bahama's archaic electricity regulatory structure acts as a disincentive for the island's power company to make $30-$40 million in critical infrastructure investments, its chief executive told Tribune Business yesterday, because there was little prospect of generating a return from such a capital outlay.

Alan Kelley, Grand Bahama Power Company's chief executive, said that engineering a change in the regulatory structure to establish a "tie between revenues and investment" had been a key focus for him in the 10 months since he took over from E. O. Ferrell.

Pointing out that all modern electricity utility regulatory regimes included such a tie-in, enabling power companies to generate a return on their capital expenditure and still cover fuel and operational costs, Mr Kelley told Tribune Business that the company's decision to boost its power generation capacity this June had involved a straight wealth transfer from its shareholders, 20 per cent of whom are Bahamian institutional and retail investors, to its customers.

The Grand Bahama Power Company chief executive also told Tribune Business that the decision by one of its major shareholders, the Abu Dhabi National Energy Company (TAQA), to relinquish its investment in the company would "not have any impact".

Taqa, which acquired a 27.7 per cent stake in Grand Bahama Power Company through its 50/50 Caribbean joint venture with Japanese firm, Marubeni, yesterday announced that it was withdrawing from this partnership - in which it invested $320 million - to focus on its Middle Eastern and African interests.

This means that its 27.7 per cent interest goes back to Marubeni for the time being, Mr Kelley indicated, giving the Japanese entity majority control once again with a 55.4 per cent equity interest. The balance is held by Canadian power company Emera, which has a 25 per cent interest through its 50 per cent stake in BISX-listed ICD Utilities, the remaining 19.4 per cent being held by Bahamian shareholders.

However, Marubeni is unlikely to retain its 55.4 per cent for long. "Their strategy calls for them to have a partner, and they're in discussions with one or two others to bring it about, so I don't expect it to have any impact on the company from an operational or financial standpoint," Mr Kelley told Tribune Business.

Several observers suggested one partner likely to be interested in partnering with Marubeni was Emera, given its enthusiasm for the Caribbean and current talks for it to become the Bahamas Electricity Corporation's (BEC) operating partner. It is unlikely, though, that Marubeni would want to cede control.

Asked how Grand Bahama Power Company was performing, Mr Kelley said of 2010: "It continues to have its challenges. This year is a tough year, like 2009 was a tough year."

He confirmed that the company had plans to modernise and expand its generational and network infrastructure, improving efficiency and reliability, but told Tribune Business that Grand Bahama's regulatory regime provided no incentive for it to do so.

"I'm looking at in the neighbourhood of $30-$40 million. I'm ready to make the investment now if we get a promise of that, if we get a regulatory structure that provides for it," Mr Kelley told Tribune Business on the need for reform. "I'm not incentivised to do the right thing.

"We have a structure where there is no tie-in between revenues and investment. I'm hopeful that we will get that turned around, so that when there is a tie between the two, we have a plan to make that investment in more efficient generation capacity."

Typical utility regulatory regimes allowed power companies to recover investment and capital expenditure costs through their revenues, while also covering operational and fuel costs.

But Mr Kelley said: "The rate was established decades ago, and while it's sometimes changed by the Consumer Price Index, it has no tie to the company's investment levels. That's what we have to get changed today to make the investment. I'm hopeful we will get it turned around soon."

The Grand Bahama Port Authority (GBPA), the regulatory authority for electricity in Grand Bahama, was "working with" the utility monopoly on the issue. It had hired an "internationally-known expert on utility regulation" to advise it, and Mr Kelley said: "He gets it, and understands the need."

He told Tribune Business that Grand Bahama Power Company needed new electricity generation equipment and technology that was more efficient and reliable than the firm's current generation capacity.

Mr Kelley said that Grand Bahama Power Company's rental of extra, more efficient power generation units in the summer had improved reliability and reduced the number of power outages.

"Most of the outages are generation related, and that's why we need to make investments," he explained. Mr Kelley also told Tribune Business that the rented generation units had saved Grand Bahama customers more in fuel than it had cost to obtain them, the latter expenditure coming from shareholders.

"The costs to rent were $1.5 million, and the fuel savings were over $1.5 million. The shareholders are helping the customers to have a more reliable service," Mr Kelley said.

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