Reprinted from Caribbean Net News
caribbeannetnews.com

USVI utility struggling with mounting debt and rising fuel costs

Saturday, August 12, 2006

by: Melody Wiggins
Caribbean Net News St Croix Correspondent
Email: melody@caribbeannetnews.com

ST CROIX, USVI: The US Virgin Islands' only electric power producer is struggling with mounting debt and rising fuel costs. Desperate to rein in a more than $3.5 million debt, the Virgin Islands Water and Power Authority (WAPA) has instituted a fuel hedging program and cut excess power to the islands.

The Water and Power Authority's cash flow problem is "dead serious" and remedies must be put in place immediately, said WAPA Executive Director Alberto Bruno Vega at a recent governing board meeting. Bruno Vega said the authority's "working cash" is $3.5 million in the red. He said that although the authority is required to pay its debt to its fuel provider, timely reimbursements are not made by the government.

WAPA, a semi-autonomous government agency, charges other VI government agencies for electrical and water usage provided by the authority. The authority purchases its fuel at a discount price from Hovensa LLC which is a joint venture between a subsidiary of Hess Corp. and a subsidiary of Petroleos de Venezuela, S.A. (PDVSA).

Hovensa, located on St Croix, has the capacity to process 495,000 barrels per day (BPD) and is one of the largest oil refineries in the world. WAPA purchases 2 million barrels a year from Hovensa - its sole source of energy for the production of electric power.

To counteract rising fuel costs WAPA's board voted to remove "spinning reserves" during nighttime hours to save on fuel. Bruno Vega said removing the spinning reserves would impact the systems' reliability by limiting the available power to exactly what is needed to provide electricity to the territory.

Bruno Vega said St Croix requires 35 megawatts of power at night, while St Thomas/St John requires 50-55 megawatts of power, but the authority normally provides more power as a back up in case of operational failure.

Under the new cost saving measures, additional power would be engaged only when a power source fails. Thus, the possibility of nighttime power outages may increase.

The board also approved a fuel hedging program as insurance against the high cost of fuel. The program would establish a hedge instrument known as a "costless collar," which sets an anticipated cap price and floor price for fuel.

When the cost of fuel exceeds the high price, the fuel hedging program would kick in and WAPA would not have to pay anything above the cap price. However, when the price of fuel falls below the floor price, the authority would not benefit from the reduced price.

The cap and floor would be determined by consultants making regular evaluations and predictions of present and future fuel prices and could be adjusted as often as every three months depending on current fuel costs.

Major banks, including BNP Paribas, Citigroup, Morgan Stanley and Shell Oil Company, are being considered as potential providers of the hedging program.

WAPA said a large part of its debt is due to government agencies not paying on time and allowing overdue bills to accumulate. According to figures provided by the board, the central government owes the authority $7 million in electric bills and $1.3 million in water bills.

Government departments and agencies have signed memorandums of agreement to address the debts and most of those agreements are current, according to board chairman Daryl "Mickey" Lynch. However the Territory's two hospitals have defaulted on their agreements according to Lynch.

The Juan F. Luis Hospital on St Croix owes $4.6 million in overdue electric and water bills and the Roy L. Schneider Regional Medical Center on St Thomas is $975,000 in debt to the authority.

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