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Answers

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GENERAL

Why is BELCO making these proposals?
BELCO is one of the only organizations in Bermuda with an obligation to serve our community and we take this responsibility VERY seriously.  You deserve a more reliable, safe, cost effective and environmentally friendly electricity supply than our current aged infrastructure can provide.  The solutions contained within this website will provide just that.  They represent the most prudent and cost-effective approach in addressing the risks of our aging infrastructure, while enhancing the Island’s environmental profile and minimizing electricity costs. This has been a decade-long journey for BELCO, with a high level of national discussion over the years.  The project is shovel-ready.  We are ready to go!  Now all we need is Regulatory approval.  NOW is the time to invest in a brighter future for Bermuda.

 

Why should all three projects be implemented simultaneously?
Simultaneous implementation of the three projects will result in:

  • Consistency with long-term public interest and the Electricity Policy
  • The lowest cost of electricity for Bermuda with the least environmental impact
  • Increased reliability of Bermuda’s electricity supply
  • Significant environmental improvements
  • The creation of approximately 200 jobs and additional sub-contracted work
  • Over $300 million invested into Bermuda’s infrastructure

 

Who is the Regulatory Authority?
The Electricity Act 2016 (The Act) came into operation on Friday, October 28th, 2016 and with it, a new regulatory regime that will introduce new protocols and procedures for the way BELCO generates, distributes and sells electricity to Bermuda.

The Act establishes a framework by which future investments in the production and sale of electricity will be evaluated and regulated.

The Regulatory Authority’s responsibilities include:

  • Licensing the generation of electricity
  • Licensing the transmission, distribution and retail sale of electricity
  • Managing the new Integrated Resource Plan (IRP) process, including public consultation
  • Regulating retail rates for electricity
  • Setting service standards

For more information on the Regulatory Authority, visit www.rab.bm.

RATES

How does the new rate regulation for electricity work?
Rate regulation is a process that the Regulatory Authority (RA) will use to set BELCO’s prices charged for electricity to all customers. The system is designed to protect customers from being charged higher than necessary rates, while ensuring BELCO can cover its costs to produce electricity and earn a fair return for its owners. If a regulated company’s costs go up or down, their profit would remain the same and, in theory, rates would increase or decrease accordingly. It should also be noted that the RA will review BELCO’s costs to determine if costs are reasonable.
Who is responsible for regulating BELCO?
As defined within the Electricity Act 2016, the RA is currently responsible for regulating BELCO. The RA will approve BELCO’s expenses, capital costs and the electricity rate that BELCO can charge customers. Prior to October 2016, the responsibility rested with the Energy Commission (EC). Therefore, unless directed otherwise by the RA, BELCO’s rates have been determined in accordance with the EC March 2016 Directive.
What goes into setting BELCO’s electricity rate?
In determining BELCO’s electricity rate, the Regulator must consider the necessary revenue requirements that are equal to the recovery of BELCO’s operating costs, fuel costs, depreciation of assets, taxes and a profit. This allows BELCO to maintain reliable service to the Country.
Is BELCO going to raise my rates to pay for the three projects it is proposing?
BELCO will be submitting a request to increase rates for the short-term. We need to recover the costs of financing the upgrades and replacement of aged assets. Once those costs have been recovered, it is anticipated that the electricity rates will, at the very least stabilize, if not decrease, given the substantially lower operating and fuel costs.
How much will the rate increase be?
If all three projects are implemented (replacement generation, transmission & distribution upgrades and conversion to liquefied natural gas), and depending upon the rate methodology that the Regulatory Authority chooses to employ, a 2-4 cent per kWh increase is projected to recover the investment made by BELCO into bringing these projects to fruition. For the average residential customer in Bermuda who uses approximately 650 kWh per month, this would equate to an additional $13/month during the recovery period.
Is this an opportunity for BELCO to implement a long-term rate increase?
The entire intention of implementing the proposed Capital Plan projects is to stabilize rates over the long-term. Our ultimate goal is lower electricity rates.
What is going to happen to my electricity rate if BELCO’s proposal is not accepted?
If BELCO does not receive the necessary permissions from the Regulatory Authority, we will need to continue to spend a minimum of $26 million in extra costs every year on fuel, maintenance and repairs for an aging plant and infrastructure. The retirement of generators will continue as planned regardless (50% capacity to be retired between 2018-2020) and a more expensive option of using temporary generation may be deployed to ensure electricity needs of the Country are met. In short, your rates will increase at a higher level if nothing is done.

We have two options:

  1. Proceed with the Capital Plan, which will result in a 2 – 4 cent/kWh increase in rates to recover the costs of the three projects, ultimately resulting in more stabilized, or potentially lower, rates beyond 2021;
  2. Do nothing – continue to spend an estimated $26 million+ per year in extra costs on deteriorating systems and deploy more expensive temporary options for generation when the current generators reach end of life. This will result in skyrocketing electricity rates and increased outages.

We believe the best option for our customers is to proceed with the three projects recommended in the Capital Plan. In addition to ensuring that Bermuda has a reliable supply of electricity with substantial environmental benefits, it is also the choice that will stabilize your rates over the long-term.

Can you explain the components of a BELCO Bill?
If you look on your BELCO bill, you will see a section called CHARGES, which breaks out the individual components of your bill.

FINANCIALS

How much will implementing all three projects cost?

The cost to complete construction of the replacement generation, transmission & distribution upgrades and conversion to LNG will be an estimated $278 – 315 million.

How will BELCO pay for these projects?

BELCO will initially use long-term debt to fund the projects proposed within the Capital Plan. Similar to taking out a mortgage to purchase a house, BELCO will own the assets and pay down the debt over time. The cost would then be recovered through a marginal rate increase of 2-4 cents per kWh. Implementing these projects will ultimately result in more stabilized and potentially lower rates beyond 2021.

Why didn’t BELCO set money aside every year so that when permission is received there would be cash available to fund the three proposed projects?

We had two choices:

Option 1: Set aside funds and earn no more than 1-1.5% interest

Option 2: Pay down current debt, which incurred interest charges of up to 5%

The more financially responsible decision was to pay down the debt. This not only saved money, but also put BELCO in a position to borrow the money that will be needed to pay for the three proposed Capital Plan projects. Using debt is the least costly approach to funding the three projects and thus will be the lowest cost option for our customers. Further, our relatively modest profits over the past decade, and the amount of money now required (caused in part by delays in decision-making by the various governing bodies), would make saving the full amount difficult, if not impossible.

If BELCO can borrow the money, why should I, as a rate payer, have to incur higher rates to cover the cost of these three capital projects?

The current electricity rates cover the cost of doing business today. Implementing the three projects proposed in the Capital Plan will increase the cost of doing business during the implementation phase of the three projects. Today’s rates will not cover that. Unregulated businesses (i.e. grocery stores, gas stations, retail stores) simply raise and lower their prices as their own cost of doing business increases or decreases. As a regulated company, BELCO cannot do that. The Regulator sets the electricity rates that BELCO charges and those rates are based on BELCO being able to earn enough to cover its operating expenses, fuel costs, depreciation of assets, taxes and a reasonable profit, which in turn allows for further investment back into the business.

Why hasn’t BELCO invested in these infrastructure projects before now?

For 12 years, BELCO has not been able to achieve the necessary rate approvals from the various governing commissions/regulators to invest in these three projects. However, the Company has invested $350 million in that same period constructing new peaking generators and upgrading infrastructure, system and facilities.

 

If so much money is needed, why were dividend levels just increased for Ascendant shareholders? Why not use that money to fund BELCO’s Capital Plan projects?

Ascendant and BELCO have an obligation to balance the needs of all of its stakeholders including customers, employees, lenders, shareholders and the community overall. Shareholders are a critical stakeholder to any company as they provide the initial capital to establish the business and ultimately share in the risks and rewards of that business. The vast majority of Ascendant’s shareholders are Bermudian citizens who rely on their dividend payments. Over the past three years, shareholders have born their brunt of the decreased financial performance of BELCO. In 2014, after 5 years of increased costs with no corresponding rate increases, BELCO’s parent company, Ascendant, found itself in the unenviable position of having its stock prices plummet. The Board undertook a review and ultimately decreased shareholder dividends to a level that was more realistic to the Company’s financial performance at the time (on an annualized basis, from 85 cents per share in 2013 to 30 cents per share in 2014) ~ see graph to the left. Ascendant has been very conservative in how it has paid out its dividends. The recently announced increase brings dividend levels up to 45 cents per share (on an annualized basis), which is still approximately 50% less than dividend levels of 2006 – 2014. This represents approximately 30% of operating earnings, compared to the utility industry norm of dividend payouts that are 50-60% of operating earnings.

So why not just sell more shares instead of increasing rates?

Using debt to cover the cost of the three projects is actually less expensive for the customer than raising money through shares.

What would be the outcome of decreasing or temporarily suspending dividend payments to shareholders?

If Ascendant does not provide a fair dividend to its shareholder base, investors will take their money elsewhere. The share price will go down, which will result in a drop in the value of the Company. This, in turn will negatively impact our ability to raise funds (both through debt and issuing shares) in the future at reasonable rates. We have actually already experienced this. In March 2014, Ascendant’s share price was $10 per share and the quarterly dividend paid to shareholders was 22 ¼ cents per share. In June 2014 the quarterly dividend was decreased to 7 ½ cents per share for each of the quarters of the year. Within six months, the share price decreased by approximately 50% to $5 per share.

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