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Despite Prepa’s Hedging, Electricity Prices Keep Rising

Power authority has spent $30 million in past year to keep electricity prices in check


May 20, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

The Puerto Rico Electric Power Authority (Prepa) has two different hedging programs to keep electricity prices to consumers in check, so why do the electricity bills keep going up?

Finance Director Luis Figueroa said the price of electricity keeps rising because Prepa’s hedge insurance policy covers only 10% of increases in oil prices, while the second hedging mechanism, the so-called client fund, is disbursed relatively sparingly to ensure prices can be kept stable over time. Hedging involves buying or selling a product or security to offset a possible loss from price changes on future transactions.

Crude oil prices broke the $40-a-barrel barrier last week, the highest since Iraq invaded Kuwait in 1990 and sparked the first Gulf War, on worries over possible terrorist attacks on Middle East oil facilities and expectations of high summertime consumption. Analysts said increasing demand for oil in China is also playing a role in keeping prices up.

Figueroa said the rise in crude prices almost certainly would translate into higher electricity prices for Puerto Rico consumers. How much higher they go depends on the complex formula Prepa uses to set prices.

At the beginning of every month, Prepa officials try to estimate the average cost of crude and the corresponding increase in the cost of power for the coming month, said Figueroa. At the same time, they adjust the price of energy to the consumer in accordance with the variation from the previous month’s estimates and the actual price paid for the crude.

The hedge insurance account pays for 10% of any increase in the price. If necessary, officials also tap into the client account to cover part of the increase.

Officials don’t necessarily use the client account to erase increases altogether, but rather to offset those increases in an effort to keep prices stable. The goal is to have enough money in the client account to keep prices stable over time, said Figueroa.

In the past year, the insurance account has paid $10 million, while Prepa has paid $20 million from the client fund. The client fund has some $20 million in it, said Figueroa.

As a result, prices haven’t gone up precipitously from month to month.

From November to March, for instance, prices remained relatively stable. Prices actually fell between November and December 2003 and between December 2003 and January 2004. They increased in February and held steady in March.

This Caribbean Business article appears courtesy of Casiano Communications.
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