Emerging energy future for Bermuda
For centuries, Bermudians have been independent, innovative and resilient in our use of renewable resources. Although many of us take it for granted, our rainwater collection system is a model for the rest of the world on how to gather and use a scarce but essential resource.
Our use of energy and electricity, however, leaves a great deal to be desired. Although we are no Saudi Arabia of the sea, Belco consumes about 2,600 barrels of oil per day. For an island with our small population, this is an incredible amount of fossil-fuel use to produce electricity.
In fact, this is about 500 barrels more per day than used by the entire country of Chad with a population of about 15 million people — and that is actually an oil-producing nation.
Yet, given the countless technological advances in the field of electricity generation and energy conservation, there is no reason why our energy future cannot more closely resemble our conservative and innovative past with water.
In furtherance of our efforts to obtain the facts and present a clearer, more transparent picture to the Bermudian people of the present state of development of the Bermuda energy policy for generations to come, we have updated our research for your benefit.
Bermuda businesses and homes are among the highest rate payers in the world for the basic commodity of electricity.
The importance of the long-term decision before the Regulatory Authority of Bermuda to all Bermudians of accepting or rejecting a $120 million liquefied natural gas conversion plant, as Ascendant Group Ltd and its wholly owned subsidiary Belco supports in its Integrated Resources Proposal, or opting to set long-term goals to use substantially more renewables to provide our electricity, as the Bermuda Better Energy Plan proposes, is crucial for our future wellbeing.
To develop a clear focus, it is necessary to be up to date on the present positions of each of the three major players influencing this decision.
They include Ascendant, the independent regulatory authority that received the IRPs, as well as about 890 public submissions overwhelmingly in support of using renewables, and the Department of Energy, which should be implementing the Government’s initiatives as stated in the Throne Speech to help the people to reduce their energy bills.
Policies towards renewables, in particular, must be co-ordinated and consistently applied by these entities over a long term, so that the Bermuda consumer can plan financially how to reduce their electricity costs.
The most important decision affecting the long-term outcome is whether Ascendant should be allowed to continue with its proposal as stated in its submission to the RAB, and in financial statements, to construct a $120 million LNG facility to convert fossil fuel to electricity, with only very minimal future commitments to renewables in its plan, or whether it should be instructed by the authority to adopt the Bermuda Better Energy Plan, whose goals are to have close to two thirds of home-grown renewables in place by 2038 and to not build the conversion plant and attendant pipeline needed to feed it.
• Recent Ascendant Developments
After reviewing Ascendant’s financial statements charter, and its filings with the Bermuda Stock Exchange, its stock price and activity, it is clear that Ascendant is well along the way to adopting its entrenched plan of committing the island’s future to LNG as the answer despite its recent upward price volatility.
This defies the projections on which Ascendant made its decision several years ago to support the LNG solution.
Ascendant’s commitment to LNG as far back as 2011, is outdated and ignores the speed at which costs of producing solar power and storage batteries have declined in the past few years, as the technology has become more refined and mass-produced.
Belco actually has in place today a contract to produce six megawatts of electricity at the airport finger at 10.13 cents per kilowatt hour — well below the existing fossil fuel prices that it passes on to the consumers with very high fuel-adjustment rates.
How can Ascendant possibly claim that solar energy is still too costly ,when the solar bank at the airport finger will soon produce its cheapest energy supply in Bermuda?
Similarly, the battery storage bank already committed to by Belco at the North Power Station, with a 20-year life, replaces $2 million per year of heavy fuel oil cost for its spinning reserve.
This replacement clearly demonstrates that Belco believes the battery storage system is a better and more cost-effective, long-term solution than burning fossil fuels.
Adoption by Belco of these two items, and their cost-saving alone, should silence the arguments that solar and battery banks are not cost-effective today when compared with the price-volatile, long-term LNG conversion scheme.
We also already know that, as an old-line Bermuda monopoly not yet grasping the role of the regulator, the shareholders, directors and executives of Ascendant have already experienced great financial rewards through adopting their long-term, fossil fuel commitment to upgrade the generators at North Power Station, replacing nine old, inefficient ones with four new ones and replacing their spinning reserve that now uses highly pollutant fuel oil paid for by their customers to turn a back-up generator in reserve with a much less cost-efficient battery system of the stated 20-year life.
Neither Ascendant nor the RAB has stated whether the consumer will participate in the cost savings from these two projects. Financing of $107 million is already in place to cover these and other improvement projects, but the decision on whether to use LNG is not cast in stone, since the four new generators use fuel oil, but can be modified at significantly additional cost to run on LNG.
Moreover, the Belco proposal of building the $120 million conversion plant is already referred to in Ascendant’s financial statements as a fully developed plan, which offers the illusion that it is a foregone conclusion, although rate increases have not been granted to pay ultimately for the upgrades of any of the capital assets or even those already approved by the RAB.
The last acting interim chief executive of the authority stated that a rate increase for the four new generators and battery back-up system had not been approved when Belco received permission to proceed. According to the RAB, the IRP will be under review by the body and its paid consultants for at least another year.
In addition, David Burt, the Premier, recently stated on television that Belco will receive no rate increase to pass on to consumers to fund its capital projects or to repay debt financing, which does not seem possible after studying Ascendant’s balance sheet and recent rise in stock price — if such a rise is really tied to the capital projects.
As every single Bermudian electricity user has a stake in this, the public need a clear explanation on where the funds will come from to pay back the $107 million Ascendant financing and the proposed $120 million LNG plant, if it is not to come from rate increases, especially when power use has diminished in Bermuda with the falling economy and is likely to fall farther as people find cheaper alternatives to Belco to satisfy their electricity needs.
Ascendant has not in the past and is not at present accumulating funds as reserves for financing the massive capital improvements.
Instead, in the past seven months we know it has spent $9.748 million of about $29 million in cash on hand to shrink its own capital by repurchasing its stock at unusually inflated prices. The stock price seems to be following an abnormal pattern of increasing even after an offer by a foreign company to purchase Ascendant at a 40 per cent premium was summarily rejected.
The directors did not follow the normal corporate practice of discussing the offer with their shareholders first before rejecting it. It appears that the repurchase plan at these inflated prices also props up and triggers an incentive compensation reward to a very few of the top Ascendant executives, which appears to be well in excess of $1 million. The names of the executives benefiting and specific amounts of the rewards for each are not disclosed in the financial statements.
The public have a right to know whether past rate increases for electricity costs are, in effect, providing the cash being used to buy out Ascendant shareholders at an inflated price, which also rewards a few executives.
Also, from reviewing the Ascendant share register, it is not possible to see if third parties unrelated to the few undisclosed controlling shareholders are purchasing the stock at the inflated price to hold for investment.
Or are these transactions merely some form of churning scheme conducted by, or for, the benefit of one or more controlling shareholders?
We do know that more than 65 per cent of Ascendant’s total stock transactions on the Bermuda Stock Exchange from May 1 to early December have been repurchases by the company and that it paid out more than $9.748 million in cash for those repurchased shares.
Using close to $10 million in Ascendant cash to repurchase its stock is very unusual for a regulated company that needs liquid assets and more capital to fulfil its stated $250 million expansion plan, but does not appear to have approval for rate increases from the RAB for any aspect of the expansion.
The public have a right to a full explanation from either the RAB Authority and/or Ascendant for why the share capital is being reduced at inflated cost to Ascendant, while its plan is to have a massive capital expansion.
Last month, all but 1,000 of the 122,861 Ascendant shares traded on the BSX, or more than 99 per cent of the total Ascendant shares traded, were repurchased by Ascendant at about $17 per share for $2,071,637, at what is being considered by Ascendant as the independent market price because of one small trade during the month.
What is the benefit to the company in pursuing this strategy? It benefits only the shareholders that sell. On its face, to the extent visible and without being able to tell if insiders or associates of insiders are trading, it appears that the plan is technically permissible under BSX rules covering share repurchases.
Historically, in the early 1980s, company stock repurchase schemes on the US markets were prohibited as a form of fraudulent stock manipulation.
Now, in the US markets, they are very common and acceptable, but the percentage of buybacks by the company to total market trades over a period is limited to make certain there is a real market price and independent trading volume — unlike the Ascendant scheme.
With Ascendant buying back more than 99 per cent of total traded shares in November, and in excess of 65 per cent of total trades over the past seven months at the inflated price, the facts speak for themselves to what extent, if any, a market exists at the inflated price of $17 per share, other than by the cash purchases from Ascendant propping it up.
We also know that recent changes to the Ascendant by-laws and a reduction in the number of board members appear to have concentrated control of the board in fewer hands and that authorisation for future executive participation in share rights/options/benefits has been significantly expanded.
None of these recent developments appear to benefit the customer of this regulated company when it comes to setting rate tariffs for the public consumer or fair purchase prices for customer-produced solar electricity.
A second article on this subject will appear shortly commenting on consumer solar investment plans and their need to be properly and consistently applied by the energy department, the RAB and Ascendant in order for the customer to properly finance the investment, and receive the economic benefit promised when inducing the consumer to make private solar investments to reduce their energy bills while feeding the grid.
• Sir John Swan, a businessman, was the Premier of Bermuda between 1982 and 1995, and a former Belco board member. Michael Murphy, a former attorney for American International Group, was the chairman of the Association of Bermuda Insurers and Reinsurers between 1985 and 2005