We must align everyone’s interests on electricity
Subsequent to our opinion articles printed by The Royal Gazette on December 19 and 20, we feel that the Bermuda public should be fully informed of the most recent developments and turn of events in the energy sector and at Ascendant (whose principal asset is Belco), which may dramatically change the course of our future with respect to the use of more renewables in lieu of fossil fuels to produce our electricity.
While the changes may bring us to the forefront of sound thinking and action on these important matters, we must ask at what price to the consumer.
We must re-emphasise that the monopoly which Ascendant holds to produce our electricity through Belco, its subsidiary, was granted by the Government to provide an essential service to the people of Bermuda at reasonable rates.
It is fully regulated by the independent Regulatory Authority of Bermuda to see that the objectives of the Electricity Act of 2016 are met.
The exclusive monopoly was not granted for enriching the shareholders of Ascendant at the expense of customers or for rewarding their senior executives through incentive compensation tied to stock prices that may or may not reflect the underlying value of the company to a third-party prospective purchaser.
Since the new year commenced, three major developments have evolved, giving cause for further thought and analysis for the Bermuda public to consider.
1, Ascendant has “begun a process of evaluating strategic alternatives, including the potential sale of Ascendant Group Ltd”. This is done by hiring an investment banking firm at considerable expense to the company to find potential buyers for the company.
We understand that currently there may be at least three interested parties in the process of emerging as possible candidates.
This development comes at an inopportune time when neither the public, Ascendant management, the independent regulator, nor prospective purchasers of Ascendant know what acceptable Integrated Resource Plan will emerge to determine Bermuda’s future course for producing its electricity needs over the next 20 to 30 years.
We know that over 900 submissions were made on or before November 30, 2018, to the Regulatory Authority for consideration after it became clear that the Belco submission showed little interest in significantly increasing the targets for use of renewable energy and reduction of rate costs for consumers.
It is hard to imagine that a new owner of Belco, a publicly regulated monopoly, could emerge, simply based on price offered by the highest bidder to Ascendant shareholders without knowing in advance from each bidder what benefits they are bringing to the consumer or Bermuda’s future electricity grid.
It appears that the cart is clearly placed before the horse if this process were followed.
We also know that the Regulatory Authority may need one year from November 30 or perhaps more time to analyse, review, and if thought fit, support an Integrated Resource Plan eventually to be implemented by Belco.
2, The speculative price of the very thinly traded stock of Ascendant continues to rise, based on the possible potential sale/ or bidding news. As we previously explained, the stock value had been propped up over the past eight months by the use of company funds to buy back about $10 million of stock at prices which were already inflated in excess of 50 per cent in April and May of 2018 by a rejected approach of one of the current suitors at a then 40 per cent lower price than it trades today.
In total, the Ascendant stock rose from about $9.50 in April 2018 to it’s most recent trade in excess of $21 per share.
Whether Ascendant’s year-end earnings in a declining economy and analysis of book value by the suitors will support the stock price rise or be determinant of a purchase price or lead to any bids at or near such recent share prices is unknown.
This is especially true when the Government has specifically stated that consumer rate increases will not be forthcoming to cover the approximate $118 million recent Ascendant debt increase to build the North Power Station and the battery back-up for the spinning reserve.
Who pays and at what price needs to be disclosed to the public.
The future profit returns to a prospective purchaser of our publicly regulated utility can only come from either cost savings, innovation, expansion or rate increases to the current customers based on a notional return of 7 to 8 per cent on new depreciable assets when put into operation.
As a public utility independently regulated in Bermuda and a monopoly originally granted by the Government, the public, our institutions and businesses will ultimately suffer the consequences should the price offered Ascendant shareholders be too high or the suitor chosen have objectives that do not or cannot meet the Integrated Resource Plan ultimately adopted that, as yet, has not had sufficient time to emerge from the process.
3, The recent appointment as chief executive to the Regulatory Authority of Denton Williams, a very knowledgable former senior executive of Belco and Ascendant with a lifetime of experience at the power company, is a positive development.
Mr Williams has a good understanding of the options available to Bermuda to generate, distribute and satisfy it’s current and future power needs.
Mr Williams, his staff and ultimately the commissioners need sufficient time and more disclosure from Belco, and any prospective purchasers of Belco as to their long-term future plans and how they fit in to the Integrated Resource Plan that emerges.
An update on the status of the review of the submissions will be helpful to all concerned parties. It would be most unfortunate if the Regulatory Authority is not fully apprised in every step of the process when a potential buyer is being considered for Ascendant.
While not germane to our update, it may be useful for the reader to contemplate one of many roads already taken by another island state. In an ideal world it would be easier if the interests of consumers, producer owners and distributors were all aligned.
The progressive beneficial results of such alignment can easily be understood by reviewing the amazing success of the Kauai Island Utility Co-operative in Hawaii, on an island with somewhat similar electricity needs to Bermuda, an analogous population size, and the desire to reduce its dependency on fossil fuels to produce its electricity.
The entity is owned and controlled by the electricity consumers.
Sir John Swan, a businessman, was the former 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