Belco ordered to phase out special discounts
Regulators have ordered Belco to phase out special discounts given to employees and hotels over the next two years, arguing that the public is effectively paying for them.
The Energy Commission has also demanded the electricity provider scrap its “convenience fee” on credit card payments.
The revelations came in the EC's 76-page filing, just published on the government website, which shines a light on almost a year of deliberations that ended with Belco being given permission to raise electricity tariffs from this month.
The document also reveals that Ascendant Group, parent company of Belco, plans to use a captive insurance company to try to reduce its insurance costs.
And the EC is also calling for Ascendant to provide more details on shared services within the group to address concerns that Belco customers might effectively be subsidising Ascendant's other businesses.
The EC, whose chairman is Michael Leverock, is due to hand over regulatory responsibility for the electricity sector to the Regulatory Authority this year. As a regulated utility, Belco must adhere to the regulator's directives.
In the filing, the EC states on discounts: “The Commission finds that the embedded staff and special hotel discounts are not in
the public interest whereby the public pays for these discounts without regulatory approval.”
In its final ruling, dated May 13 this year, the EC orders Belco: “All staff, hotel, special groups, or any other discounts applied to both the base and fuel adjustment rates (with the exception of the waiver of the facilities fee to the Bermuda Government's Social Assistance programme and the quick payment discounts) shall be phased out over a two-year period commencing on the date of this letter.”
All customers receive a 5 per cent discount for early payment, but some get additional help, Belco's submissions reveal. The Bermuda Government, for example, receives an additional 5 per cent discount, which enables it to save more than $1.5 million on its annual bill.
Bermuda Hotel Association members also get a 5 per cent discount during the November-to-April shoulder season, due to end when government payroll-tax concessions for the hospitality industry are halted.
Two hotels, the Hamilton Princess and the Fairmont Southampton, receive an additional 5 per cent discount, all year round.
A submission from Belco in the filing states: “This was originally negotiated in the early 1990s when the hotels were seeking to self-generate and disconnect from the grid. The disconnection would have caused a shift in the costs to the remaining customer base and this was agreed an incentive for them to remain on the system.”
Belco employees receive a 25 per cent discount on their electricity bills on top of the early-payment discount, a deal the utility said was “initiated as an agreed alternative to base salary increases during union negotiations”.
“The company pays for this cost and does not recover it as a part of the cost of service to customers,” Belco added. “All non-Belco entities in the group of companies pay Belco for the costs of any employee electricity discounts they have.”
On credit-card payments, the EC directed: “The convenience fee charged to customers for the use of credit cards for bill payments shall be discontinued.
“Efforts shall be made simultaneously to facilitate the use of all credit and debit cards currently utilised in the market as soon as practically possible.”
Belco customers can pay with MasterCard and a fee of 2.04 per cent is applied. The EC argued the fee is a disincentive to using credit cards to pay the bill and that it would be in the public interest to discontinue it.
Belco had argued that scrapping the fee would result in many more people using cards to pay bills. And the fees applied by credit-card companies would have be spread across the whole customer base, or “socialised”. This would “unfairly allocate costs” to those paying by other means, Belco said.
“Currently the expense to those who use cards to pay their Belco bills is approximately $45,000 per year as a group,” Belco stated. “This could instead exceed a million dollars if costs are socialised.”
Ascendant's plans to insure some of its own risks — initially coverage of plant, property and equipment — through a captive insurer were also outlined in the filing.
“Belco is spending in excess of $2 million per annum on this business class with a $750,000 deductible per incident,” Belco stated. “Belco also has currently uninsured lines of business including the distribution system, which incurred unplanned expenses of more than $4 million in 2012, funded from the balance sheet and unrecovered from customers.”
Actuarial analysis of Belco's claims history indicated a forecasted loss of $531,000 per year.
“Ascendant agreed to finance the risk at the $500,000 premium level, providing a maximum $750,000 of cover per annum for claims,” the firm stated.
“The analysis suggests a 40 per cent chance of no claim within in given year hence any premium payments retained could be accumulated and used to offset the larger and less frequent events that require significant cash to pay for unplanned events and damages.”
Ascendant Bermuda Insurance Ltd is licensed by the Bermuda Monetary Authority as a captive insurer and was incorporated in April 2014, according to the Registrar of Companies.
“The captive represents a transition from our historic ‘pay as you go' mode of operating for the first loss/deductible, which requires unexpected financing from our balance sheet, to a vehicle that offers to smooth out some of that volatility,” Belco argued.
On shared services, the EC demanded greater transparency from Belco on cost allocation.
“The Commission finds the perception remains that Belco substantially subsidies its parent entity. Shared services, loans and insurance risks are examples. Efforts to regularise cost/benefits would be encouraged to place Belco in a more favourable position in this regard.”
Ascendant said that some services were shared among the whole group, including finance, IT, human resources and transportation and that this “results in savings for Belco and its customers”.
Such services were budgeted and costs allocated to various businesses taking into consideration system usage and budgeted effort, for example. Ascendant director costs were attributed 50 per cent to Belco, while the cost of group executives was charged out on an allocated effort basis.
Asked for an update yesterday, a Belco spokeswoman said: “Belco is in the process of developing responses, initiatives and timelines around each of the Energy Commission's directives and will be getting back to the Commission with proposals to address all of the directives.”
The filing is also loaded with technical analysis. The EC approved an allowed return on equity of 7 per cent for 2016 and 8 per cent for 2017.
The new rates, which will take effect this month, will result in residential customers paying 8.7 per cent more for the first 250 kilowatt hours used. For the next 550 kWh used, there will be a 5.7 per cent increase and for the top tier — anything over 700 kWh — a 17.7 per cent hike will apply.
The graduated facilities charge will also rise by between $5 and $20 per month, depending on the amount of electricity used.
Commercial rates will go up between 16.6 per cent and 22.4 per cent.
• To see the Energy Commission filing, click under “Related Media” on this webpage.