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Oil rebound signals higher Belco bills ahead

Belco's customers will feel the effects of some significant increases in electricity prices when higher tariffs kick in next month.

But greater pain is likely in the coming months when the fuel adjustment rate — which has just hit a nine-year low — catches up with the spike in world oil prices that has occurred over the past three months.

The fuel adjustment rate reflects the cost of the diesel and heavy oil fuel that Belco burns, including the Bermuda Government duties levied on it. As a “neutral pass through” element of the bill, it has zero impact on Belco's earnings.

There appears to be a lag of around three months between a move in crude oil prices and a corresponding impact on the fuel adjustment rate, as the graph accompanying this story clearly illustrates.

Most notably, in mid-2014, when the crude price started to plummet, the fuel adjustment rate continued to rise for three months before it too started to fall.

The opposite is happening right now. The May fuel adjustment rate has been set at 7.65 cents per kWh, less than half of what it was just two years ago and the lowest rate charged since 2007.

This will have a dampening effect on the tariff increases — for now — and has allowed Belco to state that an average residential customer using 600 kWh would actually see a 3.5 per cent decrease in their total Belco bill from a year ago under the new tariffs.

That average customer will pay $45.90 as a fuel adjustment rate at today's level, down from $69 in May 2015 and $99 in May 2015.

But that element of the bill is likely to surge higher again in the coming months.

Yesterday afternoon, US crude prices were at around $49.40 a barrel, having topped $50 earlier in the day — up more than 80 per cent from the 13-year low of below $27 barrel just four months ago.

Using recent history as a guide, as depicted by the graph, it is likely that a spike of this magnitude will lead to a sharp rise in the fuel adjustment rate in the second half of the year — depending on what Belco actually paid for its fuel.

An aggravating factor for consumers is the increasing customs duty charged on fuel. The Government raised the duty last year and again this year. Duty now adds $31.79 onto the cost of a barrel of fuel oil and feeds directly into the fuel adjustment rate.

As Belco points out, duty on fuel makes up 5 cents of the fuel adjustment rate — around two thirds of the charge at this month's level.

Fuelling concerns: this graph shows the relationship between the US crude oil price, represented by the monthly average of West Texas Intermediate crude, and Belco's fuel adjustement rate (Data sources: Belco and the US Energy Information Administration)

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Published May 27, 2016 at 9:00 am (Updated May 26, 2016 at 11:32 pm)

Oil rebound signals higher Belco bills ahead

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