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WAPA Management Seeks OK from Board on Plan to Reduce LEAC

WAPA Hedge Program
Photo courtesy: istock photo

At an emergency meeting with its Board of Directors, VI Water and Power Authority (WAPA) Executive Director Hugo Hodge, introduced a plan to take advantage of the dropping cost of propane and other fuels. The plan requested permission to re-institute its former “Hedge Program” with a few modifications. Hodge justified the request saying that “Taking advantage in the drop of propane prices will give ratepayers significant cost savings.”

Traditional hedge programs allow a utility to take advantage of price drops in the market by enabling the utility to contractually gain a price commitment for a given period of time. Hedging, according to the WAPA Board Chairman Gerald Groner, is an investment tool used in the industry. But it has disadvantages,” continued Groner, “For instance, there is no guarantee once the commitment is made that prices won’t go lower. “But,” continued Groner, “hedging is a process that all companies which live off commodities use to smooth out the volatility in a given market’s pricing.” In other words, it helps to bring down the average cost to the consumer.

To expedite the process of examining the new program’s modifications, the WAPA Board agreed to the formation of an initial hedge committee which would include WAPA’s Chief Financial Officer, the Executive Director, the Board’s Chairman, and Finance Committee Chairman.

In explaining his strategy to the Board, Hodge specified that he planned for WAPA to begin the hedging in small portions and then ramp up its purchases over the next two years. The small portion purchases would begin during the second quarter of 2015 (July) and continue throughout 2016. Hodge hopes that between the third and fourth quarters of 2015, the price of propane will continue to drop, so he is not anxious to make one large purchase commitment up to the 50% capacity allowed by the Public Service Commission (PSC). He would prefer to purchase in smaller portions while monitoring for any further downward price movement in the market.

Hodge came to the WAPA Board meeting prepared with new policies and procedures and a resolution that would authorize the authority to re-establish the old hedge policy with some meaningful modifications. WAPA’s old policies and procedures allowed WAPA to hedge purchases up to the 75% level. However in the subsequent years, the PSC has restricted such purchases to only the 50% level. Hodge shared with the Board market estimates which indicate that during 2015 prices for propane could be about $.55/gallon and in 2016 that price could come down to $.51/gallon.

During the brief meeting Hodge repeated that the people of the VI along with WAPA will benefit from the hedge program because there will be NO upfront costs to WAPA. Instead WAPA will need to have an available line of credit for the purchases. Hodge also stated that WAPA, as a non-profit organization, realizes no benefit from the reduction in commodity prices. No funds go to pay for any of WAPA’s operational costs. The drop in propane prices will directly reduce the Levelized Energy Adjustment Cost (LEAC) which will result in a benefit to ratepayers. Hodge predicted that once the hedge program is re-established utility consumers could see a drop in their utility bills as soon as July 2015.

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