WAPA says LEAC falling short as deferred fuel bill hits $49.5 million

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ST. THOMAS - As discussions about avoiding a "fiscal cliff" dominate the national stage, board members of the V.I. Water and Power Association on Thursday expressed concerns about what could become the utility's own fiscal doomsday scenario.

The discussion began during a financial report from WAPA's chief financial officer, Julio Rhymer, which showed WAPA's deferred fuel balance was $49.5 million at the end of September. The deferred fuel balance represents the cost of fuel that WAPA has purchased to generate electricity and run its water system but has not recovered through the Levelized Energy Adjustment Clause, or LEAC.

In theory, WAPA petitions the V.I. Public Services Commission on a quarterly basis to adjust the LEAC to cover its anticipated fuel costs for the upcoming three-month period.

However, depending on what level of LEAC increase the Public Services Commission approves and depending on the actual price WAPA ends up paying for fuel, as well as other factors, WAPA's fuel costs can exceed the amount of revenue brought in from ratepayers.

For instance, WAPA under-recovered its fuel costs by about $6 million in the quarter that ended Sept. 30, according to Rhymer.

Compounded over several years, the deferred balance has grown to its current $49.5 million.

"We're actually having cash-flow issues at this point, especially in terms of such a large under-recovery," Rhymer said. "It's actually impacting the authority's ability to go forward."

It is unclear exactly where the balance was before September.

According to an August report from Georgetown Consulting Group, WAPA has failed to account for more than $10 million in deferred fuel costs. The consultants said WAPA had a deferred fuel balance of $53 million in March compared with a reported $42.4 million in August. No complete explanation was given for the change, according to the consultants.

Rhymer said WAPA "is not in crisis mode now," but the problem can become exacerbated if the deferred fuel balance is not reduced. WAPA has been drawing from a line of credit and bond debt - totaling about $27 million - to finance the deferred fuel balance, he said. The remainder comes directly from WAPA's operating budget, which is supposed to be spent on things such as maintenance and paying vendors.

"In terms of cash-flow, you have issues if you do not have cash," Rhymer said.

Rhymer's report showed WAPA is operating at a $5.5 million loss so far this fiscal year.

The predicament sparked alarm from board Secretary Noel Loftus and Chairman Gerald Groner.

"Clearly it's not leveling if we've accumulated $51 million in deferred fuel expenditures," Groner said. "What's broken? Why isn't it level?"

Executive Director Hugo Hodge Jr. described the LEAC as an outdated cost-recovery mechanism, a system designed for a commodity market that is not nearly as volatile as the one in which WAPA now must buy its fuel oil. Additionally, during WAPA's most recent petition to increase the LEAC, the Public Services Commission approved an adjustment based on the price of oil being significantly lower than what WAPA requested, according to Hodge.

"I'm at a loss for a reason," Hodge said.

PSC Chairman Thomas Jackson did not return a call for this story. PSC Executive Director Keithley Joseph declined to comment about the discussion that took place at the meeting.

Hodge said the uptick in the deferred fuel balance this fall was the first in more than a year.

"Actually, over the last year and a half, we've had a steady reduction," he said.

The most recent relevant data available Thursday was a fiscal year 2010 audit posted on WAPA's website.

"The deferred fuel balance increased by $354,000 to $46.2 million in 2010 as the Levelized Energy Adjustment Clause (LEAC) permitted by the PSC did not adequately allow the Authority to recover its cost of fuel during the year," the audit states.

The deferred fuel balance was $51.1 million in September 2011, according to Rhymer's report.

Either way, Hodge said, the $50 million threshold is approximate to a historic high, which did not sit well with the Board.

"We shouldn't be falling behind, whether oil is expensive or cheap," Groner said. "If the system is working, we should be able to recover our costs via our rates."

Hodge pointed to the long history of the deferred fuel balance and said that because it has been allowed to climb so high, the Public Services Commission would have a tough time trying to recover the entire balance within a short period of time.

The board circled back to what has become a familiar refrain among WAPA leaders and its critics: the more dependent WAPA is on fossil fuels, the worse off ratepayers will be.

"I think we all share in the frustration," Groner said. "This can't go on. Everybody knows the reliability of power and the efficiency of our units depends on timely maintenance and repair."

That cannot happen if WAPA is running short on cash, Groner said.

"It's like in the U.S., with the fiscal cliff," Loftus said. "We've been working up to it for years and years, and here at WAPA we have been learning to survive when we don't get enough reimbursement. But we're not over it."

Still, the situation may not be as dire as it sounded at times Thursday - at least not yet. When Loftus asked whether WAPA is nearing its credit limit, Hodge said WAPA still has access to additional credit if needed.

"I wouldn't throw up that flag yet," Hodge said. "We're not there yet."

Other expenditures

The board on Thursday also unanimously approved the following expenditures:

- $1.29 million for construction in the Main Street Hazard Mitigation Project on St. Thomas.

- $1.06 million in legal bills from the law firm Skadden, Arps, Slate, Meagher and Flom for various projects.

- $67,060 to purchase two parcels of land in Estate Penitentiary on St. Croix from the V.I. government for a reverse osmosis plant.

- Approval of a 20-year, $44,370-a-year lease with the V.I. government for a parcel of land in Estate Spanish Town on St. Croix intended to house a new electric substation.

- Contact Lou Mattei at 714-9124 or email lmattei@dailynews.vi.

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