Energy regulator orders PREPA to start fuel hedging program to mitigate rising oil prices
By The Star Staff
The Puerto Rico Energy Bureau (PREB), the commonwealth’s energy regulator, has hired Stone X Financial to develop a hedging program that will allow the Puerto Rico Electric Power Authority (PREPA) to avoid the upward trend in the price of fuel used to generate over 90% of the island’s energy.
“The Energy Bureau orders PREPA to fully cooperate with Stone X in all matters described herein and any further pertinent requests issued directly from Stone X to PREPA,” the regulator said in a recent order.
One of the main causes of the prohibitive cost of electric power in Puerto Rico is the high cost of purchasing fossil fuels. The increases and volatility of the price of fossil fuels “in the face of geopolitical events and conflicts beyond our control have caused unprecedented economic impacts both in the past and in recent times,” the PREB said.
“Although the final solution to the problem lies in relying as little as possible on these fossil fuels and moving toward electric power generation based on renewable sources,” the regulator noted, “there are tools widely used by countless jurisdictions to mitigate these increases, at least in the short term.”
One of those tools is hedging through the purchase of fuel in the futures markets. Futures markets are those financial markets listed on the stock exchange in which the purchase and sale of derivative contracts or futures contracts is made to ensure a future price of a commodity, asset or security.
A futures contract is a standardized contract between two parties to buy or sell a specific quantity and quality of a commodity, in this case fuel, for a price agreed upon at the time the transaction takes place, with delivery and payment occurring at a specified future date. The contracts are negotiated on a futures exchange, such as CME/NYMEX or ICE, which acts as a neutral intermediary between the buyer and seller.
In essence, a futures contract obligates the buyer of the contract to buy the underlying commodity at the price at which he bought the futures contract.
“Through the purchase of these contracts, the purchase price of oil or natural gas, for example, fuels used by the Electric Power Authority for power generation, can be secured,” the PREB said. “Thus, when the price of these fuels is at a relatively low level, PREPA could buy future contracts as a measure of protection against future upward fluctuations in the price of these fuels, thus achieving the stabilization of prices and avoiding having to pass this cost suddenly to the energy consumer through their bill.”
It is part of the Puerto Rico Energy Public Policy “to ensure that the purchase of fuel for energy generation and the purchases of power for the transmission and distribution network are made at a reasonable price that takes advantage of the reductions in the costs of supplies according to the market, the geographical realities, and the realities of Puerto Rico’s electrical power infrastructure.”
The PREB said that as part of its duties it intends to establish a hedging program and has acquired the professional services of Stone X Financial Inc. to develop a methodical and structured fuel procurement hedging strategy program. The design of the project is divided into two phases: Phase 1, risk assessment, and phase 2, review of procurement documentation and activities.
The PREB ordered PREPA in the Oct. 13 order to provide certain information related to its fuel forecasts in 15 days. Puerto Rico, according to the law, must draw all of its energy from renewables by 2050.