BY MAUREEN N. MARATITA
Journal Staff

San Nicolas

Michael F.Q. San Nicolas, Guam’s delegate to Congress; hosted an Aug. 16 virtual briefing on Commodity Price Risk Management, with information presented by Marti Tirinnanzi, an expert in financial risk management and hedging strategies using derivatives and swaps contracts, and a subject expert with the Institute for Financial Markets.

San Nicolas said the intent was to “get some advisement and guidance and reference on expertise for us to be able to get a greater handle on our liquid fuel costs that particularly are impacting our power bills.”

He used the example of a Guam power bill of $337, of which $205 was the Levelized Energy Adjustment Charge. “You can see that a dramatic amount of our power bill is comprised of our liquid fuel costs,” he said. San Nicolas said in general Guam’s liquid fuel costs are higher than the national average – due in part to the limited size of the market.

“We also have some issues … with the liquid fuel retailers having all of the same gas prices, despite the fact that it’s supposed to be a competitive market. Some of our research has indicated that these common gas prices may be more so related to profiting off of the market than necessary due to the market conditions factoring in to those retail fuel costs. How much of that is impacting the fuel charges that we are having to bear in our LEAC, in our fuel costs for our utilities has not been transparent,” San Nicolas said.

The increase in cost of fuel is passed directly to the consumer, he said. “If we can better understand the financial markets and the options they provide for us to be able to hedge or manage the LEAC component of our utility bills, that can help us to have a smoother utility cost, as opposed to one that gets incredibly high …”

Tirinnanzi presented an overview of strategies that utilities use to control costs and pass those savings on to customers.

Her aim, she said was to “provide a high-level overview of what has to happen within the public utility – or really within any organization when it comes to controlling risk.” She also discussed available tools provided through the futures market and hedging strategies that a utility could consider as the best way to control commodity price risk. 

The multiple considerations that affect risk strategy, Tirinnanzi said “really requires a team of people in leadership and engagement, because it’s not just something that you can execute one day and walk away from. In fact, a hedging program has to be monitored on a day-to-day basis, because the markets are that volatile and it really needs to be carefully managed.”

When commodity prices change, they send a ripple effect through the organization, she said. “It affects your forecast and your capacity to control the outcomings of the organization. In the case of a public utility, the ultimate cost of power is passed on. If it’s not controlled, consumers have to pay that cost,” she said.

Whether there is a fall in commodity price or a rise in commodity price, she said, the idea is that neither uncontrolled is very good for an enterprise. What you get paid for as an executive – as a manager of an enterprise is for utility forecasts – is to demonstrate that you can manage an enterprise so that it’s sustainable and predictable and that includes the capacity to be able to pass on to customers prices for power that are manageable and within that risk appetite that was set by the government of the enterprise.”

Tools are available to use and available through the futures market, Tirannanzi said. She described the futures market or the futures exchange as a place to go for a myriad of energy commodities. All entities from producers, the oil companies, to distributors use exchanges to reduce price risk and forecast supply and demand. “The other important reason for these exchanges is also to plan for future infrastructure investment,” she said. A power company’s accuracy in forecasting and planning would provide the assurance a municipal bond underwriter would look for, she said. Exchanges permit buyers to immediately transact with one another, as well as plan on future delivery, Tirannanzi said. There are a number in the Asia Pacific region, she said, and proximity would affect delivery price.

Utility company risk objectives with regard to the “treasury” [or finance] function must balance customer bill increase tolerance and market price tolerance, she said.

The 18 participants in the briefing included several senators or their staff from the 36th Guam Legislature and some Guam media, including the Journal. The senators included Sen. Clynton E. Ridgell, who is chairman of the Committee on Economic Development, Agriculture, Power and Energy Utilities and the Arts, and thus has oversight of GPA.

Both San Nicolas and Ridgell said they were unaware if GPA has expert advice to guide the agency on its policies. Ridgell said he would be reaching out to GPA. “We do need to hear from GPA and CCU [the Consolidated Commission on Utilities],” he said. “The entire intent of LEAC was to level out energy costs,” the senator said. “I believe they do revisit the LEAC every six months.”

Tirannanzi said she had visited the GPA website. “I didn’t see a risk management strategy there.”

The Journal asked San Nicolas if he would be in favor of privatization of GPA. He said, “It would be good for us to employ private sector expertise … third party advisors.” He said he would be in favor of having greater private sector engagement. Private-public partnerships are the way to go.”

Established in 1989, the Institute for Financial Markets is a nonpartisan, nonprofit educational foundation, according to its website.  “The IFM seeks to increase public awareness and understanding of the importance of financial markets and the financial service industry to the global economy and to improve the technical competence of those in the industry who deal with the public. In advancement of such purpose, the Institute engages in activities such as research, publications dissemination, e-learning, courses and conferences,” the IFM says on www.theimf.org.

The IMF further says, “The IFM has a unique position in fulfilling the knowledge needs of industry professionals and investors, as well as other stakeholders of financial market information, such as the lawmakers, regulators, educators and the media.”

Kyle Glenn, vice president for U.S. government relations for the Futures Industry Association also attended. The FIA is an international association of futures commission merchants, brokers, banks, and trading advisers operating in the United States, European, and Asian futures markets – and has offices in Singapore. mbj