RECO’s Conundrum
Energy Prices Stifle Island’s Growth Potential

July 1st, 2011
by Thomas Tomczyk

[private] RECO is in a “catch 22.” If it follows all the rules: stays with government price rates, continues to buy government taxed fuel, and continues to upgrade its generating and distribution capacity, it might never be profitable.

There are three possible solutions from the situation for RECO’s owner to make money: RECO secures a fuel import license, it gets the government rate increase it is asking for, or creates a separate energy company that will sell power to RECO.

With fuel import license being a prized possession of mainland interests like Freddy Nasser, RECO is focusing on the two latter options. While so far the government has refused to increase the RECO rates, a planed wind farm company “Trade Wind Energy” could provide a way to rake in substantial revenues for RECO’s owner while RECO continues to report losses.

A boat comes in to bring 100,000 gallons of fuel from Puerto Cortez's HonduPetrol to RECO.

A boat comes in to bring 100,000 gallons of fuel from Puerto Cortez's HonduPetrol to RECO.

The growth of any community depends on several basic criteria: the cost of getting supplies, cost of basic merchandise, and cost of energy. The economic growth of Roatan depends on the sum of all of these costs. The cost of energy for people living and working on Roatan has been increasingly a source of frustration and worry.

In the last two years the efficiency of RECO producing its energy went from one gallon of diesel producing 11 Kwh to 15 Kwh. “The energy commission set their proposed rates at us being 18 Kwh, and that is not attainable,” said Richard Warren, General Manager of RECO.

The company has also increased its efficiency of power distribution and the energy loses at the point of use went from 18% down to around 11%. With all these efficiencies and savings, RECO is probably one-third more efficient than three years ago. Still, Warren says that the company barely brings a profit on day-to-day operations.

RECO is still working with 1996 tariffs, and Warren says that they submitted a request for the new energy tariffs in June 2009. The Energy Commission has come back with their proposal of new rates that are lower than the current ones and RECO has sued the Honduran Central Government. Meantime said Warren “we [RECO] can continue to use old tariffs,” and showed documents that showed RECO losing 6-8 million Lempiras every month.

RECO customers feel that they are loosing as well. As energy cost has crept up to Lps. 8.30 /Kwh and with a hot summer ahead the energy bills could bankrupt businesses and individuals. To put things in perspective it is Guanaja and Utila that have the most expensive energy in the Caribbean. Roatan comes in third. UPCO [Utila Power Company], with around 17 employees and 1.5 Megawatt production sells its energy at Lps. 8.5 /Kwh. Guanaja’s BELCO, with around a dozen employees sells their power at Lps. 9.0 /Kwh. “When they need a power increase they just go to the Municipality for approval. That is the way it should be,” said Warren referring to BELCO.

Still Roatan’s Caribbean neighbor to the east manages to keep its energy costs in check. Cayman Islanders enjoy one of the best lifestyles in the Caribbean, yet their energy cost is 30% less than on Roatan. While a GDP per capita in Cayman Islands is around $43,800 Roatan’s minimum salary is of $4,300. The fuel transport costs in Cayman Islands are considerable as it takes over two days for a fuel boat to reach the isolated country state.

With the most expensive energy cost in the Caribbean, some of the lowest salaries in the Caribbean and history of riots over energy costs in 2007-2009; it is perhaps surprising that there have not been protests in front of RECO gates.

“If I didn’t have the Cobras [Honduran riot police] here, we would have had riots here already,” said Mayor Galindo. “Everyone knows that taking to the streets doesn’t only hurt RECO but hurts the local economy.” While that is certainly true, RECO’s kilowatt cost to consumer and unreliability are a hurt and danger to the economic future of Roatan. With the energy bill being 20% or more of the operating costs, the profit margins are too small to make business on Roatan feasible.

Elmer Santa Maria, founder of the 138 low-income housing of a residential area in Dixon Cove agrees. “Its [riots] not far from happening. (…) People are just afraid of Cobras,” says Santa Maria.

A typical home in the residential area of Santa Maria is one bedroom. Sara Romero, a homemaker, says that three years ago she paid Lps. 500 a month for electricity and now her bill is over Lps. 1,700. “We still have the same appliances: a fridge, television, stove, two fans, a washer, but now we pay Lps. 1,700.” With two people working and bringing in Lps. 7,500 a month, she has to spend 23% of her income on electricity. “After paying for house payment [Lps. 2,720] and school we barely have enough for food,” says Romero.

There is a possible solution for energy costs for the very low energy consumers on Roatan. The “Bono 80” plan proposed by Bay Islands Congressman Romeo Silvestri and passed by Honduran congress in 2010, has the below 150 Kw consumers, electric bills to be paid entirely by Honduran government. Governor Shawn Hyde says that Bay Islands are the only Honduran department where central government doesn’t apply the subsidy. Hyde says that the hold on implementing the plan is at the Honduran ministry of Finance.

While until now small consumers had few choices but to be on RECO, large residential consumers and businesses have been switching off RECO in droves. “We are not on RECO,” said Mayor Galindo, who explained that his monthly home electricity bill would go from $1,500, where he uses his own generators, to $2,000 if he switched over to Roatan Electric Company.

“Let them use their own generators,” angrily said Richard Warren. “But rules are about to change.” Warren said that these customers will be charged a monthly “demand charge” and a higher cost per Kwh than full time customers.

There is a point where electricity costs begin to stifle growth of an island and endanger its future growth. “When you spend 15% of your profit on energy, then your margin disappears,” said Herb Morici, owner of Pineapple Villas development that switched off RECO to save thousands of dollars a month.

RECO’s answer is that “they calculate the fuel costs, but don’t account for the costs of overhauling and purchasing new generators,” said Matthew Harper, RECO Operations Manager. Still, just a couple years ago it didn’t make sense to buy your own fuel and run on your own generators.

The most expensive part of running RECO is buying the diesel to run its generators. Once or sometimes twice a week a boat filled with 100,000 gallon of diesel makes its way to RECO. The boat tanks are filled with diesel from Puerto Cortez and in mid June RECO was paying Lps. 65.20 per gallon. With one US oil barrel containing 42 gallons and costing $102.00, the gallon costs $2.42 or Lps. 45.90. The extra Lps. 20 that RECO is paying goes to Honduran taxes and Hondupetrol fees. That is the profit margin RECO needs to stay profitable.

After a government intervention and take over of RECO in 2007 some islanders fell in love with a concept of a benevolent billionaire, Kelcy Warren, who would subsidize a company out of his own pocket. That wish some islanders had wasn’t realistic and the acceptance of reality has been slow in coming.

A RECO employee looks over a Wartsilla generator.

A RECO employee looks over a Wartsilla generator.

While in 2008 it still made sense to be connected to RECO as cost of running a generator could not be lower than power purchased from RECO, this is no longer true today. More and more houses and businesses are switching off RECO to save money and take out the unpredictability of losing power in the middle of the night and having their electrical equipment damaged: Roatan Mayor’s house, the house of Ana Svoboda, the president of the Chamber of Commerce, Pineapple Villas… the list goes on and on and is growing, are all off RECO power.

“I can’t afford to pay aguinaldos [extra monthly salary paid to employees] and my 112,000 Lempira RECO bill. I will have to lay some people off,” said Bonnie Jackson. Jackson was amongst the islanders who trusted that Kelcy Warren represented an American with competence and cash to run the company better than bidders from Dominican Republic [Punta Cana] or Freddy Nasser from San Pedro Sula.

Kelcy Warren didn’t look very far to appoint a General Manager for a broken energy company. “I’ve run big operations, pipeline processing companies,” said about his qualifications to be General Manager of RECO, Richard Warren. The fact is Kelcy Warren appointed his cousin [Richard Warren] who never ran an electric utility company, worked outside the US, let alone in a corrupt Third World country. The learning curves for the two Warrens have been steep.

While Kelcy Warren lives in Dallas and vacations at his mega house in Barbaretta, it is his cousin that manages day-to-day RECO operations. Richard Warren loves the spotlight, doing weekly TV shows and Radio shows, yet he has done little to improve the company’s image in the community. “We buy soccer balls. Fix baseball stadiums. I find out about it when I have to sign a check for it,” said Richard Warren. RECO’s GM has no strategy, nor expressed any regards to develop one, how to change its tattered image of a company that many people see as incompetent, exploitative and arrogant.

Richard Warren in turn sees RECO as a victim of incompetent and corrupt central government officials. “They are uneducated, but they just can’t help it,” said a patronizing Richard Warren.

When asked if he was planning to be paying the increase fee of Lps. 300.00 per pole to Roatan Municipality, Richard Warren just laughed. When asked when he would install “buy back meters” to encourage small producers to sell power to RECO when they can Warren responded: “when we get a new tariff.” So much for promises and developing solar, independent energy producers.

Richard Warren seems to have an answer for everything and is unapologetic about any of RECO’s performance and loyal to his cousin-boss. “We grew up dirt poor,” describes his [Richard Warren] and Kelcy Warren’s childhood.

Still Kelcy Warren, hasn’t gotten to be a billionaire by just being a nice guy. Few people had met him and he remains just a name to most Roatanians. “He doesn’t regret the investment, but is disappointed in the way he was treated. He just wants to do well for the island,” said Richard Warren about his billionaire cousin. While Kelcy Warren might “want to do well” for Roatan, he definitely “wants to do well” for himself. In the US Kelcy Warren made headlines with the biggest US real estate purchase of 2010; a 46.5 million dollar Colorado ranch that was valued at $88 million. Warren knows a bargain when he sees it.

Arlington Castro, operations and maintenance chief at RECO stands by a Wartsilla generator

Arlington Castro, operations and maintenance chief at RECO stands by a Wartsilla generator

Kelcy Warren, or “the investor” as his cousin Richard Warren likes to call him, has certainly made a lot of improvements in RECO, $24 million to be exact. There are new filters for fuel and water and now RECO is moving its main lines from “the bush” to run on concrete poles along side the island’s main east-west road. “Its easier to access [the main lines] when there is a problem and much easier when we have to work at night,” said Arlington Castro, operations and maintenance chief at RECO. He has been working at RECO for 14 years, practically from the beginning of RECO as a private company.

With 42% above the 12.7 Megawatt peak demand of Roatan, the island still suffers frequent outages. “I’ve been on many Caribbean islands for the last 20 years and this one is the worst and most unpredictable. We are basically paying dock fee prices, that are 47-50 cents maximum,” says Mike McKmney, manager at the Palapa Bar at Parrot Tree Plantation.

An example of how people dislike RECO came during the Easter Week (Semana Santa) when 12 “unexplained faults” on Wednesday paralyzed the entire island. The suspected acts of sabotage coincided with a visit to the island of Honduran Vice president and president of congress. Richard Warren suspects political motivation. Chopped down trees falling on RECO wires, had fallen from Sandy Bay to Pollytilly. “We filed a police report,” says Mathew Harper. “RECO has a lot of enemies.”

Whatever the cause, the “faults” RECO disappointed many causing business to lose customers and providing an image of Roatan as a destination that can’t get its act together. “Over the Easter Week [2011] it [the electricity service] was ridiculous. It was out every single day, especially late at night. They [RECO] should have brought back ups,” said McKmney.

McKmney says that RECO’s customer service is atrocious and hasn’t changed since the new owner took it over. “No one ever says hello or greets you. The office is the same unpainted as four years ago and when you call emergency number no one ever picks up the call.”

With all their technical expertise RECO and money, the company has no strategy of public relations, image management. The number of people that are upset with RECO is growing. As an example Boicot [sic!] to RECO Roatan Facebook page, had 380 fans while RECO’s official Facebook page had 240 fans.

Many people believe that RECO has a monopoly on power generation and distribution on Roatan. That issue is not so clear. According to Mayor Galindo RECO has a document signed by the Roatan and Santos Guardiola Municipalities providing RECO with exclusive rights as the islands power provider and distributor. “That monopoly is not allowed under Honduran laws and that [RECO’s “monopoly” on power generation and distribution] “could be challenged in court.” In fact Roatan Municipality is considering its own way of generating power from methane in the municipal garbage dump. “They could generate two megawatts of energy per 20 tones of trash a day,” said Mayor Galindo, who estimates that 65 tones of trash are deposited at the Mud Hole dump by five municipal trucks, not “counting private dumpers.”

“We won’t prevent them. We want to be good neighbors about it. If they want to lose money trying to generate power they are welcome to..,” said about Municipal plans Warren. While Muni is thinking of challenging RECO’s monopoly on power production, Kelcy Warren is in the process of stripping RECO of that monopoly himself.

Tradewinds Energy, located on a 77 acres site on slopes of Dixon Hill, is a company that Kelcy Warren created to generate wind power and sell it back to RECO. According to Richard Warren 26 refurbished Nordtank 150 kW wind turbines from a wind farm in the Mojave dessert are making their way to Roatan right now. A $3.5 million investment is expected to generate 3.9 Megawatts of energy, about one third of energy RECO currently consumes.

Within a year RECO plans to be buying power from Trade Winds Energy at a stable rate, but keeps the books separate from RECO’s. The investment would also be less vulnerable from possible government take over threats that have happened in Latin America before.

The Caribbean has some of the most expensive energy in the world. Other than that of the natural gas on Trinidad and geothermal on Dominica, Caribbean islands are almost exclusively dependant on diesel and bunker fuel for their energy supplies.

In 2010, Steven Chu, US energy secretary supported the idea of interconnecting Caribbean islands. “Some of these island-states have wind and solar sources… in order to make them more economical it would be nice if you could connect these island-states to each other… underwater High Voltage DC lines have the potential to link Caribbean islands, make clean energy more accessible and profitable, and make island economies more energy secure.” “Energy secure” Roatan is far from being. [/private]

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