The Caribbean Utilities Company (CUC), while moving to clear confusion about electricity costs, has indicated that prices could rise again in March 2012.

A price cap, which currently limits the cost of fuel, will expire in March next year, exposing Cayman consumers to the vagaries of international oil markets.

CUC watchdog the Electricity Regulatory Authority (ERA) could order that a new capping agreement be put in place, but at a potential cost of $1.7 million.

The utility provider completed the one-year agreement to preserve the price of diesel at $3.55 per gallon in early April this year, after gaining late-March approval from the ERA.

“There were ongoing discussions on hedging for several months while the relevant documentation was developed and agreed by the ERA, CUC and the hedging counterparties,” the statement said. “The final approvals and instructions to proceed with the specific hedges were received from the ERA in late March.

“The agreements were completed in early April, after ERA approval.  The contracts are on a deferred premium basis with equal monthly installments totalling CI$1.7 million by the end of the agreements in March 2012.”

The hedge will expire in March 2012, and while CUC said on Thursday it would not renew the price cap “unless requested by the ERA,” its statement says it had solicited a five-year fuel-supply contract with local companies Esso and Texaco.

CUC said it was fair that consumers should pay for the $1,7 million hedge agreement because the company was not earning a profit from the investment but rather seeking to control costs.

“The hedge is not a financial play,” the company said, meaning it was not gambling with the money. “It is protection against the price moving above $3.55 which was requested and approved by the ERA on behalf of consumers. CUC does not stand to gain financially from the transactions.”

The statement comes in the wake of last week’s call by Premier McKeeva Bush for an outside auditor to examine CUC’s books “to see what the true cost [of electricity] is and where it’s coming from”.

The company says government’s 75-cent tax on each gallon of diesel fuel means far higher costs to consumers than the $1.7 million one-time payment, although questions remain.

The impact of the duty, the company said, is just more than two-and-a-half cents per kilowatt hour (kWh), “$0.0265”, according to an official statement, which calls that number “significantly higher than the $0.0035 hedging impact”, approximately one-third of a cent per kWh.

While the hedge caps the price of fuel at $3.55 per gallon, market prices are currently at $3.03 per gallon. Additionally, only 40% of the fuel CUC burns each year, approximately 30 million gallons, is included in the $1.7 million hedge, but which tacks another 15 cents onto consumer bills for each of those 12 million gallons covered by the agreement.

“The consumer is paying market price which is currently approximately US$3.00 [per gallon] and the hedge premium is the equivalent of approximately US$0.15 per gallon for the volume of gallons hedged,” a CUC statement said.

Still, questions persist. CUC says the 75-cent per gallon tax is the highest in the region, compared with a second-highest 40 cents elsewhere and an average of 10 cents throughout the Caribbean.

Yet, while the tax yields $14.4 million per year for government coffers, the company also says that those taxes are the least costly element in producing a kWh of electricity, which costs 35 cents.

Only 4.5 cents of the total is attributed to fuel duty. More than twice that amount, 10.5 cents, goers to cover CUC’s own costs, while the final 20 cents per kWh pays the $3.03 price of diesel fuel.

Saying, “we have no additional comment”, CUC did not respond to further questions.