Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

House Bill 110 Would Disallow Use Of Fuel Adjustment Clause For Baseload Gas-Fired Electric Utilities; Creating Inequities And Higher Costs For Ratepayers  Posted: January 11, 2013

House Bill 110, sponsored by Representative Jim Gooch and assigned to Chairman Gooch's House Natural Resources and Environment Committee, would prohibit utilities from using the fuel adjustment clause for natural gas-fired electric baseload generating units, and require a full-blown rate case before an adjustment can be made to ratepayers rates due to changes in natural gas costs.

Fuel adjustment clauses allow utilities that are subject to the Public Service Commission’s jurisdiction to adjust the price of electricity in order to reflect fluctuations and changes in fuel costs (and costs for purchased power) on a real-time basis, without the necessity of a full base rate case. More predictable fixed costs are recovered generally in formal “base rate” cases (though costs for environmental compliance can be recovered through a surcharge mechanism rather than a full rate case).

By allowing fuel cost adjustments to occur outside of a formal rate case, this component of utility rates can change in a more contemporaneous manner to when the underlying costs are incurred by the utility. The utilities do not earn a profit on the use of a fuel adjustment clause (FAC), but instead pass through changes in fuel costs dollar-for-dollar. The FAC changes on a monthly basis, producing a credit or a surcharge on the bill reflecting higher or lower fuel costs incurred two months earlier.

Fuel adjustment clauses offer several potential benefits – first, by assuring that the changes in costs are paid or the benefits received by those customers whose demand resulted in the costs having been incurred and who benefited from the fuel purchase, rather than being borne at a later time by ratepayers who may not have created the demand that resulted in the fuel cost having been incurred. A more contemporaneous passing through of fuel cost changes equips ratepayers to better control their utility cost by adjusting usage or taking steps to become more efficient in the consumption of the fuel.

The decision to disallow fuel adjustment for natural gas-fired utilities (but not those utilizing coal as a fuel, nor natural gas-fired peaking units, which would still be able to utilized the FAC) would affect those electric utilities under PSC jurisdiction who, utilizing the “least-cost alternative” analysis that has been imposed on them by the General Assembly and the PSC, have elected to replace existing coal-fired electric generation capacity with natural gas to meet base load rather than as peaking units. In the end, however, it is the ratepayers of these utilities who will pay the price for more frequent base rate cases, and in potential overpayment for fuel costs that are not allowed to be more timely adjusted.

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