Printed in the Business Monday Newspaper on February 13, 2012
The Commission will be engaging the services of consultants who will review and assess the operating and financial performance of the Barbados Light & Power Co. Ltd. (BL&P). This week this forum will be used to look at some of the issues that will be examined as the Commission undertakes a detailed review of the application of the fuel clause adjustment (FCA).
The Commission will be examining whether a revision of the current approach to the recovery of fuel cost is warranted and whether the BL&P could be given increased incentive to utilise the fuel and generating plant to ensure that fuel cost is minimised. In so doing the consultants will among other things assess whether the funds obtained from the current FCA methodology is equal to the actual fuel costs incurred by the BL&P. The consultants will also consider the impact of the monthly fluctuation of the FCA on the BL&P’s cash flow and how alternate methods of fuel cost recovery will impact the cash flow. Another important component of the project is the investigation of the use of efficiency factors.
The FCA is a mechanism that is intended to allow electricity service providers such as the BL&P to recover the cost of fuel used in the generation of electricity. The clause, as it is employed by the BL&P, is designed to track and respond to these changes on a monthly basis. It is a direct pass-through charge of the costs of fuel, which precludes the need for a full rate case that reviews all of the utility’s cost of service. Instead, this rate component is allowed to change with the utility’s underlying fuel costs. In its simplest form the unit value of the FCA is the cost of fuel used divided by the kilowatt-hour (kWh) sales. The actual unit price of fuel is outside the control of the BL&P as the company purchases fuel from the Barbados National Oil Company Limited, the sole direct supplier of fuel on the island.
The typical motivations for FCAs are two-fold:
- The underlying costs are often large and quite volatile. As such, it is difficult to predict their expected level in terms of price or quantity accurately over long horizons and, at times, even over relatively short horizons.
- The underlying costs are largely beyond the utility’s control, since they reflect, for example, market conditions in the wholesale fuel markets that individual utilities do not choose or influence.
A significant number of jurisdictions including Jamaica, Florida, Louisiana, Iowa, Arkansas and Tokyo utilise an FCA, which may have been adapted to meet their specific requirements. At present BL&P’s FCA fluctuates on a monthly basis depending on fuel prices and the number of kWh sold. In some jurisdictions it is set on a yearly basis by the regulatory board, based on current and/or historic fuel costs and projections. Provisions for amendment may also be included should there be under or over recovery. In Kentucky in the United States of America, the FCA is set against a baseline fuel cost that is incorporated within the per kWh portion of the base rate. If fuel costs in a given month are above the baseline, the FCA appears as a per kWh surcharge. Alternately, if fuel costs fall below the baseline, an FCA per kWh credit is applied.
In Colorado the FCA is designed to allow cost recovery only within certain limits, thus not assuring the utility of full recovery. Vermont and Wisconsin explicitly prohibit FCAs out of concern that these mechanisms can result in ratemaking that places undue focus on one cost factor while failing to capture reductions in other costs that may be occurring simultaneously. During a rate hearing, these two states do not separate fuel costs but incorporate it with the other cost components and assesses all electricity generation and production costs at the same time.
In 2006 the Commission undertook a study on the fuel clause adjustment which examined the application of the FCA and confirmed, among other things, that the company did not make any profit on this charge. However, in view of the full pass-through nature of the FCA, it does not incorporate any specific requirement for the company to be fuel efficient. Nevertheless information available suggests that the company has been generally efficient. In concert with the Commission’s usual monitoring programme and in view of the time that has elapsed since the last review, the Commission has contracted for an independent evaluation of the method of application of the FCA of the BL&P.
The Commission will also consult with the public on this issue to facilitate a clear understanding of all of the matters involved and to collect any comments and recommendations so as to allow your feedback to inform the way forward. We therefore encourage the public to grasp this opportunity to participate fully in the upcoming consultation.