Among the fees that are appended to your monthly electric bill is a little-understood fee that allows utilities to automatically pass on the costs they pay for fuels like coal and natural gas.
When natural gas prices go up like they did in the last two years, the utility companies pass these costs directly on to the tariff payers. Lawmakers and energy experts say these electric fuel adjustment fees have resulted in higher-than-expected utility bills in Kentucky, often when people need electricity most, like during a summer heat wave or a winter cold snap.
State lawmakers were so concerned about the impact of these fees that earlier this year they issued a resolution Call on utility regulators at the Kentucky Public Service Commission to review rules that allow utilities to pass these costs on to customers.
Kentucky’s supply regulators responded by opening an administrative review of fuel adjustment fees earlier this month. The case could lead to changes in the rules and reduce the volatility that ratepayers see in their month-to-month utility bills.
“In light of the Kentucky Senate’s request and due to his own concerns, the Commission opens this procedure to investigate the fuel adjustment clause, Cost recovery for purchased electricity, current and future fuel and electricity price volatility, and related cost-recovery mechanisms,” the commission wrote in one order opening the case.
The rules are from the late 70’s. Back then, coal was king, as 95% of the state’s electricity came from burning the black stuff. For coal, utilities have generally secured long-term, fixed-price contracts. However, as coal-fired power plants are being phased out, utilities are increasingly relying on a mix of renewable energy and natural gas.
Unlike coal, utilities generally buy gas on a daily basis on an as-needed basis, the commission said.
So when it gets really hot in the summer and everyone turns on their air conditioning, utilities often buy natural gas to meet peak energy demand. However, as the Commission notes in its mandate, these purchases are based on market prices, which also peak when demand is high.
Add in some geopolitics: inflation, a pandemic, a looming global recession and the war in Ukraine, and you have a recipe for volatile fuel prices passed right through to consumers. That’s because utilities simply want to recover dollar for dollar the cost of purchasing fuel to run their facilities. The fee or credit varies monthly with fuel price.
“Therefore, increasing reliance on natural gas as a fuel source for generation increases the volatility of fuel costs driven by the [fuel adjustment clause]’ the commission wrote.
Officials are questioning the allegations
The Commission is also skeptical that utilities are properly charging tariff payers for fuel costs, and is asking utilities and other stakeholders whether utilities need to provide additional evidence to justify this.
“The Commission will seek an opinion on whether utilities should be required to submit additional evidence regarding the reasonableness of their FAC charges and the cost of electricity purchased,” the order reads.
In January, eastern Kentucky utility has Kentucky Power overwhelmed customers more than $3 million due to a higher than average fuel adjustment fee. In this case, Kentucky Power reduced later charges to make up the difference for customers.
A Energy Affordability Study As of 2020, residents in the east of the state will pay most of their income on their electricity bills.
Josh Bills, Energy Manager for the Mountain Association, said many residents and businesses in eastern Kentucky experienced higher-than-expected prices again this summer because of Kentucky Power’s fuel adjustment fees.
The Mountain Association is among the nonprofit organizations intervening on behalf of the feepayers. Bills said he would like regulators to address the uncertainty that charges create for ratepayers when they receive their monthly bills.
“It would be nice to see a bit more stability, because that’s when energy demand is at its peak,” Bills said. “For households with a monthly budget, it is difficult enough to pay for electricity during these months.”
Kentucky Power declined to comment publicly on the case before responding to the utility’s regulators, but a spokesman said the utility supports the commission’s efforts.
With the advent of renewable energy, an even bigger question lurks: why would tariff payers pay for fuel when utility companies could generate electricity from sun and wind with zero fuel costs?
“So with wind or solar, you don’t have the fuel costs associated with natural gas or coal,” he said. “Part of that has to be establishing renewable energy as a really beneficial source of generation.”
But as it stands, fuel costs aren’t necessarily an economic concern for utilities because they have no “skin in the game” and can pass those costs directly on to customers, Bills said.
A spokesman for the Public Service Commission said no hearing was scheduled in the case, but the commission accepts comments from interested parties and will update the Legislature on any recommendations that emerge from the investigation.