Among the fees tacked onto your monthly electricity bill, there’s a little-understood charge that allows utilities to automatically pass on the costs they pay for fuels like coal and natural gas.
When prices for natural gas spike, as they have over the last two years, utilities pass those costs directly on to ratepayers. Lawmakers and energy experts say these electric fuel adjustment charges have led to unexpectedly high utility bills in Kentucky, often when people need power the most, like during a summer heatwave or a winter cold snap.
State lawmakers were so concerned about the impacts of these charges that earlier this year they passed a resolution urging utility regulators at the Kentucky Public Service Commission to review the rules that allow utilities to pass these costs onto customers.
Kentucky utility regulators responded by opening an administrative case to review fuel adjustment charges earlier this month. The case could lead to changes in the rules and reduce the volatility ratepayers see in their electricity bills from month to month.
“Given the request of the Kentucky Senate and based on its own concerns, the Commission opens this proceeding to investigate the fuel adjustment clause, purchased power cost recovery, current and future fuel and power price volatility, and related cost recovery mechanisms,” the Commission wrote in an order opening the case.
The rules originated in the late 70’s. Back then, coal was king with 95% of the state’s electricity coming from burning the black stuff. With coal, utilities generally secured long term contracts at fixed rates. But as coal plants retire, utilities are increasingly relying on a mix of renewables and natural gas.
Unlike like with coal, utilities generally make daily gas purchases based on demand, according to the commission.
So when it gets really hot in the summertime and everyone kicks on their air conditioning, utilities often buy natural gas to meet the peaking energy demand. But as the commission notes in its order, these purchases are based on market prices, which also peak when demand is high.
Add on top of that some geopolitics: inflation, a pandemic, a threat of a global recession and the war in Ukraine, and you’ve got a recipe for volatile fuel prices that are directly passed on to customers. That’s because utilities are supposed to simply recover dollar-for-dollar the costs of purchasing fuel to power its plants. The charge or credit varies monthly with the price of fuel.
“Therefore, the increased reliance upon natural gas as a generation fuel source increases the volatility of fuel costs recovered through the [fuel adjustment clause],” the commission wrote.
Officials question the charges
The commission is also skeptical that utilities’ are properly charging ratepayers for fuel costs, and is asking utilities and other stakeholders whether utilities should have to provide additional evidence to justify them.
“The Commission will seek comment on whether utilities should be required to file additional evidence relating to the reasonableness of their FAC charges and purchased power expense,” according to the order.
In January, the eastern Kentucky utility Kentucky Power overcharged customers more than $3 million because of a higher than average fuel adjustment charge. In that case, Kentucky Power reduced later charges to make up the difference to customers.
An energy affordability study from 2020 found residents in the eastern part of the state pay the largest percentage of their income for their electricity bills.
Mountain Association energy manager Josh Bills said many residents and businesses in eastern Kentucky saw unexpectedly high prices again this summer because of Kentucky Power’s fuel adjustment charges.
The Mountain Association is among the nonprofit organizations intervening in the case on behalf of ratepayers. Bills said he’d like to see regulators address the uncertainty the charges create for ratepayers when they get their monthly bills.
“It would be nice to see a little bit more stability because it’s hitting when demand for energy is highest,” Bills said. “It’s already hard enough to pay for electricity in those months for households on a month-to-month budget.”
Kentucky Power declined to comment on the case publicly prior to its response to utility regulators, but a spokesperson said the utility supports the commission’s efforts.
With the rise of renewable energy, there lurks an even larger question: Why should ratepayers pay for fuel when utilities could be generating electricity using solar and wind, which don’t have any fuel costs?
“So with wind or solar you aren’t getting those fuel costs that are associated with natural gas or with coal,” he said. “Part of this has to be lifting up renewables as a really beneficial source of generation.”
But as it stands, fuel costs aren’t necessarily an economic concern for utilities because they don’t have any “skin in the game” and can pass those costs directly on to customers, Bills said.
A spokesperson for the Public Service Commission said a hearing has not been scheduled in the case, but the commission is accepting comments from interested parties, and will inform the Legislature of any recommendations that come out of the investigation.
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