Strategic Issues Discussion Paper - Impact of High Oil Prices on Electric Bills
How Does CVEA Make Electric Rates and Collect Fuel Costs - What is FPPC -
What Impact has Crude Oil Prices had on the FPPC -
What has CVEA Done to Help with High Fuel Costs
How Does CVEA Make Electric Rates and Collect Fuel Costs
CVEA electric rates are based on a detailed Cost of Service Study. The rates we charge today are based on a Cost of Service Study prepared in 1997, which used as its basic assumptions 1996 operations as the test year. The Cost of Service Study allocates costs to customer classes; i.e., residential, small commercial, large commercial. Following this cost allocation procedure, rates are designed to collect the appropriate amount of revenue for each customer class as determined by the Cost of Service Study. A typical rate structure includes the following three components:
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Customer Charge - A flat charge which collects the cost of meter reading, meter depreciation, and the cost of billing and collection activities.
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Energy Charge - This charge varies depending on the number of kilowatt hours the customer uses. The energy charge collects all non-fuel, non-hydro and non-customer related costs; e.g., distribution, operation, and maintenance costs.
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FPPC - Fuel and Purchased Power Cost (see discussion below).
The fuel and purchased power cost (FPPC) appears as a line item on electric bills and is charged for every kilowatt-hour. The FPPC is a blend of fuel cost and hydro power cost. The FPPC collects both the cost of fuel to generate electrical energy and for the Solomon Gulch hydroelectric power purchased from the Four Dam Pool. Every customer is charged the same FPPC regardless of size, district or customer class.
What Impact has Crude Oil Prices had on the FPPC
Since 2002 Alaska North Slope (ANS) crude
has exponentially increased. A similar pattern is seen in our FPPC rate.
Fuel burned at the diesel and cogeneration plants is tied to the cost of
oil. Oil cost increases drive fuel price increases which in turn drive
increases to the FPPC.
In addition to increases in the market price of crude oil, a proceeding before the Federal Energy Regulatory Commission in 2004 resulted in an order that significantly increased the price Petro Star is charged for the quality bank component of oil purchased from Conoco Phillips. The increased price is passed along to CVEA for LSR fuel it purchases from Petro Star for the cogeneration project.
What has CVEA Done to Help with High Fuel Costs
The FPPC goes up and down as fuel costs change. For the past two years the fluctuations in the FPPC have been very volatile. The FPPC can also fluctuate dramatically depending on the time of year. Up until October 2004 CVEA revised the FPPC quarterly. For the past two years we have put forth a significant effort to address fluctuating prices.
On
the success side, in October 2004, in response to the high fuel prices,
CVEA implemented a 3¢ fuel credit program which was continued through May
2005. This program essentially absorbed $1,555,000 of fuel costs which
normally would have been passed on to customers through the FPPC. Early
in 2006 the Board authorized using 2005 margins and a Four Dam Pool refund
to absorb an additional $900,000 in fuel costs over the first six months
of 2006.
During this time of rising prices, the historical method of quarterly revision to the FPPC has made increasingly less sense. In 2005 the FPPC dropped significantly to 8.34¢ during the summer generating season, but it shot up to 15.93¢ in October 2005 as we entered into winter generation mode. This huge increase was the result of a combination of factors, the largest of which was the shift from summer to winter operation.
About this same time the Board of Directors
began to discuss ways to minimize the drastic changes of transitioning
from summer to winter generation mode. As a consequence
of
those deliberations, in July 2006 the Board of Directors acted to
levelize the FPPC over the
remaining six months of the year by
setting
the FPPC rate at 10.94¢ in hopes of avoiding a very large increase as was
experienced last year (from 8.34¢ to 15.93¢).
CVEA will continue to explore ways to address price fluctuations and will endeavor to better inform customers of anticipated price changes.
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