Public Service Commission of Kentucky Proposes Amending Regulation Governing Uniform Fuel Adjustment Clauses

Fuel adjustment clauses (FAC) have been a feature of electric bills in Kentucky since the 1950s. An FAC adjusts on a monthly basis the kWh rate paid by customers for electricity to reflect changes in the cost of fuel, and in many instances, purchased energy.

FACs benefit electric utilities and their customers alike. An FAC benefits utilities and their customers by permitting the timely recovery of the cost – but no more than the actual cost – of fuel consumed in the production of electricity. By limiting regulatory lag – the delay between a change in a cost and when the new price is recovered – customers who benefit from the fuel consumed pay the cost of the fuel they use instead of customers further removed in time. Fuel can be a significant component of the cost of producing electricity. The timely recovery of such costs through the FAC can help limit the need for general rate cases and their costs, which ultimately are borne by customers. Finally, the FAC benefits customers by helping to smooth out any “rate shock” associated with a general rate case.

Beginning in 1977 the Public Service Commission of Kentucky mandated the use of a uniform FAC by all electric utilities subject to its jurisdiction. The current regulation establishing the uniform FAC was promulgated in 1982. This month the Commission proposed amending the current regulation for the first time in the 37 years since it was first promulgated.

Many of the proposed changes are editorial and are intended to conform the regulation to current drafting requirements for regulations. Two are more substantive.

The first proposed change will permit, but not require, the Commission to conduct its twice annual reviews of each utility’s FAC on the basis of the paper record established in the review and without the necessity of a public hearing. This amendment will limit the costs, which ultimately are borne by customers, associated with such hearings, while allowing the Commission and its staff to direct their limited resources to matters more appropriate for hearings.

The second amendment directs the Commission to exclude from its determination of the reasonableness fuel costs to be recovered through a utility’s FAC any costs associated with Kentucky’s coal severance tax. West Virginia recently reduced its coal severance tax to a rate 33 percent less than Kentucky’s 4.5 percent of the gross value of the coal. At some recent coal prices, the Kentucky coal severance tax adds approximately $2.50 per ton to the cost of coal.

The public will have an opportunity to offer comments on the proposed amendments at a public hearing to be conducted on May 30, 2019 at the Commission’s offices. Written comments may be submitted to the Commission through May 31, 2019.