No Guarantee Rising Fuel Costs May Be Passed On By Regulated Utilities to Customers

Implications:     The input costs for utilities to generate electricity are up.  These costs include coal, transportation, natural gas, and power purchases.  There are no guarantees, however, that a regulated utility may pass along these costs as discussed in the commentary section.

Analysis:     The discussion that follows is for regulated utilities, not unregulated utilities (Independent Power Producers.)               

    The cost to generate electricity is going up for utilities.  There are no guarantees, however, that regulated utilities can pass along the costs to customers through increased rates.
 
     First, some utilities do not have a power cost adjustment (“PCA”) provision that allows them to pass along power-related cost increases experienced intra-year.  Instead, any un-hedged fuel or power position risk after a predetermined date prior to the start of the year is borne by the regulated utility—both positive and negative.  Any movement in the cost of fuel or power in this scenario would on the regulated utility, rather than customers.
 
     Second, even in the existence of a power cost adjustment provision, there is the risk the regulated utility could experience a disallowance for failure to be prudent in its purchases.  A regulated utility is always under such look-back scrutiny.  If the fuels department or power operations department were not deemed prudent, the Public Utility Commission could disallow that which it considers to be imprudent.  This has happened in the past.               

    Third, a regulated utility may have a gain-sharing program between it and customers on cost increases and savings on power costs.  These gain-sharing programs may even have a dead band before they trigger or collars.               

    A review of a regulated utility’s financial statement for its hedged position and regulatory treatment and inclusion of a power cost adjustment is prudent to perform.