the energy wiz: THE FACs Of Life
A 1995 study by the DOE found that 39 states allowed utilities to raise energy rates to cover those costs. Not all utilities that have this ability exercise it, but many have done so recently. Others, such as TVA, have had the ability since the 1970s but have held off such increases. Now, however, even TVA announced (in February) that it may need to initiate FACs for the 158 co-operative utilities that distribute TVA power in the Appalachian states, potentially affecting over 8 million customers. A dozen utilities surrounding TVA already have, or are implementing, FACs.
How FACs WorkEmbedded in most utility rates for electricity and natural gas are wholesale base costs for fuel and purchased power that reflect costs common over a long period. In one area, this base cost for many years was about $5 per million BTU (roughly $.83/gal for fuel oil or $.50/CCF of gas). At those prices, the FAC was zero. When prices fell below that level, the FAC was a negative number, resulting in a credit. When prices rose above that level, the FAC was positive.
Utilities are barred from profiting through a FAC; it is merely a reflection of wholesale costs at the retail level. To try to guard themselves and their customers from fuel cost volatility, many "hedge" their fuel purchasing by buying part of their winter gas during the spring and summer (when it's usually cheaper) and paying to have it stored in geological formations and pipelines. Some buy gas futures, although public utilities commissions (PUCs) have frowned on such strategies by disallowing any over-market costs that result if prices later drop.
FACs Are Becoming More CommonA utility lacking a FAC must typically wait for a proceeding where they can petition a PUC that regulates rates to allow a general increase to cover higher fuel costs. Such rate cases may not occur for a year or more, during which the utility must "eat" the difference, potentially jeopardizing its dividends and/or cash flow. Utility stockholders (which include many pension trusts) are never happy to see dividends drop, and may exert political pressure for a quicker resolution. Investment ratings may also drop: the Fitch rating service recently issued a report warning that, as political pressures are felt to minimize economic impacts on ratepayers, legislative bodies may minimize utilities' ability to raise utility bills.
In other cases (such as in the Carolinas), PUCs have approved several increases in retail natural gas rates in late 2005 due to market conditions when the flow of gas from the Gulf of Mexico was curtailed by hurricane damage.
In other states lacking FACs, efforts are underway to add them to utility tariffs. Energy users in such states should stay abreast of developments, which are often covered first in the business sections of newspapers.
What Can Energy Customers Do About FACs?Higher FACs actually promote renewable energy sources, such as wind power, that are generally unaffected by the oil and gas markets. Purchasing fixed-price power from such sources may not only earn a few "green" points, but may (depending on the tariff) minimize FAC impact.
Where energy markets have been deregulated, customers buying from a marketer (instead of a utility) may minimize the impact of FACs by buying energy under a fixed price (or at least one that does not include a fuel cost rider). If, however, peace breaks out in the world or hurricanes become gentle breezes, one could end up paying a higher price than would occur with a FAC.
Where deregulation has not occurred, some large customers use the same hedging tactics as utilities. If a FAC rises due to tight market conditions, so do the value of energy futures purchased before a run-up in pricing. The futures are then sold at a profit, providing revenue to buy down the FAC impact on a utility bill. Care must be taken, however, in the accounting for such financial gains to ensure that Uncle Sam does not try to tax them as corporate profits.