Strategies for Encouraging Good Fuel-Cost Management: A Handbook for Utility Regulators

View Full Document Requires name and email to access

Estimated reading time: 30+ minutes

Why This Matters for Rural Electric Co-ops

Fuel and purchased-power costs can drive major price volatility and affordability crises for electric cooperative members, as demonstrated when sustained high natural gas prices in 2022 drove the single largest year-on-year increase in electric bills nationally and contributed to $16 billion in unpaid utility bills. This handbook outlines six policy mechanisms that create stronger incentives for utilities to actively manage fuel costs rather than pass 100% of fuel-price risk to customers through fuel adjustment clauses (FACs).

For rural electric cooperatives, the concepts translate into better board governance over wholesale power and fuel pass-throughs, stronger scrutiny of G&T fuel-supply strategies, and planning practices that reduce long-term fuel risk and protect member affordability. Co-op leaders can use this resource to identify specific questions to ask about how fuel costs are being managed and recovered on their members' behalf.

Key Takeaways

Implementation Considerations

• Cost or Funding Requirements: Implementing stronger analytics (including fuel price scenarios, procurement benchmarking, and audits) may require additional staff capacity or outside expertise.
• Regulatory or Governance Considerations: Co-ops may not have the same regulatory levers as investor-owned utilities, but boards can adopt analogous internal policies covering fuel procurement standards, hedging oversight, and thresholds for reviewing cost pass-throughs from G&Ts.
• Member Buy-In: When fuel and power cost riders drive bill spikes, member communication about what caused the increase and what steps are being taken to reduce future exposure can reduce distrust and reinforce cooperative values.

Notable Examples

• Rocky Mountain Power (Wyoming): Uses an Energy Cost Adjustment Mechanism that shares 20% of fuel cost deviations between the utility and customers, creating a financial incentive to manage costs carefully.
• Pacific Power (Washington): Operates a banded Power Cost Adjustment Mechanism with a $4 million deadband and tiered sharing percentages, with cost differences recovered over two years to reduce rate shock.
• Portland General Electric (Oregon): Annual Power Cost Variance Mechanism shares 10% of fuel cost deviations outside an asymmetrical deadband, subject to an earnings test to protect the utility's financial health.
• Hawaiian Electric Company: Uses a straight-sharing Energy Cost Recovery Clause that trues up 98% of fuel cost deviations with a $2.5 million annual financial exposure cap.
• Oklahoma Gas & Electric: Offers a "guaranteed flat bill" tariff based on each customer's weather-normalized historical usage, with a risk premium capped at 10%, providing a real-world model for fuel-risk reduction tariffs.

View Full Document Requires name and email to access

Estimated reading time: 30+ minutes