Section 100. Standards for fuel cost projections of electric utilities

The 1989 Session of the General Assembly adopted Senate Joint Resolution No. 156 ("Resolution") requesting the State Corporation Commission to establish standards for evaluating the reasonableness of the fuel cost projections of electric utilities. The Resolution stated that "such standards need to be established in order to ensure that payments for power purchased by electric utilities from cogenerators are fair, reasonable, and appropriate." Pursuant to that Resolution, the Commission, by an order dated January 10, 1990, directed its staff to complete an investigation and submit its findings and recommendations in a report. On February 15, 1990, staff submitted its Report on the Development of Standards for Fuel Cost Projections ("Staff Report").

By Order dated March 16, 1990, the Commission directed its Division of Energy Regulation to provide notice of the proposed standards contained in the Staff Report and invited interested persons to comment and to request a hearing. Pursuant to that March 16, 1990, Order, the Commission received comments from CRSS Capital, Inc.; Chesapeake Corporation, Stone Container Corporation, and Westvaco Corporation ("Industrial Protestants"); and Delmarva Power ("Delmarva").

Fuel cost projections have several interrelated applications and, accordingly, the accuracy of those projections is very important. First, an electric utility must make fuel cost projections to facilitate optimal resource planning. The more accurate the fuel cost projections, the better the utility can anticipate and plan for its future needs.

As emphasized in the Resolution, fuel cost projections are also essential to ensure payments for power purchased from cogenerators and small power producers are fair and reasonable. Administratively determined payments to such qualifying facilities are based upon an electric utility's avoided costs, which are necessarily calculated by projecting the utility's system costs, but for the purchases from the qualifying facilities. The assumptions underlying that calculation clearly must include fuel cost projections. Again, to ensure payments that are fair to the qualifying facility and to the ratepayer, those projections must be as accurate as possible.

Finally, fuel cost projections must be made to develop the fuel factor which an electric utility adds to its base rates for all electricity sold. Each fuel factor is designed to recover the fuel costs the utility expects to incur during the subsequent twelve months. It also includes a correction factor designed to correct any over or under recovery of prior period fuel expenses. Although the fuel factor includes a true-up mechanism, it is still important for the utility to base the factor on accurate fuel cost projections to minimize extreme fluctuations or variances in customers' bills.

Staff recommends, and we agree, that standards for fuel cost projections should be broad and flexible. Such a framework will allow the standards to be readily applied to each individual utility in differing circumstances. General parameters, however, must be established.

Staff recommends the following minimum standards for fuel cost projections:

1. A sophisticated "state-of-the-art" production costing model should be utilized for projecting fuel expenses.

2. Key input data and assumptions should reflect historic data. Any significant deviation from historic trends should be adequately explained and evaluated for reasonableness.

3. Key input data such as load forecasts, generating unit characteristics, fuel data, and system parameters should be developed in the same relative time frame and reflect consistent assumptions.

4. Demand forecasts should be current and reflect economic growth, normal weather, the price of electricity, elasticity assumptions, appliance saturations, income and population changes in the utility's service area. They should also reflect projections of energy, peak demand and the effects of demand-side options.

5. Expected fuel prices should reflect historic fuel costs adjusted for any known dynamics of the projection: i.e., labor contracts, expected operation of the spot market, current fuel contracts, the world fuel market, inventory levels and fuel availabilities, purchasing volumes, coal severance taxes, etc.

6. Unit operations should consider planned maintenance, forced outages, expected dispatch levels, historical performance levels, seasonal capabilities, as well as ongoing enhancements or unit deterioration.

7. Dispatch orders should reflect such variables as system economics, unit availabilities, minimum operating levels, heat rates, and terms and conditions of purchased power contracts.

8. Purchase power levels should consider need, system economics, power availability and transmission constraints.

9. Projections supporting the development of cogeneration rates should include a comparison of key input data and assumptions from the last fuel projection filed with the Commission. Major changes should be adequately explained.

Historical Notes

Derived from Case No. PUE900004, eff. November 27, 1990.

Statutory Authority

§§ 56-235.1 and 56-249.3 of the Code of Virginia and Senate Joint Resolution 156 (1989 Session).