CUC’s faulty assumptions

I want to thank the Commonwealth Utilities Corp. for holding the public hearing on Nov. 10, 2004 concerning the impending 3.5-cent fuel surcharge fee increase. The meeting was informative, and shed a great deal of light on CUC operations. Unfortunately the public was not represented well and the general public should be ashamed of itself when they begin to complain on Dec. 7, the date the FSF increase is scheduled to be implemented.

CUC’s entire argument and presentation for a FSF is based upon two key assumptions

* CUC sells all power for 11 cents per kWh across the board to all customers. This is simply not true. Making this assumption simply does not tell the entire story of the FSF and is extremely dangerous.

* CUC made another rather large assumption related to the price of fuel for the 4th quarter 2004. CUC is projecting that fuel is going to increase 35 percent to $1.465 per gallon in the 4th quarter from an average price of $1.089 per gallon for the first three quarters of 2004. That is a big increase.

I offer my comments and observations related to the presentation. Using CUC’s own figures, the cost to produce a kWh of electricity is 15.507 cents. This is computed using 5.507 cents per kWh for non-fuel expenses and 10 cents per kWh for fuel based upon average fuel purchases for calendar year 2004 (If for some reason fuel declines this number would also decline) provided by the CUC controller.

The CUC currently charges 16 cents per kWh for commercial power, allowing for a _ cent per kWh profit. According to the CUC about 65 percent of power sold is commercial power and is sold at 16 cents per kWh. Notice that I said that currently CUC is producing commercial power at a profit of _ cents per kWh. Yes, I said profit, despite claims of higher fuel prices. I wonder what happened to all the profits when fuel price were half of what they are today? I will leave that question for our elected leaders to address.

On the residential side, the cost to produce a kWh of electricity is 15.507 cents as well. Power is sold for 11 cents per kWh or at a loss of 4.507 cents per kWh. According to the CUC about 35 percent of the power sold is residential. Notice that I said a loss of 4.5 cents per kWh.

For example if 1,000 kWh produced, split between commercial (65 percent) and residential (35 percent) the following would occur.

kWh Power Price Revenue
Split
1,000 65% 650 0.16000 $ 104
35% 350 0.11000 $ 39
$ 143 Total Revenue
650 0.15507 $ 101
350 0.15507 $ 54
$ 155 Total Cost
$ (13) Monthly Loss
12
$ (151) Annual loss
12,000 KWh Annual production
$(0.012570) FSF based upon 12,000 kWh annual production

Based upon the above, the annual loss of $151 in the example, the per kWh surcharge should only be 1.26 cents per kWh across both residential and commercial users. A FSF rate far lower than the proposed 3.5-cent rate. It is also evident that commercial power clearly subsidizes the residential power.

If the CUC really wanted to be fair, residential rates should be raised to reflect the real cost of power generation and commercial rates should be left alone. If that happened CUC would easily be able to cover all their costs. Incidentally, in America commercial power is always less than residential power. It seems only in the Pacific is commercial power more expensive than residential power.

Additionally, the CUC disclosed that they are planning another 2 cent per kWh increase on January 7, 2005. Essentially the FSF will be 5.5 cents per kWh within 30 days of Dec 7, 2004.

The bottom line on all this is that further study is needed to explain what will CUC will do with a 4 cent per kWh profit on the commercial side of the business once the 3.5-cent FSF is implemented. I really want to know what they will do with 6 cents profits per kWh in 2005.

The example below depicts the profits by CUC with a 3.5 cent per kWh FSF:

kWh Power Price Revenue
Split
1,000 65 percent 650 0.19500 $127
35 percent 350 0.14500 $51
$178 Total Revenue
650 0.15507 $101
350 0.15507 $54
$155 Total cost
$22 Monthly Profit
12
$269 Annual Profit
12,000 Annual production
$ 0.022430 Profit per kWh based upon annual production

A 3.5-cent FSF will be more than enough to cover fuel cost increases, in fact it allows for 2.2-cent profit per kWh across the board for the CUC. What is going to happen to all the profits from the FSF increase? The FSF proposed is far in excess of what CUC needs if the figures provided at the public hearing are correct.

The catastrophic impact that will result in this power increase will be irreversible. If this 3.5-cent FSF is implemented, many businesses will not be able to pass on the increase and will be forced to close their doors forever.

This will cause less jobs and less tax revenue in the overall economy, costing more jobs in the future. It is apparent that some increase is warranted; lets hire legitimate experts to study what the proper amount is and get the increase right. Making a mistake on the size of the increase will be one mistake we will not be able to correct.

Larry Knecht
San Vicente