‘LEAC rate higher than required; needs to be reduced’

Posted on Sep 27 2011

The current levelized energy adjustment clause rate being charged by the Commonwealth Utilities Corp. is “unquestionably higher than required” and should be reduced at the earliest date possible, according to CUC’s own independent consultant.

In the status report it filed with the Commonwealth Public Utilities Commission on Monday, Georgetown Consulting Group Inc. recommends the creation of a process for changing the LEAC rate to reflect current world fuel oil market conditions.

“For instance, the current LEAC rate is set at an effective fuel price of $3.55 per gallon (inclusive of the volatility element). However, the current price of fuel oil and the October 2011 gasoil futures are priced at less than $2.90 per gallon—a difference of $0.65 per gallon or almost 20 percent. This over-recovery situation has existed since approximately the May 2011 timeframe,” stated Georgetown in the eight-page document it filed with the commission.

It also believes CUC was in a similar over-recovery situation between May 2010 and November 2010.

Georgetown cautions PUC, however, that while fuel oil prices have the most impact on the LEAC rate, there are other factors that influence the under- or over-recovery such as generation efficiency and line losses. These factors, according Georgetown, will need to be analyzed before the exact impact any over- or under-recovery can be quantified.

Georgetown’s status report does not propose any change at this time to the current LEAC rate. It review the key considerations that impact the LEAC rate and recommends that PUC consider a process for changing the LEAC rate to reflect world fuel oil market conditions and the reconciliation of any past over- or under-recovery of fuel oil revenues collected from CUC customers.

Georgetown said the framework associated with developing the LEAC rate should take into consideration the reconciliation of LEAC fuel expenses and LEAC rate revenues.

“To the extent LEAC revenue is greater than the costs incurred for fuel and lube oil and related expenses, a true-up process will refund to consumers the over-recovery. Likewise to the extent that LEAC revenue is insufficient to cover the costs of fuel and lube oil and related expenses, the true-up process requires that the LEAC rate be increased to appropriately reimburse CUC for its costs,” states the report.

Georgetown disagrees with the CUC position that the reconciliation should be calculated based on what it refers to as the “collection” method for determining LEAC rate revenue.

“Georgetown strongly disagrees with the CUC position on LEAC rate revenue recognition and it will be necessary that this matter be briefed and heard by the PUC,” the report states.
[B] Course of action[/B]

The current LEAC rate is “clearly over-recovering fuel costs and should be reduced at the earliest date possible” after appropriate hearings, Georgetown said. In addition, it said a reconciliation is in order and should be undertaken, based upon a high-level review of just the fuel cost component of LEAC rate. The consultant suggested a two-step process for PUC.

“Step one should lead to the immediate consideration by the PUC of a revised LEAC rate. We would propose that within 30 days, the PUC set a hearing date to consider a new LEAC rate for the period November 2011 through March 2011,” it said, adding that after its conference call last Sept. 21 where it initiated the informal discovery, CUC is expected to provide a response on Sept. 27. An expedited report is expected to be completed by Oct. 12 where PUC hopes to put in place a new LEAC rate that will likely show a substantial reduction.

Step 2 is to have a full reconciliation proceeding with analysis.

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