CUC: LEAC model too complex, costly and must be replaced

Posted on Oct 14 2011

The Commonwealth Utilities Corp. strongly disagrees with the Commonwealth Public Utilities Commission on the need to retain the current method for computing CUC’s fuel charge, saying it must be eliminated and replaced with a new formula.

CUC said that the proposal to change the LEAC model, or the levelized energy adjustment clause, to the monthly fuel adjustment clause, or MFAC, is necessary because of the high level of complexity involved in LEAC computations, expending so much time and resources.

At the same time, CUC said that replacing the LEAC model—which changes every six months—with a formula that will compute the fuel charge every month will result in significant benefits for its customers.

A Senate bill now pending in the House of Representatives proposes to make the change. The commission had opposed the bill’s passage, saying it will have significant negative impact on consumers.

“On the contrary, the bill will have a significant benefit on CNMI consumers, by ensuring that they will pay a fuel charge that reflects immediate actual fuel costs. The current LEAC charge is a six-month charge that can vary widely from actual fuel costs, based on the changes in the price of a barrel of oil over that long period of time. Further, implementing an MFAC will eliminate the need for CNMI ratepayers to pay the significant costs incurred in administering the LEAC charge. The complex and cumbersome process of developing, updating, and regulating the LEAC has resulted in significant costs for legal and CPUC consulting fees. These fees will be unnecessary under an MFAC,” CUC told Saipan Tribune in a statement.

According to the commission, the Senate bill has no formula by which consumers and the commission would know what is included in the monthly fuel adjustment clause, a claim denied by CUC.

“This is incorrect. The legislation contains as an appendix a copy of the specific model and formulas that will be used to calculate the MFAC. The model is based on the LEAC but is far less complex and burdensome to update. The CPUC will be provided a copy of the MFAC model immediately upon implantation of the charge. The proposed legislation does not change the CPUC having statutory authority over rates.”

It added that the MFAC will also be reviewed and approved by CUC management prior to implementation and the MFAC charges will be subject to audit every three months to verify that it is collecting the proper amount of fuel-related charges. The audit will be done by an independent auditor who can verify the calculation.

[B]On reimbursement[/B]

In its letter to the Legislature, the commission indicated that there is no provision in the bill for reimbursing consumers for the over-recovery of fuel-related expenses.

CUC said this is incorrect and reiterated that there is no verification that any over-collection in LEAC revenues has occurred. Further, CUC said there is substantial evidence to indicate that CUC’s LEAC and non-LEAC revenues are significantly less than expenses.

“CUC’s August financial statements reveal that CUC has experienced an operating loss of $8,120,441 for the year to date, and LEAC revenues have been $1,610,233 less than fuel expenses. In light of these numbers, allegations of ‘over-collections’ do not appear to be based in fact. CUC has repeatedly stated that it is willing to meet with CPUC staff to discuss its analysis and the economic and mathematical details regarding why there has not been an ‘over-collection’ of revenues. This analysis is also contained in CUC’s recent water and wastewater filing,” it said.

According to CUC, the bill does not strip the CPUC of its authority over rates and the MFAC proposal is far from being “cloaked in secrecy” because all calculations and relevant work papers will be available to the public. CUC said it considers the process of calculating an MFAC to be open and easy to understand and describe, “unlike the far more complicated and confusing” LEAC calculation model.

[B]Problems with LEAC model[/B]

CUC said it has experienced several difficulties in operating and administering the LEAC method in the two years since it was implemented.

“It has been very difficult for CUC staff to update the LEAC model and complete a new LEAC calculation. The model developed to calculate the LEAC is highly complex, as it is composed of approximately 15 separate spreadsheets [that] require substantial data input. The process for updating the model is extraordinarily time-consuming in terms of acquiring the necessary data, entering it into the correct areas of the model, and testing the model’s output for accuracy and reasonableness. CUC senior staff must spend approximately two person-weeks completing each update, which diverts their time and attention from other job responsibilities,” it said.

[B]$1.1M bill from Georgetown in 2008[/B]

Due to the complexity of the LEAC model, CUC said the commission’s consultant, Georgetown, billed CUC a total of $1.124 million in fees and expenses since December 2008, with a large portion devoted to LEAC development and updates. Further, since oil prices surged in late 2010, resulting in two emergency LEAC increases, Georgetown has billed CUC about $81,000 for its assistance in these increases. CUC considers the level of time and expense it must devote to LEAC-related issues “to be far too burdensome” for its ratepayers.

CUC and Georgetown, it added, have engaged in numerous contentious disputes over the model’s findings. These disputes have involved the LEAC rate itself and the amounts of any alleged over-recovery by CUC of revenues relative to fuel expenses. These disputes have only added to the costs CUC and its ratepayers have been compelled to incur in order to maintain the LEAC.

“CUC believes that the implementation of the MFAC will eliminate these issues, result in far less cost to CNMI ratepayers and effort for CPUC and CUC staff, and ensure that as oil prices decrease the savings will be immediately passed through to ratepayers. The MFAC legislation does not change the CPUC having statutory authority over rates. CUC is a publicly run, non-profit utility—we serve only the peoples of CNMI,” added CUC.

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