All rates are applicable to the Fuel Adjustment Clause and the Environmental Surcharge. Both of these charges are pass through charges from our power supplier (East Kentucky Power) through Farmers RECC billing to the customer.
The Fuel Adjustment Clause (FAC) is a state regulation that allows EKPC to have prompt cost recovery of its fuel used to provide power supply.
EKPC owns and operates 9 coal generating plants and 7 natural gas combustion turbine generating plants. In addition, EKPC purchases power from the wholesale market, which it resells to member distribution systems. Monthly fuel cost is calculated by multiplying the amount of coal, natural gas, and purchases used to serve member systems by their individual costs.
As a rough rule of thumb, the fuel cost of coal is around 2 cents per kWh, the fuel cost of natural gas is around 8 cents per kWh, and the fuel cost of purchases is around 5 cents per kWh. However, natural gas and purchases are extremely volatile and their costs move up and down quite a bit.
Many factors affect the FAC calculation. These include, load, coal cost, coal inventory level, natural gas cost, wholesale purchase power market price, unit availability, etc.
The Environmental Surcharge is also a cost recovery mechanism that enables utilities the opportunity to recover current costs of complying with the Federal Clean Act. EK applied for and received approval to implement an environmental surcharge in the summer of 2005. We are recovering the depreciation expense, return, taxes and insurance on four projects; 1) pollution control equipment at Gilbert, 2) Spurlock 1 precipitator, 3) Spurlock 1SCR, 4) Spurlock 2 SCR. We also receive a return on our emission allowance inventory, the emission allowance expenses for current vintage year allowances consumed and pollution control-related operation & maintenance cost.
Every month, East Kentucky calculates the actual costs associated with the aforementioned items and divides by an average 120 month total revenue amount. This yields a percentage factor. Note that, like the FAC, an adjustment is made to eliminate the effect of the off-system sales. The percentage factor is then used to derive the factor for the Member Systems.
While the surcharge is not as big a factor as fuel, it nonetheless is very important and will be growing. Now, it’s about $60 million or so annually, compared to $300 million for fuel. It is imperative that EK continue to recover these environmental costs.