If you read our primer on fuel cost sharing published in April 2023, you may be wondering what can be done about such a large and long-standing problem. We now issue a multi-author publication entitled Strategies for Encouraging Good Fuel-Cost Management. Think of it as a handbook to help our commissioners begin to think about what only a few states have implemented and tried. So very few states have done much about how fuel costs are handled since 1973. Think about how much has changed since 1973 yet the practice of passing through all fuel costs to the customer remains the standard practice. Thus, this handbook is also an invitation to most of our states to start examining the issues surrounding a 100% passthrough of fuel costs. It’s inefficient and carries the typical results seen whenever moral hazard is present. The cost to customers and our economy is high when the volatility of the price of fuel is high and the amount used is large. Natural gas is the most popular technology used for electricity generation. It's price volatility is very high.
The passthrough is unfair to competitors in the marketplace and results in higher electricity bills for any user of electricity as less efficient technologies shift their largest operating costs to another party. It’s time to think about how this outdated activity can be modified and improved. In an age where no or low fuel technologies exist, the high financial price of having the least knowledgeable party pay 100% of the bill cannot go on without impacting the economic well-being of most people. I’m talking about customers who have no real knowledge of the operating or financial variables having to pay the whole bill for the largest cost component somebody else created.
Our commissioners have a very high workload at present. Some of it is very controversial. When it comes to the largest recurring cost items on customer bills, fuel is the top line item in many states and the highest on average for the country. Focusing on how to update outdated laws or practices that are fifty years old will be a large and possibly complex task, but isn’t that how all significant problems worth addressing are? It certainly shouldn’t be a controversial topic.
The handbook will cover what has been done by some of the pioneering states. The results of such efforts to date have been marginal. The outcomes to date should not discourage innovation and iteration to seek better solutions. It’s very likely the answers will vary from state to state. The odds also favor solutions not tried and yet to be devised. Let’s embrace the challenge and accept the problem as large, but worthy of our time and attention.
If you are new to this topic, check out the primer on fuel cost sharing which is also attached.