TVA Fuel Cost Adjustment
What is a fuel cost adjustment?
How does it affect member bills?
How does it work and how is it calculated?
Do any other utilities use this method to offset these fluctuating prices?
What have been the changes to the fuel cost adjustment charges since January 2007?
Does "fuel" refer to gasoline?
Is the drought affecting the Fuel Cost Adjustment?
Why will the October 2008 FCA be so high?
| What is a fuel cost adjustment? |
| It is the mechanism TVA uses to help recover largely uncontrollable fuel and purchased power costs. A variety of factors affect these costs, including weather and global supply and demand issues. |
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| How does it affect member bills? |
| The FCA, which started Oct. 1, 2006, appears as a separate line item on member bills. It adjusts up or down quarterly depending upon global shifts in fuel costs, such as coal and natural gas. With costs of these fuels spiking since the FCA went into effect, the FCA has been an increasingly large portion of member bills. |
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| How does it work and how is it calculated? |
| The FCA is calculated every three months as generation fuel costs and the cost of power TVA purchases from other suppliers rise and fall. The FCA calculation works by capturing the difference between the amount that TVA forecasts to pay for fuel during a given quarter and the amount that is collected through rates. This formula has two main components: the first is a forecast of anticipated fuel and purchased power costs; the second is a reconciliation of any fuel costs TVA under or over collected. The FCA can be a charge or a credit depending on these differences. It is included on consumers’ bills as a per kilowatt-hour charge or credit. The fuel cost adjustment is updated quarterly - every January, April, July and October. |
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| If the FCA is to be used to help TVA offset these costs, why is the money collected on Middle Tennessee Electric bills? |
| Middle Tennessee Electric distributes the power TVA produces. In fact, MTEMC operates on about 18 cents of every dollar that comes into the cooperative, with the remaining 82 cents going back to TVA to pay for the power MTEMC distributes. The FCA will also go back to TVA to help them counter the fluctuating market prices. |
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| What is purchased power? |
| Purchased power is electricity TVA buys on the open market when it can be purchased cheaper than TVA can produce it. |
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| Do any other utilities use this method to offset these fluctuating prices? |
| Yes. Many utilities across the nation and most of TVA’s neighboring utilities use similar mechanisms to adjust their rates. In fact, fuel adjustments have been used for quite some time across the country to help the utility industry better align cash flow with fluctuations in fuel and purchased energy costs. TVA actually had a monthly fuel expense adjustment in the mid-1970s. |
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| What have been the changes to the fuel cost adjustment charges since January 2007? |
| Jan. 2007 - Started as an increase of one hundredth of a cent per kilowatt hour, or (.010 cents). April 2007 - Increased to .087 cents. July 2007 - Increased to .091 cents. Oct. 2007 - Increased to .450 cents. Jan. 2008 - Decreased to .278 cents. April 2008 - Increased to .572 cents. July 2008 - Increased to .714 cents. |
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| Does "fuel" refer to gasoline? |
| This is not about recouping increased gasoline charges for TVA vehicles. The fuel costs this adjustment addresses are the fuels TVA uses to generate electricity, which are primarily coal and natural gas. The prices of both coal and natural gas have grown increasingly volatile. Additionally, when TVA cannot generate enough electricity to supply the power demand of Valley customers, it has to purchase electricity on the open market. That is necessary but expensive, and the associated costs can be recovered through the Fuel Cost Adjustment. |
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| Is the drought affecting the Fuel Cost Adjustment? |
| Yes. TVA's cheapest source of power generation is the hydroelectric power generated by dams along the Tennessee River. The drought that has ravaged Middle and East Tennessee since 2007 has severly limited TVA's ability to generate power in this way. To fill the void, TVA often has to turn to "purchased power." That's when TVA has to buy power on the open market, which is much more expensive. Those costs are rolled into the Fuel Cost Adjustment. |
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| Why will the October 2008 FCA be so high? |
| Because of dramatic price increases for fuels commonly used to make electricity – coal and natural gas. Coal costs have more than doubled since December 2007; natural gas prices are up by more than 65 percent. In addition, the TVA region is in the third year of a historic drought that continues to reduce its cheapest power source – hydro-generation – forcing it to use more expensive power. |
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