The Fair Trading Commission Act, Cap. 326B of the Laws of Barbados;

• Jurisdiction: Barbados
• Court: Fair Trading Commission (Barbados)
• Judge: Sir Neville Nicholls,Mr. Gregory Hazzard,Mr. Andrew Brathwaite,Mr. Andrew Willoughby,Dr. Philmore Alleyne
• Judgment Date: 11 October 2013
• Docket Number: FTCUR/REVFCA-2013-01

In the Matter of the Fair Trading Commission Act, Cap. 326B of the Laws of Barbados;

And in the Matter of the Utilities Regulation Act, Cap. 282 of the Laws of Barbados;

And in the Matter of the Utilities Regulation (Procedural) Rules, 2003 and the Utilities Regulation (Procedural) (Amendment) Rules, 2009;

And in the Matter of the Motion to Review the Fuel Clause Adjustment pursuant to Section 16 of the Utilities Regulation Act, CAP.282 of the Laws of Barbados.

Before:

Sir Neville Nicholls Chairman

Mr. Gregory Hazzard Commissioner

Mr. Andrew Brathwaite Commissioner

Mr. Andrew Willoughby Commissioner

Dr. Philmore Alleyne Commissioner

FTCUR/REVFCA-2013-01

FAIR TRADING COMMISSION

DECISION

PART ONE – EXECUTIVE SUMMARY

1 The Fair Trading Commission (Commission) has completed its review and analysis of the Motion to Review the Fuel Clause Adjustment (FCA).

2 On May 29, 2013, the Commission gave Notice that it was commencing a Motion to Review and vary the principle (formula) which is used by the Barbados Light & Power Company Limited (BL&P) to calculate the FCA. The Motion to Review the FCA was initiated in accordance with Section 16 of the Utilities Regulation Act, CAP 282 (URA) and Section 36 of the Fair Trading Commission Act, CAP 326B (FTCA) of the Laws of Barbados.

3 The Motion focused on two actions. The first action requires the BL&P to switch to the use of historic fuel costs as opposed to projected fuel costs, which is presently employed in calculating the FCA. The second action determines that the BL&P can minimise the variation of the FCA through the use of smoothing.

4 Four interested persons, through the submission of letters of intervention, met the criteria to participate in the Motion. They were the BL&P, Mr. Anthony Gibbs, Mr. Erskine Durant and CARITEL. All of the parties participated fully in the FCA Motion and their Written Submissions were considered during the Commission's decision making process.

5 The Commission, after review of the written submissions in this matter, determines that the FCA should be calculated by taking the fuel cost that was incurred in the preceding month and dividing this figure by the energy generated in the previous month adjusted for the estimated system losses incurred and the auxiliary consumption which represents the previous month's energy sales.

6 Auxiliary consumption is the amount of energy consumed by auxiliary equipment, such as feed pumps and air fans of generating units, expressed as a percentage of gross energy generated. Net energy generated is the energy produced by the power plant less the auxiliary consumption. System losses are estimated from the difference between the net energy generated and the energy billed to end-customers. The Commission is of the view that the BL&P should use a 12 month running average of monthly losses because in practice it is very difficult to measure losses over a single meter reading period as not all meters are read simultaneously. Losses should not vary greatly on a monthly basis.

7 This proposed formula for calculating the FCA is reflected as follows:-

8 Fuel costn-1 will include adjustments for any cumulative over/under recovery from the previous months. It is possible that the fuel revenue recovered from the FCA may be different from the actual fuel cost of the previous month. This will occur due to monthly variations in electricity sales which will affect the revenue recovered from the FCA. It is for this reason that the Commission determines that the fuel costn-1 in the new formula for calculating the FCA will include adjustments for any cumulative under/over recovery from the previous month, (i.e. the balance carried forward).

9 In instances where the BL&P considers that the month-to-month change in the FCA is significant, the BL&P engages in a process of smoothing to avoid rate shock to consumers. In other words, if the calculated December FCA is much greater than the FCA in November, the BL&P may apply an FCA in December that is less than that calculated from the formula. This shortfall will then be recovered in the following month.

10 The Commission further determines that the BL&P will continue to have discretion to smooth the FCA when warranted as it reduces the impact on customers of significant fluctuations in the FCA from one month to the next.

11 The Commission requires the BL&P to advise whether and to what extent the FCA was smoothed.

12 In light of the foregoing, the Commission orders that within two (2) calendar months of issuance of this Decision and Order the BL&P shall implement the new formula for calculating the FCA. Thereafter, the BL&P shall submit monthly reports on the FCA advising whether and to what extent the FCA was smoothed and including all the factors that were considered to derive the smoothed FCA.

PART TWO – BACKGROUND ON FUEL CLAUSE ADJUSTMENT

13 The cost of providing electricity service to customers is affected by the fluctuation of oil prices on the international market. Since the cost of fuel is one of the main inputs in establishing the cost of electricity, the volatility of oil prices can have the effect of creating considerable uncertainty over the electricity rates. In 1983, the Public Utilities Board (PUB) issued a Decision which permitted the BL&P to apply an FCA to all customers' electricity bills each month. The FCA eliminates the need to conduct a rate hearing every time there is a change in the cost of fuel. Through this mechanism, changes in the cost of the fuel are passed through to customers.

The Existing Fuel Clause Adjustment Methodology

14 The present FCA is calculated by dividing the projected fuel cost (taking into consideration any over/under recovery of fuel cost from previous months) by the projected sales. The BL&P prepares a forecast for both the cost of fuel and sales when calculating the FCA for any particular month.

15 For example if the BL&P is calculating the FCA for the month of December, then at the start of the month the BL&P will make a projection of both the fuel cost as well as the sales figures for December. If the fuel revenue collected in November was less than the projected fuel cost for November (that is, there is an under recovery), then the projected fuel cost for December is adjusted by adding this under recovery to the projected fuel cost for December. If however the fuel revenue collected in November was more than the projected fuel cost for November (that is, there is an over recovery), then the projected fuel cost for December is adjusted by subtracting this over recovery from the projected fuel cost for December.

16 This method of calculating the FCA relies heavily on projections which make the process less transparent than it should be. Moreover, the difference between projected fuel cost and actual fuel cost may be significant because of the volatility of the fuel market. This volatility has in the past resulted in unexpected changes in the fuel market thereby making it more difficult to accurately predict fuel costs. The Commission is of the view that the use of fuel costs and electricity generated from the previous month, that is, a historic approach, would provide a formula that is easier to calculate as the necessary inputs have already been recorded. Based on the foregoing, the Commission is of the view that the existing FCA should be revised.

17 The FCA is presently computed using this existing formula:

PART THREE – LEGISLATIVE FRAMEWORK

18 The Commission is charged under Section 4 (3) (a) of the FTCA with the responsibility of establishing the principles for arriving at the rates to be charged by service providers. This function is reiterated under Section 3 (1) (a) of the URA which states:-

“ The functions of the Commission under this Act are, in relation to service providers to:

(a) Establish principles for arriving at the rates to be charged.”

19 In accordance with Section 2 of the FTCA and the URA “ principles” mean the formula, methodology or framework for determining a rate for a utility service.

20 By virtue of Section 16 of the URA where the Commission has not fixed a period of time in accordance with Section 15(1), the Commission may on its own initiative or upon an application by a service provider or consumer review the rates, principles and standards of service for the supply of a utility service.

21 Further, by virtue of Section 36 of the FTCA, the Commission may on application or on its own motion review and vary or rescind any Decision or Order made by the Commission and where under this Act a hearing is required before any decision or Order is made, such Decision or Order shall not be altered, suspended or revoked without a hearing.

22 The FCA was first approved in a 1983 Decision and Order of the PUB and later upheld in the Commission's BL&P Rate Review Decision and Order dated January 28, 2010.

23 The FCA was approved by the Commission as a principle (formula) that the BL&P is permitted to use to pass through the cost of fuel used to generate electricity for use by its customers.

24 Following the Commission's review of the FCA which included the consultation conducted in April 2012 and the Findings Report issued on April 19, 2013, the Commission proposed that the FCA should be revised to provide greater transparency and to make the process more auditable.

25 The Commission therefore brought the Motion for review of the FCA in accordance with Section 16 of the URA and Section 36 of the FTCA. The Motion was heard by way of a written hearing in accordance with Rule 37 of the Utilities Regulation (Procedural) Rules 2003 (URPR).

26 The Commission reserved its right at all times under Rule 37(3) of the URPR to convene a one day oral session to hear oral submissions of the parties. However after review of the Written Submissions the Commission did not believe that it was warranted to convene an...