Q. Why is the PCA necessary?
A. Fuel costs make up a significant portion of the cost of generating electricity. Fuel prices, including the price of coal can fluctuate widely over relatively short periods, as can the price of purchased power. The PCA allows utilities to reflect those fluctuations in their electric rates without having to request changes in their base rates. Without the PCA, utilities would likely be required to have more frequent adjustments in their base rates, and the changes in base rates would be greater.
Q. Do utilities earn a profit on the PCA?
A. No. The PCA serves strictly as a mechanism for reflecting the costs of fuel and purchased power on a dollar-for-dollar basis.
Q. How is the PCA amount determined?
A. The PCA is set against a baseline fuel cost that is incorporated within the consumption-based (per kilowatt-hour) portion of a utility’s base rates. If the utility’s fuel costs in a given month are above the baseline, the PCA appears as a per-kilowatt-hour surcharge. If fuel costs fall below the baseline, the PCA appears as a per-kilowatt-hour credit.
Q. How often does the PCA change?
A. The PCA changes monthly to reflect the fuel costs incurred one month earlier.
Q. Why doesn't the PCA drop right away when cost of coal declines?
A. In order to maintain adequate reserves, utilities (like our supplier, Kentucky Utilities) typically purchase coal months before it is used and maintain an inventory that is generally equal to a one or two month supply. Thus the price of coal being burned to generate power in any given month is unlikely to correspond directly to the current market price of coal. Furthermore, in order to be assured of a reliable source of supply, utilities purchase much of their coal under contract. The contract prices may not correspond to the current market price. Thus, it usually takes several months for changes in coal (and other fuel prices) to be reflected in the PCA. But, because the PCA is used to pass through prices on a dollar-for-dollar basis, those changes will eventually be reflected in utility bills as either credits or, if prices increase, as surcharges.