The Fuel Surcharge: Necessary Evil, or Unnecessary Burden?

By Herbert A (Haz) Samuel

Electricity consumers in St Vincent & The Grenadines received an unwelcome start to 2012 with their first electricity bill. Delivered by St Vincent Electricity Services Ltd (VINLEC), the bill included a fuel surcharge rate of over fifty cents, which meant that (excluding VAT), more than half of domestic consumers bill payments were going towards the widely misunderstood and much-maligned fuel surcharge. That situation wasnt entirely new: over the past decade the fuel surcharge rate has risen steadily in practically every year from 2002 up to 2008, when it first shot past 50 cents and stayed there for seven months. Over that period, consumers became increasingly confused, frustrated and angry to the point where irate protesters picketed VINLECs headquarters every Friday for several weeks in 2008. This year however has been unprecedented: the fuel surcharge has been higher than fifty cents for eight consecutive months. And yet, despite all the aggravation caused by the fuel surcharge over the years, which at the very least should have provided a clear incentive to the utility to explain it properly, consumers are today none the wiser. So, is the fuel surcharge a necessary evil as the utility would no doubt insist or an unnecessary burden, as is the consensus opinion of the man on the street? Its both. First, consider a little history. In 1973, a brief war broke out in the Middle East, between Israel and a coalition of Arab nations led by Egypt and Syria. Angered by Americas support for Israel in the conflict, the oil-producing nations deployed their so-called Arab Oil Weapon: they declared an embargo on oil shipments to the USA. The price of crude oil on global markets, previously stable for decades at about three dollars a barrel, quadrupled to $12 within a matter of months. This presented massive problems for utilities all over the world that used diesel (a by-product of crude oil) to produce electricity for their customers. Because utilities were suddenly forced to buy diesel at rapidly inflating prices, the cost of producing electricity was similarly increasing. Overnight, utilities were faced with the prospect of having to pass the higher costs of their primary raw material on to their consumers, or go out of business. It is important to acknowledge this basic principle. If a company is producing a good or delivering a service, it must at least break-even doing so: it must be able to sell the product at a price that is at least equal to what it costs to produce it. A company that cannot do this has no future. Naturally, going out of business was not an option for the utility, so a solution had to be found.

There was a critical technicality. The price that the consumer pays for electricity (referred to as the tariff rate) was fixed, under the provisions of the Electricity Act, at a specific dollar value per unit. That tariff rate could not legally be changed without a lengthy application and review process. But by early 1974 the price of oil was literally changing every week, and there was no way the company and the authorities could make tariff changes quickly enough to keep up. So, the companys owners devised the fuel surcharge, which was introduced in 1974. The purpose of the surcharge was simple and uncontroversial: it was to pass on to the customer the full cost of fuel used to generate electricity. The mechanism employed was innovative, but straightforward. Split the total cost of fuel into two parts; a fixed part, which represents the cost of fuel before the price increases started and a variable part, which represents the variations in the cost after that time. The fixed part of the fuel cost is included in the tariff rate, (which remains the same as before) and the variable part would be added on as a surcharge each month. Then, amend the law to allow the addition of a surcharge and: problem solved. Except; not quite, because the subsequent problem arose whereby customers could not understand why their electricity bills were so volatile: one month they would pay a particular amount and the next month, without much varying their consumption behaviors, their bill might be so much higher. Of course, during most of the post-1974 period, electric utilities didnt really care about any of this. Up to the turn of the century, their concept of customer service was roughly something like: We supply you with electricity. You pay us. Or else. So not surprisingly, for most of its history, VINLEC never properly explained the fuel surcharge in a way that its customers would understand. In more recent times, the company has attempted to change this, but to little effect over the past decade, VINLECs efforts to explain the fuel surcharge have ranged from practically nonexistent (prior to 2004, when new management took over) to inadequate (thereafter). Part of the problem lies in their terminology. On the customers bill, the fixed part of the fuel cost is included in what is called the Energy charge, which its name suggests to be the price for the electricity you have consumed. The term Fuel surcharge doesnt really explain anything, least of all why you still have to pay for fuel after youve already paid for the energy generated by the fuel. Whats worse; at the times when the fuel surcharge is high and coming down, VINLEC might issue a press release advising customers that the fuel surcharge will be lower on the upcoming bill. The wording of the advisory would sometimes subtly (though one would imagine, inadvertently) suggest that the reduction is something that VINLEC is doing for its customers, rather than simply passing on to its customers. The impression comes across that VINLEC actually has control over what any particular months fuel surcharge will be, even though the truth is that they dont. So, on a month-to-month basis and for the basic reasons outlined above, the fuel surcharge is a necessary evil.

But this is only half of the argument. The fuel surcharge was clearly necessary when it was introduced 38 years ago. But today, in the second decade of the 21st century? Not so much. To see why this is so, consider the fact that VINLEC has a significant penetration of hydropower in its capacity mix which, in a good year, supplies close to 20% of our total electricity needs. This is a good thing and (except for Dominica) unheard of elsewhere in the Eastern Caribbean. Our use of hydroelectricity has the happy effect of keeping our fuel surcharge low; a fact proudly emphasised by VINLECs management, most recently during their 50th anniversary celebrations. But herein lies the crux of the matter. A progressive, forward-looking utility in VINLECs position should, in this year 2012, be firmly on a path towards near-100% renewable electricity penetration. A bold but realistic energy vision for VINLEC should have been set out when the Petrocaribe agreement was signed in 2005, and it should have been almost cemented in stone by July 2008, when oil prices hit a record high, dramatically exposing the unsustainability (not to mention sheer folly) of our continued dependence on imported oil-based energy. The vision should have said something like We will achieve 80% renewables-based electricity supply by 2020, by harnessing all existing hydro resources and developing geothermal, wind, solar and energy efficiency measures. Achievement of such a vision would deliver all manner of economic and social benefits and would practically eliminate the fuel surcharge. Instead what we have, at a time when VINLEC has recently turned fifty with significant achievements under its belt and should be on course for another five decades of new achievement, is lip-service and window-dressing, exemplified by a few in-house photovoltaic projects; a nonexistent wind farm project and vague statements trotted out each year about exploring possibilities in geothermal energy. The only real action seemingly taking place is a backward step to using heavy fuel oil for electricity generation. So the upshot is that, a few years hence, well still be paying the fuel surcharge and it may well be higher than the one were paying today. At that point, it will be an unnecessary and dangerous burden, imposed on us by an unfortunate lack of vision and progressive leadership in our energy sector. ---------------October 2012