Dramatic increases in the price of electricity resulting in price shocks could be avoided using new methods of predicting fuel costs, it has been argued.

The Regulatory Authority said it was considering changes to the Fuel Adjustment Rate “that could minimise potential price shocks in the future”.

Last October, Belco bills rose by around 20 per cent overnight after the RA approved a increase in the FAR component of fees by almost 50 per cent, a move that led to protests and a threats of legal action from the Government.

In a review of the electricity sector made public in a report yesterday, the RA noted that the FAR is calculated quarterly to recover the costs of generating electricity incurred by Belco.

The report added: “However, the current methodology, combined with the volatility of the fuel market, is such that the price shock risk can be disproportionate — especially in the second half of any calendar year.

“This is because the current approach seeks to true up any deficit/excess in fuel revenues within the current calendar year — such that, for example, in the event where a deficit in fuel revenues is observed in Quarter 3, the approach implies that it should be reconciled in full over Quarter 4.

The report outlined two methods to reduce the volatility of the FAR.

It suggested a “smoothening out” of prices by calculating the FAR on a 12-month rolling forecast. But it noted that this method “could introduce added uncertainty as assumptions and forecasts need to be continuously updated further into the future”.

Alternatively, it suggested that any sharp rises in electricity production could be spread out over a year rather than over a single quarter.

The report states: “For example, scaling factors for the FAR could consider 75 per cent of the true-up from Q1, 50 per cent of the true-up from Q2, and 25 per cent of the true up from Q3, or similar.

The authority is seeking public feedback on a proposal to increase the frequency under which Belco must report fuel cost-related data to the RA.

The report said: “The RA believes that increasing the frequency of reporting from quarterly to monthly, could allow the RA to review and analyse fuel cost trends more frequently and anticipate on the need to update the FAR sooner.

In an earlier consultation period last summer, the RA received only one response — which was submitted by Belco.

According to the report, the electricity supplier said: “Belco will reserve comment until the second round of the consultation and hopes that, at that stage, [it] will have a better understanding of the interplay between the recommendations in the Consultation Document and the ongoing initiatives in the sector.”

Richard Ambrosio, the interim chief executive of the RA, said participation “fell short of our expectations for the initial consultation”.

He added: “We nevertheless encourage stakeholders, including the public, to review the preliminary report, accessible on our website.”

Written comments must be submitted by February 25.