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Transparency Needed Now: Alabama Power and the Alabama Public Service Commission

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What we need to see that’s behind the Alabama PSC’s closed doors:

  1. Information for comparing Alabama Power’s allowed earnings with other similar investor owned utilities. Everyone else uses Return on Equity -around 9-10% on average. Alabama PSC – for Alabama Power only – uses a Weighted Return on Equity – 5.75-6.15%. Do the math and Alabama Power still gets a higher profit on its equity capital than any other electric utility in the country. 

In 2013 the PSC changed Alabama Power Company’s (APC’s) allowed earnings calculation from one based on the industry standard Return on Equity (ROE) to a weighted cost of equity formula created just for it, unused by any other regulator.

During 2013 “informal public proceedings” in place of a rate case, APC picked what they considered to be peer investor owned utilities to compare in order to show that their ROE wasn’t so high when capital structure was considered. However, data required to compare APC earnings with peer IOUs haven’t been made publicly available since, either by the PSC or APC. They can provide these comparisons easily, but it is extremely difficult and costly for consumers to try to track down comparable numbers locked behind paywalls.

If it objects to using ROE for compensation, citing the importance of utility capital structure, then APC and/or the PSC should provide comparable Weighted Return on Equity data. (PSC calls it Weighted Retail Return on Common Equity = WRRCE).

Actual ROE for the company was above 13.2% in 2017 and 2018. APC projects its WRRCE to be 6.12% in 2019. With its planned increase of percent of capital from equity to 51.24%[1], its projected ROE works out to be 11.94%. How does this 6.12% figure compare to other electric utilities’ weighted cost of equity? We don’t have that information. The 11.94% calculated ROE projected for 2019 is still very high – see background information below.

With the closed system at the Alabama PSC, we have no way to determine if we’re getting the best service at the lowest reasonable cost. The PSC should initiate pre-decision transparency in its review of APC’s rates, instead of providing only a post-hoc set of meetings for APC to share financial information that has already served as the basis for an effective filing with the PSC. They should also provide comparable return data from other utilities in order to allow comparison to APC’s returns using their unique adopted formula.

 

  1. Access to and participation in the 2019 Integrated Resource Plan. On July 17, 2019, after various public hearings and stakeholder recommendations, Georgia Public Service Commission approved Georgia Power’s 20 year plan for providing electricity to its customers. Alabama Power faces no PSC requirement for submitting its plan, which remains behind closed doors. 

APC and its sister operating companies and most other utilities prepare a plan (Integrated Resource Plan – IRP) every 3 to 5 years to look ahead 20 years. APCs last IRP was in 2016[2], finished in late 2015, and it will be completing another in 2019. An IRP includes not only traditional electricity supply, transmission and distribution, but also renewables and demand side options such as energy efficiency and distributed energy, generated by customers. The IRP is a guide for future decisions by APC, such as decisions made to comply with environmental requirements.

In other states, stakeholders can provide input into these plans allowing the opportunity for a broader perspective. Many have a stake in electric utility plans – residential, commercial and industrial customers, clean air, water and land use advocates, representatives of low-income groups, environmental justice supporters, clean energy businesses and others. APC’s sister Southern Company operating company, Georgia Power, has a relatively transparent planning process for its IRP. Affected parties can review and comment on the parts of it that aren’t trade secrets. Assumptions, including the viability of old plants, can be challenged and the draft plan changed before it’s approved by the Georgia PSC.

In Alabama there is no requirement for IRP approval by the PSC, much less allowance for stakeholder participation, or even the opportunity to read a redacted version. Assumptions about future demand, market conditions, regulations and other factors influencing APC choices are evaluated behind closed doors.

The PSC should require that: stakeholder input be built into APC’s IRP development process; the completed IRP be filed with the commission; and, after considering stakeholder review and comments and making appropriate changes to the final plan, the Commissioners should formally approve it.

 

  1. Legitimate APC price comparisons more specific than “below the national average”.

Alabama Power Company (APC) is proud to claim that their rates are lower than the national average. The national average includes Hawaii and Alaska, and other states which have very high rates. This “average” also mixes residential, commercial and industrial rates. In discussions of our high electricity use and bills, APC has pointed out that the Southeast differs in important ways from other sections of the country. That being the case, it is more relevant to compare APC rates by customer class with other similar IOUs in the 11 Southeast states (SE).

The U.S. Energy Information Agency reports annual average prices for each customer class by state, ownership class and utility.[3] Comparing 2017 prices for 33 IOUs in the SE, APC has the 7th highest residential prices at 13.37 cents a kWh, the 4th highest commercial price at 12.16 cents/kWh and is slightly below the SE IOU average for industrial users. In addition, APC has the 10th highest residential price of the 36 utilities all over the country which the utility itself chose in 2013 as comparable IOUs to justify its high ROE.

APC and its regulator, the Alabama PSC, should provide at least annual utility price comparisons that unpack the convenient but misleading “below the national average” refrain relied on by the power company.

 

  1. Pre-decision public discussion of consequences and impact on consumers of all major APC-requested orders – well before the Commission votes.

Perhaps the most serious and consequential APC and PSC surprise decision, which continues to seriously affect electricity consumers and the state of Alabama, occurred on January 8, 2013. The PSC voted, with no discussion or public evaluation of impacts, to impose a stiff tariff of $5 per kW nameplate capacity on any self-generated electricity, including solar, if the customer chose to remain connected to the grid for backup.[4]

The request for this decision was made electronically on December 20, 2012 just before the holiday. There is no available record of how long this request had been before the PSC staff and commissioners, or what review and analysis they or our assistant attorney general consumer advocates did or didn’t do. However, this is business as usual for any APC request, except in rare cases of acquisition or construction of new generation, which require a hearing.

The PSC allows APC to withhold their requests for PSC orders from public view and submit them online only two weeks before the expected formal vote. The staff may have worked with the utility for months or longer. By some unclear process[5], prior to the PSC monthly meeting, the commissioners have individually and privately assessed matters they will be voting on. At their meeting they typically vote without discussion. The official meeting seldom lasts even an hour, including pledge, prayer and point of personal privilege from the commissioners.

Ideally, Assistant Attorney Generals assigned to consumer protection at the PSC have participated in shaping the requests to reflect consumer interests, but there is little public demonstration of their involvement. They work for the Attorney General, who activates them only if she or he deems it in the “public interest”. Consumer advocacy groups in Alabama are relatively few, underfunded, understaffed and can seldom effectively challenge the business as usual decision processes at the PSC. However, Southern Environmental Law Center did file a complaint against the “solar tariff” and there is now testimony on both sides. See the background point number 4 for more information.

When APC requests a major new or changed tariff, program or service of any kind, and especially for distributed or renewable energy, the PSC should require that there be open analysis of the potential impact on each customer class. In order to provide time for informed participation and possible intervention, this information should be easily available to the public well before any PSC vote.

Background

  1. Allowed earnings – Background

Five years ago, the Alabama Public Service Commission (PSC) changed the formula for how much Alabama Power Company (APC) is allowed to earn. From 1982 to 2013, Return on Equity (ROE) was used to determine electric utility returns by every PSC in the country, including Alabama, which had one of the highest, if not the highest allowed ROE in the U.S.

Most other regulated electric utilities in the country have had their allowed earnings set by occasional structured, technical rate cases with expert testimony reviewed, analyzed and discussed in order to determine a return on equity capital (ROE). This allowed return has historically been based on various ways to calculate the cost of obtaining that capital,[6] but the Alabama PSC uses a Rate Stabilization and Equalization (RSE) formula implemented in 1982[7].

The Alabama PSC hasn’t had a formal rate case since RSE was implemented in 1982. In a series of “informal public proceedings” in 2013 in place of a rate case, the formula for APC was changed in a way that allowed them to continue that high rate of return without it being so visible. However, allowed ROE for the gas companies was cut about 20% from their 13% range to a 10% range, and it’s been cut even more this year.

Alabama Power earned an ROE of 13.24% in 2012, more than any other reported regulated utility in their class was allowed, but within their PSC range of 13.0 to 14.5%. After the formula was changed from ROE to a weighted return on equity (between 5.75% to 6.21%),[8] APC has continued to earn very close to its 2012 rate, ending 2017 with an ROE of 13.27%. 2018 earned ROE was 14.38% but Rate RSE operated to reduce that to 13.21% because they were over their allowed range[9].

Edison Electric Institute, a trade organization for investor owned utilities (IOUs) like Alabama Power, provides a summary of average ROE’s allowed in IOU rate cases. For the 10 quarters from 2016 through Q2 2018, the high average allowed ROE of 10.26% in Q1 of 2016 declined to a low of 9.51% in Q2 of 2018. Alabama Power’s results of over 13% ROE are higher than any reported by their trade organization. Comparisons are complicated by other considerations, but with the closed system at the Alabama PSC, we have no way to determine if we’re getting the best service at the lowest cost.

  1. Integrated Resource Plan – Background

Energy Alabama has reviewed the IRP processes for TVA and APC. Their IRP policy brief reaches the following conclusion – that legislative action is needed to require a transparent and more accountable integrated resource plan for Alabama Power.

”The Alabama Public Service Commission has an opportunity to improve the provision of low-cost, low-risk electricity for its only regulated utility, Alabama Power, by following the best practice lead of other states and the advice of investors and regulatory advisors. Planning should be transparent, and consumers should have an adequate opportunity for knowledgeable and effective representation in the planning process and in the rate setting process overseen by our Public Service Commission.

To have a successful Alabama IRP process the Alabama legislature should enact a law requiring the PSC to conduct an open and transparent IRP process, as Georgia has required since 1992.[10]

Without this necessary legislative and PSC action, customers are left in the dark about the demand and supply assumptions and analyses the utility conducts and whose interests they serve.”[11]

  1. Comparison of rates and prices – Background

As an example of in-state rate comparison, Georgia PSC performs residential annual summer and winter rate surveys for electric cooperatives, municipals and their one investor owned utility, Georgia Power. “Surveys rank electric service providers by rates based on total electric bill amounts for 500, 1000, 1500 and 2000 KWH (kilowatt hours). Surveys are conducted biannually with winter surveys utilizing rates in effect for the month of January, and summer surveys utilizing rates in effect for the month of July. All electric providers in Georgia participate…”[12]

There are avenues for the Alabama PSC (APSC) to be more forthcoming with APC customers about comparable rates even without doing the annual survey its neighboring PSC performs. The APSC prides itself on giving money back to the general fund. This practice may be a disservice to utility customers by cutting budgets and shortchanging them on important informational services as well as robust public proceedings.

  1. Pre-decision public discussion and analysis – Background

The imposition of the extra charge of $5 per kW nameplate capacity of the self-generating electricity source has created a major disincentive to solar installation and jobs in APC territory – the southern 2/3 of the state. Taking this vote without any public discussion of its impacts or analysis of actual costs or benefits to the system is just one example of the consequences of the lack of transparency at the PSC. According to the PSC rules, there was public notification. APC’s requested new tariff was posted online on the PSC data base 5 days before Christmas 2012 and the vote was made with no discussion a week after New Year’s day 2013. Perhaps not surprisingly, given the timing, no interested party picked up on this major requested extra charge, thereby missing the short window of opportunity to intervene and request a hearing.

The Southern Environmental Law Center has filed a complaint with the PSC on behalf of Gasp and some of its members about the inappropriateness of the tariff imposed on self-generated electricity with grid backup. APC responded with a request to dismiss their complaint and to raise the fee. This process is only partially available for public view, through searching the proceedings file located on the PSC website for dockets #U-4226 and #32767. If depositions are taken, they won’t be available to the public and the process will not necessarily result in a public hearing.[13]

This question of the value of solar and its contribution to the grid is being debated all over the country – in public – but not in Alabama.[14]

Another curious aspect of the Alabama PSC formal public monthly meetings is the vote on the off-agenda administrative details as the last item. Although a public vote is evidently required, there is no notice of the content, just a mention of a recently-circulated document. Only once was the public able to see an administrative issue that was involved, because two commissioners introduced procedures that upset the president of the commission by limiting her ability to speak unilaterally on behalf of the PSC. She objected in public, complaining about decisions being made “behind closed doors”. Yes!

See also: Outdated Alabama Public Service Commission needs change  By Joyce Lanning   10/26/18

[1] The ROE formula used before 2014 capped the amount of capital from equity at 45%. In the new formula, WRRCE, which weights common equity by multiplying it by ROE, the capital from equity can rise as much as the company desires. Higher equity and lower debt are perceived by investors as less risky. Southern Company operating companies, including Alabama Power, are increasing equity toward 55%. Note that, with the WRRCE formula, as capital from equity increases, allowed ROE declines. The maximum ROE under the 2018 WRRCE formula with 55% capital from equity is (6.21+.07) = ROE x 55% equity. ROE = 6.28/55 = 11.42%. The bonus points of .07% are awarded if the company has an “A” bond rating or high customer satisfaction, which is almost always the case. The new 2019 base WRRCE range was changed in June 2018 and is 5.75%-6.15% (or 6.22% with bonus addition). At 55% capital from equity, the maximum ROE would be 11.31% . With a projected WRRCE in 2019 of 6.12 and the added bonus and projected % capitalization of retail equity of 50.21%, their 2019 projected ROE would be (6.12+.07)/51.24=11.94%.

[2]https://www.alabamapower.com/content/dam/alabamapower/Our%20Company/How%20We%20Operate/Regulations/Integrated%20Resource%20Plan/IRP.pdf

[3] https://www.eia.gov/electricity/sales_revenue_price/

[4] https://www.alabamapower.com/content/dam/alabamapower/Rates/RGB.pdf

[5] The open meetings law prevents discussions of conclusions among a quorum of members of a governmental organization when that subject will later require a formal decision by the body. However, it allows a quorum, including two members of a three-member body like the PSC, to “…gather for the sole purpose of exchanging background and education information or for the sole purpose of discussing an economic, industrial, or commercial prospect or incentive that does not include a conclusion as to recommendations, policy, decision, or final action on the terms or request or an offer of public          financial resources.”    See https://www.openmeetings.alabama.gov/generalpublic/downloads/Act2015-475.pdf

[6] The Discounted Cash Flow model, Capital Asset Pricing model and Allowed Return Risk Premium Analysis.

[7] See https://www.alabamapower.com/content/dam/alabamapower/Rates/RSE.pdf

[8] Weighted Retail Return on Common Equity (between 5.75% to 6.21%) = ROE x % of capital from equity. Given the two other numbers in the formula, you can calculate ROE=WRRCE / % capital from equity.

[9] APC ended 2018 with WRRCE=6.75% which was over the allowed range of 5.75%-6.21%. An adjustment was required by the Rate Stabilization and Equalization formula in order to return over-collected amounts as a credit on customers’ bills, lowering the resulting earnings to a calculated ROE of 13.23%. See  https://www.alabamapower.com/content/dam/alabamapower/Rates/RSE.pdf

[10] § 46-3A-2. Filing and approval of an integrated resource plan   O.C.G.A. § 46-3A-2 (Lexis Advance through the 2018 Regular Session of the General Assembly)

[11] See the Energy Alabama Policy Brief: Open and Transparent Integrated Resource Planning https://alcse.org/wp-content/uploads/2018/12/Energy-Alabama-Policy-Brief-Open-and-Transparent-IRP.pdf

[12] http://www.psc.state.ga.us/electric/surveys/residentialrs.asp

[13] https://www.pscpublicaccess.alabama.gov/pscpublicaccess/PSC/PSCDocumentDetailsPage.aspx?DocumentId=170fd1f2-3a15-4bb9-b960-4bb960825d64&Class=Filing  Redacted Testimony of Karl Rabago and Accompanying Exhibits Filed by Southern Environmental Law Center

[14] https://www.utilitydive.com/news/in-2017-solar-policy-debates-took-the-industrys-future-to-higher-ground/515716/

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