Power Politics: Formal hearings on utility rates possible
by Tim Lockette
tlockette@annistonstar.com
Feb 16, 2013 | 8414 views |  0 comments | 12 12 recommendations | email to a friend | print
Alabama Power's plant in Gadsden. (Photo by Trent Penny / The Anniston Star)
Alabama Power's plant in Gadsden. (Photo by Trent Penny / The Anniston Star)
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MONTGOMERY — When Terry Dunn decided to campaign for formal review of the profits made by the state's biggest utility companies, he knew it wouldn't be easy.

"I knew it would be a struggle from the start," said Dunn, who sits on Alabama's Public Service Commission. "We're talking about millions of dollars."

Last week, after nearly two months of trying, Dunn convinced his colleagues on the three-member commission to conduct formal hearings on how much profit utilities such as Alabama Power, Mobile Gas and the Alabama Gas Corp. generate from money stockholders have invested in the company — if the commissioners conclude that less-formal hearings won't do the job.

In other words, he got a firm maybe.

Dunn said he wants the formal review because there hasn’t been one since the early 1980s. It's the commission's job, he said, to find out if electricity and gas are costing the state too much.

But his call for the formal hearing generated weeks of backlash from PSC president and fellow Republican Twinkle Cavanaugh, who said Dunn's move was a way to open the door to "extreme environmentalists" who want to hobble Alabama's coal industry. The conflict even got a nod from Republican Gov. Robert Bentley, who backed Cavanaugh in a speech earlier this month, warning about anti-coal groups trying to "infiltrate" the debate.

Dunn, an Etowah County general contractor whose PSC candidacy was endorsed by Karl Rove, says the accusations are just a distraction.

"I have nothing against coal," he said. "I like to breathe clean air as much as anybody, but I'm not an environmentalist."

Locked in

Dunn's request for a formal hearing has roots in a chain of events going back to the 1970s. Back then, the Public Service Commission regularly renegotiated electricity and gas rates with the state's utilities. It kept the commission in litigation with the companies much of the time.

In 1982, the commission set up a formula for more or less automatically adjusting utilities' rates. That system was based on return on equity — in other words, the amount of return the utility sees on money invested by stockholders.

The PSC set an allowable range for those returns. If the return on equity fell below a certain range, utilities were virtually guaranteed a rate increase to make up the difference. And if return on equity got too high, cuts in utility rates were just as certain.

For the Alabama Power Co., the current return-on-equity rates are between 13 percent and 14.5 percent. That's just a tad below the 1982 rate, between 13.5 and 15 percent, according to press acounts from the time.

Alabama Power claims it's a better system for everybody, leading to fewer sudden spikes and troughs in rates for customers.

"It's been in place for 30 years, and it's flattened out the curve of rate increases," said Michael Sznajderman, a spokesman for the company.

Alabama was one of the first states to try the return-on-equity system, though it's widespread now.

But critics note that in other states, the allowable RSE is lower than in Alabama. A 9.5 percent to 10.5 percent return on equity is common for utilities, said J. Randall Woolridge, a professor of finance at Penn State's Smeal College of Business.

"Companies usually ask for 11 percent, but they don't get that," said Woolridge, who tracks — and testifies in — utility rate hearings in various states.

Woolridge says the return-on-equity rate has been discussed dozens of times at formal rate hearings nationwide in the last decade, but not in Alabama.

Dunn said he doesn't have a problem with the return-on-equity approach, but with interest rates now very low, he thinks it's time to formally review the rate itself.

"In 1982, the interest rate was 14 percent," he said. "Now it's almost nothing. It seemed like something we should look at."

Sznajderman, the Alabama Power spokesman, said comparisons between allowable rates can be misleading. Alabama Power uses less equity than most utilities, he said, which skews the numbers.

"Our overall return is a little less than 8 percent, which is typical," he said.

Attack on coal?

Dunn is asking for a formal hearing into the allowable rate of return — a quasi-judicial proceeding that would require participants to be sworn in to testify.

He said it would create a record that could be used to defend the PSC from a suit by a utility.

PSC President Twinkle Cavanaugh opposed the idea. In press releases and letters to the editor, she said formal proceedings could be hijacked by "extreme environmentalists" hoping to end the use of coal in Alabama. She said her priority was "standing as the last line of defense against federal mandates coming down from an agenda driven by radical environmentalists who want to kill Alabama's coal industry and our industrial recruitment."

Cavanaugh mentioned two environmental groups in particular: the Virginia-based Southern Environmental Law Center and the Birmingham-based Alabama Environmental Council. Cavanaugh declined to respond to The Star's questions about how possible hearings would be connected to the fortunes of the coal industry.

Dunn said he has no connection to SELC or AEC, but has shaken hands with environmentalists who have approached him after PSC meetings. Keith Johnston, managing attorney at SELC's Birmingham office, said he's not aware of any connection between his group and Dunn. Attempts to reach Michael Churchman, director of the AEC, were unsuccessful last week.

Both Dunn and his chief of staff, David Rountree, say the accusations are just a way to change the subject.

"It's a shame it got so dirty," Rountree said.

Flexibility

Asked what federal mandates pose a threat to Alabama's use of coal, Cavanaugh declined to respond.

But Dunn had some ideas. He said Alabama Power had spent billions complying with changes to Environmental Protection Agency regulations on emissions from coal-fired power plants over the past decade — costs that get passed on to customers.

Dunn said one worry on the horizon was the potential that EPA might rule that coal ash, a waste product from burning coal, is toxic waste. That would create costly new rules for disposal, he said.

"We have been watching that, in the event it comes down from the federal government," he said. "We've been fighting these new regulations ever since I've been here."

Dunn said he wants utilities to operate in a way that protects the environment, but he doesn't think it's a good idea to add costs in tough economic times.

Another person watching for possible new regulations is Keith Johnston of the Southern Environmental Law Center. He's hoping for tighter rules.

Johnston said that in plants across the South, coal ash is often stored in unlined ponds, which could allow leaching into drinking water or escape into rivers. That's a problem, he said, because the ash often contains toxic metals such as mercury or arsenic.

"Coal is by its very nature a dirty business," he said. He also said he expects it to be around for a while.

"We know we're not going to zero-out coal," Johnston said. "But if a coal-fired plant is going to operate, it should operate within the parameters of the law."

In recent years, Alabama Power has moved dramatically away from the use of coal. In 1999, Sznajderman said, 77 percent of the company's power was coal-generated. In 2012, just under 50 percent came from coal.

Sznajderman said EPA regulations were one reason for the change. But the falling cost of natural gas was a bigger reason.

"It was a market-driven decision," he said.

Changes in the energy market have the utility hedging its bets lately. Last year, for instance, Alabama Power converted its Gadsden plant from all-coal to a dual operation that could generate electricity with either coal or gas.

"People misinterpret our position, and think that we're pro-coal," he said. "We aren't pro any source. We're pro-flexibility."

The coal that burns in the company's plants isn't all from Alabama. Sznajderman said about 55 percent of the company's coal is imported from the Powder River area in Wyoming. Thirty percent is from Alabama, with lesser amounts from Colombia, Colorado and out-of-state Appalachian mines.

Compromise

After weeks of controversy over the rate change, the PSC seems to be moving toward reconciliation — and inching toward the formal hearing Dunn wanted.

When the commission met Wednesday in Montgomery, commissioners swapped stories about their families preparing for Valentine's Day. Dunn and fellow Commissioner Jeremy Odum left the podium to present Cavanaugh with a present: a new gavel.

Shortly after Cavanaugh banged that gavel, Dunn again offered a motion for formal hearings. Oden offered an amendment, saying that formal hearings would be conducted if the PSC isn't satisfied with informal rate hearings already scheduled for coming weeks.

The motion passed unanimously.

After the meeting, Oden said the vote would let the commission move forward.

"Let's move through it," he said. "We're in the position now to get the job done, so let's get it done."

Cavanaugh later issued a release saying the compromise position was what she wanted all along.

“The public rate reviews that Commissioner Oden and I have endorsed remain the most cost-effective and transparent way to ensure that Alabama consumers are being treated fairly, but he and I have said repeatedly that formal hearings will be held if agreements on rates cannot be reached," Cavanaugh is quoted as saying in the release.

The debate may not be over yet. Once informal hearings are held, the PSC will have to come back to the question of whether to do a formal inquiry.

"I think it's going to happen," Dunn said. "I get emails every day from people encouraging me. People want it."

Capitol & statewide correspondent: 256-294-4193. On Twitter @TLockette_Star.

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