Now, Alabama Power rates are set so that the company is guaranteed at least a 13% return on investor’s equity, but it can’t exceed 14.5%. If the return reaches that number, rates are cut.
Power Company rates, like almost all utilities, are difficult to understand at times and many people wonder why the state is involved in setting rates for a business.
The simple answer is that the utilities have a monopoly situation where the consumer doesn’t have a choice. If you want to buy electricity, your only choice is the company’s wires that run in front of your house. That might be Alabama Power, or TVA or a rural co-operative. Whichever company it is, that is your electrical company.
For that huge business advantage, the utilities must deal with the PSC in setting rates for consumers.
The creative idea of guaranteeing a rate of return has been used in Alabama since the 1980s. Before that, a rate request was a long-running fight between the Power Company, consumer groups, business groups and politicians. Gov. George Wallace was a master at portraying the company as a beast to be tamed and only he could do that from the governor’s office. Others used it too, but nobody as well as Gov. Wallace.
The guaranteed rate of return stopped all the wrangling for the most part. But now, at least one PSC member, and groups like AARP are lobbying hard to reduce that high end of the return from 14.5% to around 10%. And while no one has said, if we keep the same spread, the low end would be 8% under the AARP plan.
AARP officials told The Anniston Star that lowering the rate from 14.5% to 10% would save Alabama citizens $287 million per year. That’s a lot of money that will come out of the pockets of the Power Company and stay in the pockets of consumers if their projections are right and if the PSC agrees to do that.
The real question is how much of a return should a power generating company expect to make on huge capital expenditures? In recent years lots of businesses have seen their profits crumble. They don’t have a captive audience or a PSC examining their books. They are free to cut expenses, or increase revenue through rate increase if they like and if they are confident customers won’t go away because of price increases.
A cut from 14.5% to 10% on the high end seems a little drastic. Perhaps a cut to 12% on the high end would work better, giving consumers some relief but not cutting Alabama Power’s revenue as deeply.
We suspect that whatever side of this issue you take, and whatever action the PSC takes, it won’t make everyone happy.
It might seem like the 1980s again.