How Not to Set Electricity Rates

Guest Blog | August 13, 2012 | Energy Efficiency, Energy Policy, Utilities

Clare McGuire, former attorney for the Georgia Public Service commission and Georgia Watch, contributed to this post.

Electricity rate setting is a hornet’s nest full of accounting, policy-making and politics. People love power companies when rates are low, and they sometimes even love them when rates are high. The thing that really riles electric customers is when rates skyrocket. Thus, power rates can increase slowly, rates can be consistently high, and even the total power bill can be enormous. The only thing that power companies cannot do–if they want to keep ratepayers happy–is raise rates suddenly.

Alabama Power Company (APCO), an operating affiliate of Southern Company, along with a complicit Alabama Public Service Commission (PSC) has devised a unique way to collect big checks from Alabama residents without inciting ratepayer’s ire.

The APCO system is known as Rate Stabilization and Equalization or “RSE”. The system is complicated, but here is a simplified overview: Each year APCO estimates a number of financial factors and feeds these estimates into an RSE formula. The estimates go in on one end and a rate comes out on the other.

The good part of RSE  is that the rate cannot be more than 5% above the previous year’s rate. The outrageous part is that the system allows APCO to earn a 14.5% return on equity. For comparison, Georgia Power, a neighboring Southern Company affiliate, has a target rate of return of 11.15%. According to the Edison Electric Institute, the average awarded ROE for all rate cases in the third quarter of 2011 was around 10%.

Now think about what interest you might earn on an investment in today’s economy? 14.5%? Of course not. 1%? Perhaps.

Many Alabama electricity customers might look at this disparity and shrug. After all, APCO’s common refrain is that Alabama has low electricity rates; if the electricity rates are “low”, why should consumers care about how much profit APCO accumulates?

Does this formula make sense to you? No? Too bad that the PSC doesn't let you ask.


The answer is that Alabamians are actually paying more for electricity than APCO publicizes. According to data from the Energy Information Administration, Alabama’s average residential retail price for electricity is 10.67 cents per kilowatt hour–the second highest residential electricity rate in the entire Southeast, with only Florida consumers paying more. Unfortunately, it gets worse. Total electricity bills (comprised of charges beyond a mere calculation of electricity used multiplied by rates) represent the total amount that Alabamians pay the power company. When accounting for total bills, Alabama customers are paying the third highest electricity bills in the entire country.

Adding insult to ratepayer injury, residential customers aren’t even allowed to intervene in Alabama PSC reviews of APCO’s rate increases. Between 1968 and 1982 there were ten separate  PSC “rate cases” in which APCO proposed to raise rates and customers turned out to complain and defend their wallets. APCO didn’t want all that bad press, and public input was effectively silenced in 1982 when APCO and the PSC agreed to the new RSE system, which cut residential bill payers out of the process.

Alabama has the third highest electricity bills in the US and the second highest rates in the Southeast

In stark contrast to how rate cases are handled in Alabama, when Georgia Power wants to increase rates it must file an increase request with the Georgia Public Service Commission, as opposed to the automatic operation of RSE in Alabama. In Georgia the PSC then initiates a public hearing process, in which groups representing diverse classes of ratepayers — including residential, commercial and industrial interests — may intervene. As part of the public hearing process, on the public record, the Georgia PSC must hear testimony from witnesses for Georgia Power, from the PSC’s own staff and for any of the public interest groups that chose to present a witness. In addition, the Georgia PSC also allows members of the public to make brief comments at the outset of each day of hearings, giving individuals a chance to voice their opinions without the time or expense of intervening and presenting witnesses.

In Alabama, however, APCO holds private meetings with PSC employees (typically not the elected Commissioners themselves) throughout the year and, in December of each year, APCO tells the PSC employees what its rates will be. It is only at this point, after the decision is made without any witnesses, days of hearings, public records or open debate, that the public is able to make a comment.

The RSE process approved by the Alabama Public Service Commission is a case study in how not to set rates. Between regionally high electricity rates, the third highest bills in the entire country, no process for residential customers to raise concerns with their elected commissioners and APCO accumulating enormous profits, it is high time for APCO customers to demand more from their elected PSC commissioners. The PSC’s job is to balance the need for APCO to earn a profit on its services against the customers’ rights to be billed a reasonable amount for electricity. As it stands, there is nothing balanced about APCO’s exceptionally high return on equity and the exceptionally high bills that customers must pay, without any choice among electricity providers.

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