Time to Face Facts on Rates

This morning’s Charleston Gazette carried a pretty thorough picture of the WV PSC’s recent decision to put aside the compromise worked out by the power companies, PSC staff attorneys, the PSC’s Consumer Advocate Division (CAD) and the industrial and commercial customers in WV represented by the WV Electrical Users Group (WVEUG).

While the Gazette article is interesting, because you get to see the Consumer Advocate squirm for being under cut in consumer advocacy by the Commissioners themselves, the Commission’s order, and Commissioner Palmer’s dissent, are much more interesting and educational.  I may not always agree with Commissioners’ decisions, as readers of The Power Line well know, but I have found that the WV PSC Commissioners generally do a good job in their orders of summarizing the issues in cases and educating non-experts about the issues they consider important.

Here is a link to the .pdf version of the recent AEP rate increase order.  I have not been able to open that file, so here is a link to the text version of that order which is not as pretty, but loads better on the slow Internet speeds we are forced to use in rural WV.

In their order, the Commissioners provide very useful discussion about the two kinds of rate cases allowed by PSC rules.  It is important to understand this distinction.  AEP has hit its WV customers with repeated rate increases in the last few years.  The PSC points out that these have all been rate cases to recover cost changes caused mainly by sudden changes in fuel costs.  In fact, the Commissioners point out at the very beginning of their discussion that “(c)oal costs incurred in the generation of electricity are the single greatest expense in the ENEC process.”  In other words, if your electrical generation is based on burning coal (or any other fossil fuel) market price changes for that fuel will result in higher electric rates, and the PSC must allow that under current rules.

We in the US have enjoyed the privilege of being among the first wave of people to fully exploit the fixed reserves of fossil fuel for our energy sources.  Now the Chinese people and the Indian people are able to use these energy resources on a similar scale.  Because nations like the US have already used the easiest to mine reserves, getting to what is left is more expensive to get out of the ground.  Demand for coal and natural gas is rising, while supply is disappearing.  Rising demand plus falling supply means fuel costs will rise from now on.  That is an economic fact.

The Commissioners go on to point out that the most recent rate case is not an ENEC case, but a “base rate” case.  Base rate cases are different from ENEC cases, because changes in all of the company’s costs can be included for consideration, not just short term price changes in fuel.  As it turns out, AEP threw everything but the kitchen sink into its base rate increase case: executive bonuses for the AEP holding company in Columbus, OH, the completely unproven carbon capture experiment at its Mountaineer plant, unjustified costs for the December 2009 blackout for which rate payers had already paid on costs for AEP’s right of way maintenance, which AEP had failed to perform, and many others.

West Virginia has resisted the fashionable deregulation trend of the 1980s and 1990s that was pushed by both Republicans and Democrats at the federal level.  Political leaders in our state were pushing us rapidly toward deregulation in the early 2000s when Enron single handedly destroyed California’s unregulated electrical system.  WV very wisely pulled back from the brink of disaster.

There are many good aspects of what deregulation has brought to many states that take a smart approach to the process.  There are also many bad features to a fully regulated process like the one we have in WV.  I won’t argue these distinctions here.

In a regulated rate process, power companies are forced to seek approval for any rate increases, but the law states that rates can go up if they are justified by reasonably allowable cost increases.  Regulators can’t just deny rate increases because they want to.  Power companies could sue them in court for being unreasonable, and would certainly win.

Here’s how the Commissioners explain it, very reasonably and clearly, in yesterday’s order:

The Commission cannot simply disallow rates because they represent an increase. That action would not be balanced, as required by the statute, and would be contrary to the Commission’s obligation to ensure adequate and reliable utility service.  The Commission is very sensitive to the economic impact of rate increases upon the public; however, it is also aware that in order to ensure adequate and reliable utility service, it must allow sufficient rate increases to allow the utility to meet increased costs in providing adequate utility service. This reality was recognized by every party to the
stipulation who recommended a rate increase greater than the increase provided in this Order. Those parties represent a broad array of interests including residential, commercial and industrial customers.

The Commission understands that it will be criticized by allowing any rate increase.  Nonetheless, the rate increase of $51.12 million (shown on Appendix C) allowed by this Order is the lowest reasonable increase to cover increased costs, and to attract capital necessary to ensure adequate and reliable electric service in the future.

That reference to “balance” comes directly from the law under which the PSC operates.  That law is determined by the WV Legislature, not the PSC.  Allowing regulated power companies to include legitimate costs and reasonable profit rates in their consumer rates is a basic feature of a regulated electricity systems.  It is far preferable to many of the chaotic practices we see in unregulated east coast states and parasitic “markets” that the PJM cartel operates.

There is another feature of WV’s PSC system that is not so benign.  There is now a system enshrined at the PSC that high volume industrial customers get special breaks on their electric rates.   The Legislature reinforces this practice every chance it gets.  In the 2010 session, the Legislature passed special legislation that granted the opportunity for huge rate reductions to the now closed Century Aluminum plant in Ravenswood.  It was supposed to be all about jobs.  Well, the plant’s still closed.

The WV PSC and the Legislature both claim that they support the improvement of energy efficiency in WV.  Why then do they consistently provide lower rates for the biggest users of electricity?  This says to all consumers, if you use more electricity, it will become cheaper and cheaper.  That is hardly incentive for increased efficiency.

As you read the PSC’s order, look closely at the discussion of the stipulated agreement between AEP and the parties to the agreement.  You will note that the only party with any claim to represent residential customers was the PSC’s own Consumer Advocate Division.  The CAD is supposed to “represent the interests of consumers” in the PSC process, but that is a long way from actually involving consumers in the process.  The only real consumer groups in the case did not participate in the stipulation agreement deal.  The Gazette article specifically notes that high volume industry and commercial customers, like the steel industry and Walmart, will receive special cut rates in the deal, while residential customers will bear a higher burden.

West Virginia electricity rate payers need to face some facts.  As long as we remain passive “consumers” of electricity, we will remain slaves to the obsolete technologies and industry practices of our coal based electrical system.  Rate increases are built into this system.  Shiny objects, like politician John Perdue’s rate freeze, won’t stop rate increases either.

There are only three kinds of electricity that do not face permanently rising fuel costs:

  • wind power
  • photovoltaic sun power
  • using less electricity by using it more wisely

So far, the PSC has made tiny steps in the direction of these long term strategies for weaning our state’s electrical system off coal.  The Legislature and our recent Governors have pursued disastrous policies that push for coal at any cost lock WV’s electric rates into an ever rising spiral.

It’s time to face the facts about electric rates.  And it’s way past time to get serious about real investment in our future, instead of throwing our hard earned money down the coal rat hole.