Charleston Daily Mail reporter Ry Rivard has done us all a great service in his article this morning. Rivard has done what every good reporter should do. He went to APCo and asked the right questions to find out exactly what caused their push for their bond bill, and what the alternatives might be.
From his good work, we have learned exactly what has caused APCo’s desperation to cover their 2008 coal mistake.
Appalachian is asking for the plan after a scheme to avoid a dramatic rate hike in 2009 failed. That year, Appalachian and its sister company, Wheeling Power Co., asked for a 43 percent rate to recover $442 million in fuel, purchased power and pollution control equipment costs.
The company primarily blames a spike in coal prices starting in 2008 for causing the problem.
The companies and the state Public Service Commission avoided a one-year increase – which would have been the largest in state history – by agreeing to spread it out over four years.
That plan didn’t work out.
Appalachian spokeswoman Jeri Matheney said the company is still in the hole by about $300 million after three years. Now customer rates are still too low to recover those costs or to pay for still-elevated coal prices. A drop in sales – including curbed demand from large industrial customers like the now-idled Century Aluminum facility in Ravenswood – has not helped, either. [emphasis added]
So, the three year pay off plan designed by the PSC and APCo failed to significantly retire APCo’s 2008 coal mistake because APCo’s electricity sales continued to fall, reducing the amount of money they collected from rate payers.
So the solution APCo’s lobbyists are providing, and the WV PSC’s Consumer Advocate supports, is to spread that debt out over ten years using the proposed bond plan. I have read the bond bill, HB4530, closely. The bill locks WV rate payers in to a fixed annual bond payment and requires the PSC to adjust electric rates upward in years when electricity sales don’t generate enough money to make the payment. This requirement would be fixed in state law, which provides APCo with the low interest rates they are seeking.
So, what if HB4530 passes, the bonds are issued, and electricity sales in WV continue to fall? You guessed it. Rates will rise because the bond payments must be met every year for the life of the bond.
Rivard also does a good job of describing APCo’s reasoning:
Under the plan, utility companies could ask the PSC to allow them to sell bonds. The bonds would be guaranteed by PSC-mandated utility rates. Because the bond would be backed by law, Appalachian believes the bond would be repaid at the same low-interest rate that governments receive.
The company contends it could get a AAA-rated bond with the lowest possible interest rates if the bill passes. Appalachian’s own bond rating from Moody’s is Baa2, which is considered medium grade.
“The legislation is necessary so these bonds have a AAA rating,” Matheney said.
Without the bill, the company said rate increases are unavoidable. With the bill, the company thinks it can deal with previous coal costs without raising rates at all.
“Spreading it out that way means we can pay for the bonds in the rates we already have; we wouldn’t have to raise rates at all – that’s the goal to keep rates where they are,” said Steve Ferguson, Appalachian’s director of regulatory affairs.
It’s not clear how much money the company would save if it simply entered another multi-year deal with the PSC to spread the costs out like it did back in 2009.
APCo claims that the PSC-forced bond payment is required to give the bonds a AAA rating and therefore lower interest rates than APCo can get on its own. So if it is just about the interest rate, then the life of the bonds could be shortened to the life of the previous PSC deal, that is, three years, to minimize total interest rate payers would have to pay and minimize risks of forced rate increases. A problem here is that APCo can’t predict what the rating will be on these bonds. Ratings are only issued by ratings companies after the bond is created, and we won’t know that until after HB4530 is passed. What if these bonds do not get AAA ratings?
APCo’s Ferguson also claims that APCo’s “goal is to keep rates where they are.” This is another bet placed on some uncertain assumptions. It is quite likely that this “we wouldn’t have to raise rates at all” is not based on the bond situation at all. APCo has gotten a number of coal price adjustments over the years, including the 2009 deal with the PSC, which would be expiring in the next few years. If coal prices stabilize, and electricity sales don’t continue to fall, (both assumptions in themselves) then WV rate payers would actually see some reduction in rates, as natural gas rate payers have seen in the last year. It appears that APCo may be depending on this sleight of hand, the substitution of new bond payments for expiring past rate increases, to “keep rates where they are.”
So the alternative to the proposed bond scheme would be to adjust rates somewhat higher to keep the original 2009 payoff plan on track. In that case, APCo’s 2008 coal mistake would be paid off in a couple more years. Instead, APCo wants to “spread out” the debt over a longer period of time, and lock in the risk that further declines in electricity sales will result in rate increases for as much as ten years in the future.
Which is it APCo? Do you need the bonds to get lower interest rates? Or are you using the “spreading out” of the risk you have shifted to rate payers to give you more flexibility to raise rates for other purposes in the future? Is this about interest rates, or is it really about your public relations problem? As Rivard points out in his story:
Even if the bond bill passes and the PSC approves a bond sale for Appalachian, the company may still have to ask for a 3 to 4 percent increase this year because of new costs associated with a construction surcharge for a natural gas-fired power plant coming online in Ohio.
Rivard does not note an additional source of future rate increases, as well as further exposure to the risk of coal price increases. APCo’s parent company, AEP, is forcing APCo to buy out Ohio Power’s interests in two WV coal-fired power plants. This new “investment” in coal-fired generating capacity will also likely lead to further rate increases for WV rate payers.
Thank you, Ry Rivard, for helping WV rate payers find some more of the pieces to the APCo bond bailout puzzle.