It likely will be the most hotly contested part of Georgia Power’s rate hike proposal. But, if approved, it would be only a small portion of customers bills, analysts say.
The utility wants to increase the amount of profit it’s allowed to make to 11.5 percent, up from 11.15 percent. That, in turn, would increase shareholders’ rate of return.
But that request has drawn criticism from consumer advocates.
“The average person in Georgia can’t afford to pay more on their power bills and then see the shareholders’ profits go higher and higher,” said Liz Coyle, deputy director of Georgia Watch, a consumer rights group. “Just as the state is starting to come out of the recession, this is not the time to be putting additional burden on ratepayers.”
The utility wants to hike rates about 6.1 percent starting next January to pay for pollution equipment, new transmission lines and smart grid technologies, in addition to raising the shareholders rate of return. For consumers, that would mean paying an additional $8 a month for a typical bill of 1,000 kilowatt hours.
Georgia Power’s profit margin already is higher than the industry average of 10 percent, according to industry data. It is allowed a profit margin of between 10.25 percent and 12.25 percent.
The higher the percentage, the more attractive the company and its parent, Atlanta-based Southern Co., are to investors.
“People get energy to their homes because someone invests (in the company to build infrastructure),” said David Parker, a utilities analyst with Robert W. Baird & Co. “It’s not the government, it’s investors who have lent money to Georgia Power and Southern. If investors don’t get a fair return, they don’t lend the money in the future.”
Regulators will set Georgia Power’s rates. Any profit higher than 12.25 percent, a portion of that money must be returned to consumers. If profits fall below 10.25 percent, then Georgia Power can petition the PSC to raise rates to make up for that amount.
More than 90 gas and electric companies had their rates and profit margins reviewed last year. On average, the allowed rate of return has been falling since 2000, according to data from the industry trade group Edison Electric Institute and consulting firm Regulatory Research Associates.
“I have recognized a trend across the country of utility ROEs (return on equity) going down,” said Georgia Public Service Commission Chairman Chuck Eaton. “I think that’s something that we’re going to be taking a look at here in Georgia.”
Utility regulators in Florida last year cut a proposed 11.7 percent rate of return on equity from Gulf Power, Georgia Power’s sister utility, to 10.25 percent. In Alabama, however, sister company Alabama Power is under fire for having an earnings band of 13 percent to 14.5 percent.
In other states, Duke Energy Carolinas received a 10.2 percent profit in its current rate review. North Carolina regulators cut Dominion North Carolina Power’s profit margin to 10.2 percent from a requested 11.25 percent in 2012. Regulators also reduced Progress Energy Carolinas’ allowed profit to 10.2 percent down from the company’s requested 11.25 percent.
“As a shareholder, you are earning a portion of the business, but nothing is guaranteed,” said Paul Patterson, a utilities analyst with Glenrock Associates. “Utilities are not guaranteed a return, they are supposed to be given the opportunity to earn a return.”
A typical Georgia Power residential bill averages $117.20 a month. A small portion of that goes to the utility’s rate of return, analysts say. The bulk of the bill pays for fuel capital projects and labor costs, including pensions and health care. Additional fees pay for environmental and energy-efficiency programs. Georgia Power customers also pay a surcharge for the company’s nuclear expansion project at Plant Vogtle.
“In the overall scheme of things, it’s (the profit margin) actually not a large portion of rates,” Patterson said. “It’s often something that’s contested.”
The Georgia Public Service Commission will decide who wins that dispute in December after a series of hearings in the fall.
If regulators decide to significantly lower Georgia Power’s profit margin, or if it falls below the earnings band, that eventually could lead to higher costs when the utility goes to borrow money, the company argues. Those increased borrowing costs also eventually could flow through to customer bills.
“You want to have investors lending you money at the lowest rate possible,” said Parker, with Robert W. Baird and Co.
The $14 billion Plant Vogtle project is one that the utility could not have embarked on without a solid balance sheet.
And, despite Vogtle’s cost increases and controversial monthly fee that customers are paying, Georgia Power touts long-term savings of $2 billion, in part because of low interest rates.
“Georgia Power’s source of funds from the equity market is by way of its parent, Southern Co. Southern Co. sells shares of the company into the market for cash which it provides to Georgia Power to build the reliable electrical system customers deserve and depend on every day,” Georgia Power said in a statement.
The timing of the profit increase request is critical. Georgia Power is in the middle of one of the largest capital expansion programs in the company’s history.
The utility is spending billions to install pollution-control equipment at its coal-burning power plants to comply with federal environmental rules.
It also has yet to secure long-term financing in the form of loan guarantees from the federal government to pay for its share of a $14 billion nuclear expansion project in Waynesboro. The federal government awarded the Plant Vogtle project more than $8 billion in taxpayer-underwritten loans for Plant Vogtle. Southern and the Department of Energy still haven’t agreed on the loan terms, however.
Southern may be able to get a better deal in the private market, especially if it can show that investors will get a good return for their money. The window for competitive borrowing rates could be closing: Mortgage rates and other borrowing rates are starting to increase, which means the cost of capital could be rising as well.
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