Alabama Power has accepted the Public Service Commission’s recommended modifications to Rate RSE (Rate Stabilization and Equalization).
The PSC on Aug. 13 voted 2-1 on a recommendation to begin measuring Alabama Power’s allowed range of return on a weighted cost of equity basis instead of return on equity (ROE). Weighted cost of equity (WCE) is ROE multiplied by the percentage of the company’s total capital structure funded through equity, which is Southern Company stock. Equity currently makes up about 44 percent of the company’s financing.
Commission President Twinkle Andress Cavanaugh and Commissioner Jeremy Oden voted for the change. Commissioner Terry Dunn voted against the change.
Due to the lower adjusting point, the company estimates about a $40 million reduction in potential revenues. The modification will not result in any immediate reduction in customer bills, but it is expected to put downward pressure on rates over the long run.
Alabama Power is already keeping RSE rates flat through 2013. A unanimous vote by the PSC on Aug. 13 on a separate accounting order, along with other measures, will allow the company to keep base rates flat through 2014 as well.
Under the newly accepted modifications to RSE, the allowed range for WCE would be between 5.75 percent and 6.21 percent, which is less than Alabama Power’s previously allowed ROE range of 13 percent to 14.5 percent at the then allowed 45% equity ratio.
Other changes under the modifications to RSE include:
– Creating a performance-based incentive that could add seven basis points (0.07 percent) to the 5.98 percent “adjusting point” for weighted cost of equity at the time of the annual RSE filing. The incentive is added only if Alabama Power holds an “A’’ credit rating with at least one of the recognized rating agencies or if the company ranks in the top one-third of its customer value benchmark survey.
– Adding a new mechanism to test for significant changes in the interest rate for 30-year Treasury bonds. An increase of more than 350 basis points or a decrease of more than 200 basis points would signal that a review of the WCE range may be needed.
– Requiring Alabama Power to file its income statement and balance sheet twice a year with the PSC. Around March, the company must report on the most recent 12-month period ending Dec. 31. Around September, the company must provide financial information related to the first six months of the current year.
In addition, every six years beginning in 2019, Alabama Power must prepare for the PSC staff and the Attorney General’s Office financial and operational information comparable to what the company presented during the four public meetings that took place this year. After the more detailed six-year review, the PSC staff will report to the commission whether any further review or other action concerning the return is warranted.
Alabama Power officials in the four PSC public meetings held between May and July presented hours of testimony for keeping the current system in place. Many supporters of the company and of the RSE system also spoke in favor of maintaining the current system.
Although the PSC staff found, following those meetings, that the company’s return was fair and reasonable, it recommended the modifications, and a majority of the commission voted for the changes.
While the company strongly supported the existing system, Nick Sellers, vice president of Regulatory and Corporate Affairs, said the switch from ROE to WCE does provide a better measure of the company’s broader capital structure. “We’ve always said you can’t look at the return on equity alone – which is just one component of the capital structure – when determining our return compared to our peer utilities,” Sellers said.
For decades under the RSE system, Alabama Power has provided reliable electric service at prices below the national average. In addition, the company ranks among the best in the industry for customer service and satisfaction. The company is also considered a leader in responding swiftly following major storms or natural disasters.