Plocal
ages
North Central Electric Cooperative
Who approves electric rates?
Large utility rate cases before the Public Utilities Commission of Ohio (PUCO) and the
PUCO’s announcement of a revised Percentage of Income Payment Plan (PIPP) have
been in the news for the last 12 to 24
months. Several members have asked: “Who
regulates the cooperative’s rates?” and “Why
doesn’t the cooperative have a PIPP plan?”
It is important to know that all electric
utility rates are regulated in Ohio in some
manner. Ohio law provides for the rates of
investor-owned utilities (IOUs) such as Ohio
Power and Ohio Edison to be regulated by a
five-person commission appointed by the
governor and confirmed by the Ohio Senate
for five-year terms. Municipal electric rates
are regulated by a local utilities board usually
appointed by the mayor and approved by members of the
town council, who are elected by the residents of the municipality. (A few municipalities have charters where the
utility board members are elected rather than appointed.)
Municipalities have the authority to approve their own
rates under the “Home Rule” provision of the Ohio Constitution.
Electric cooperative rates are regulated by the cooperative’s trustees who are elected from and by the cooperative’s members. Ohio’s legislators have not seen the need to
impose additional regulation on cooperatives since their
formation more than 75 years ago because of their local
representation similar to municipal electric systems. Ask
yourself, “Why subject the cooperatives to the expense of
PUCO regulations out of Columbus when the cooperative’s
members elect their own local trustees to set policies, approve budgets and regulate rates?”
Regardless of who regulates electric rates in Ohio, all
electric utilities develop rates based upon well-established
principles, some of which are simply prudent business
practices and others are legal principles tested over many
years in federal and state courts. These principles can be
summarized in this sentence: “Rates are to be approved for
the prudent costs of electric service and are to be just, reasonable and non-discriminatory.”
Many people fail to realize the rate regulation process
looks two ways (even at the PUCO) between the electric
utility and the rate payers. Notice the above rate principle
sentence does not say rates should be, could be, might be
or may be approved. It says they are to be approved for the
prudent cost of electric service. Now there may be an argument about what constitutes a “prudent” cost, but these
usually can be established by IOUs with proper documentation. I’m sure you will agree that determining and approving “prudent” cost expenditures is one of your
cooperative’s board of trustees most important duties.
Keep in mind IOUs are subject to service standards for
which they must spend a certain amount of money to
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meet. In the case of electric cooperatives, our mortgage
agreements require us to meet certain standards of system
maintenance and reliability. Our mortgage holders want to
know the cooperative’s electric system is kept in proper
condition to maintain its value as collateral for the mortgage. Obviously, a well-maintained system also benefits the
members with more reliable electric service. The bottom
line is all regulators of electric utilities in Ohio, whether of
IOUs, municipal systems or electric cooperatives must approve rates high enough for the utility to pay its bills and
to make a profit (at IOUs) or a margin (at cooperatives) to
provide electric service. A profit or margin is a necessary
business expense incurred by the utility to raise the capital
needed to finance improvements to the electric system.
In my view the second part of the rate principles sentence that rates are to be “just, reasonable and nondiscriminating” deserves a lot of attention by rate regulators and
the rate payers. “Just” means the rates reflect the actual
costs to provide electricity to a particular type of consumer
(e.g. residential, commercial or industrial) plus a “reasonable” profit (or margin) to the utility. “Reasonable” does
not refer to how high a rate is set, but rather how fairly
and equitably costs have been allocated among different
classes of consumers. For example, the cost of building a
substation to serve one industrial customer would be allocated to that customer and not spread to all of the residential customers. If the “just” and “reasonable” principles are
followed, then rates usually will be “nondiscriminating” in
that no class of electric consumers subsidizes another.
The PUCO’s duty is to make sure the IOUs follow these
rate-making principles. Cooperatives also follow these
Plocal
ages
North Central Electric Cooperative
principles. First, they were formed as
not- for-profit cooperatives to provide
electric service at cost. Secondly, even
though the board of trustees is the cooperative’s rate regulator, the board
follows these well established ratemaking principles using cost-of-service studies to guide them.
Ultimately, both the PUCO and the
local cooperative’s board of trustees
know they must be prepared to defend
their rate making decisions in court, if
their decisions are challenged for violating these principles.
What are “rate riders”?
Rate riders are special rate provisions used to pass through variable
costs such as the price of fuel to generate electricity. In fact, most of the
Ohio IOUs, municipal electric systems
and electric cooperatives have what is
called a Purchased Power Adjustment
or Fuel Adjustment Rider. For example, if the approved electric rate assumes an average cost of power of 6
cents per kWh, but the actual cost for
the month was 6.5 cents per kWh,
then .5 cents per kWh would be added
to the bill. On the other hand, if the
actual cost was 5.5 cents per kWh,
then .5 cents per kWh would be credited to the bill. The cooperative also
uses rate riders to pass along wholesale power savings to those members
participating in the cooperative’s load
management program. For example,
members receive a $1.50 monthly
credit on their bill for each electric
water heater controlled by a load
management switch during peak demand periods. There is really nothing
wrong with rate riders if they reflect
the actual cost of electric service to the
consumer.
Are utilities welfare agents?
However, rate riders have taken a
direction for IOU customers that cooperatives have decided not to follow
because we believe they violate basic
rate making principles and cause unfair discrimination among rate classes
and among consumers within rate
classes. To be fair, this direction was
not initiated by the IOUs, but rather
imposed by the Ohio legislature with
“good intentions.” IOUs were assigned
the administration of a public welfare
program on top of providing electric
service.
For example, the PUCO last winter
took a long established program and
approved a “new and improved” version of it called the Percentage of Income Payment Plan or PIPP Plus.
Households with a gross yearly household income at or below 150 percent
of the federal poverty guidelines are
eligible to participate. Under PIPP
the difficulties some members have
paying their electric bills. We just
don’t believe electric utilities can or
should be state-guided welfare agencies.
Now the PUCO is moving forward
into the arena of “Corporate Welfare.”
On July 15, 2011, the PUCO issued an
order (Case No. 11-4304-EL-UNC) to
investigate a “proposed economic development tariff template” that would
be adopted by all Ohio IOUs. The idea
Cooperatives don’t oppose public assistance
programs, nor are we unsympathetic to the
difficulties some members have paying their electric
bills. We just dont believe electric utilities can or
should be state-guided welfare agencies.
Plus the electric consumer pays $10 or
6 percent (10 percent for all electric
homes) of their gross monthly household income, whichever is greater, toward their electric bill. Each time a
household pays their bill under the
PIPP Plus formula on time and in full,
they no longer owe the rest of that
month’s bill! The “Plus” part is that
they also receive a 1/24 credit toward
any old unpaid electric balance. If they
make full, on-time PIPP payments for
24 straight months, then all of their
past due bills are eliminated. Isn’t
that miraculous! I wonder who is
picking up the difference?
Well, it isn’t the IOU. You see there
are those “pesky” (at least to some legislators) Amendments V and XIV to
the U.S. Constitution and Article I
Section 19 of the Ohio Constitution
which the courts have interpreted as
saying the United States and the State
of Ohio cannot force a person or business to sell their product or service at
a loss, which is exactly what PIPP Plus
does. How does the PUCO resolve this
problem? It “saddles” all of the IOU’s
consumers with another rate rider to
allow the IOU to assess a special
charge per kWh so the IOU can recover the electric service “welfare benefit” of reduced price electricity to the
PIPP Plus participants. Cooperatives
don’t oppose public assistance programs, nor are we unsympathetic to
would be for the Ohio IOUs to offer
new or expanding business special
rate discounts with the rate discount
percentage depending upon the number of new jobs and payroll created
and/or the amount of new capital invested. I wonder who will be picking
up the rate difference?
Again, the answer is not the IOU.
All of the IOU’s consumers would be
“saddled” with yet another rate rider,
but the PUCO proposes this time with
only 80 percent of the rate difference.
My guess it will be 100 percent, since
I’m not sure how forcing the IOUs to
pick up 20 percent of the loss will
stand up in court. Should you be concerned? I certainly would be if I were
an IOU industrial consumer and had
to pay a higher rate to subsidize a
competitor’s rate. But wait — the Ohio
Manufacturer’s Association Energy
Group commented to the PUCO that
legislation should be pursued so that
the discount recovery mechanism
should apply to customers of all IOUs
and of all electric cooperatives in the
state.
We will be watching this one
closely along with our Ohio Rural
Electric Cooperative statewide association. Folks, there should be no such
thing as a “free-ride” in an electric
utility, just like there are really no free
lunches. We don’t want our members
“saddled” with this “rider.”
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