Alabama Industrial Energy Consumers

Alabama PSC Explains Alabama Power Rate Change

The Alabama Public Service Commission approved a recommendation to revise the return on equity component of Rate RSE for Alabama Power Company. The proposal requires the consent of Alabama Power Company and may be finalized by the Commission’s next meeting September 10, 2013. The Commission issued the following explanation concerning the proposed change:

• Previously, Rate RSE stipulated a Retail Return on Common Equity range of 13.00 to 14.50 percent with an adjusting point of 13.75 percent. The equity ratio was limited to 45.00 percent. Together, these components equaled an allowed “weighted cost of common equity” adjusting point of 6.19 percent (13.75% x 45.00%).

• On August 13, 2013, the Alabama Public Service Commission approved a new approach that modernizes Rate RSE, recognizing that you should not look at ROE in isolation, but in the context of the company’s capital structure. The changes focus on the weighted cost of common equity rather than simply the return on equity. Under this approach, the new weighted cost of common equity range for Alabama Power is 5.75 to 6.21 percent, with an adjusting point of 5.98 percent.

• The Commission’s recommendation does not dictate a particular Return on Equity or Equity Ratio. The Staff will monitor these components and, consistent with the WCE constraints, any adjustments made by Alabama Power as market conditions warrant.

• When Rate RSE operates (rate adjustments) going forward, the adjusting point will be 5.98 percent. As noted above, the previously allowed adjusting point was 6.19 percent.

• Based on the latest available data (twelve months ended June 2013), the lower adjusting point would reduce Alabama Power’s revenue requirements by approximately $40 million.

• The annual bill impact for an average residential customer would be $15.12 (including revenue taxes). Of course, the more KWh consumed, the greater the savings.

• The new weighted cost of common equity adjusting point of 5.98 percent is equivalent to a 13.29 percent ROE, based on the currently authorized 45 percent equity ratio. This is 46 basis points lower than the previous adjusting point of 13.75 percent.

• To place this in perspective, if Alabama Power increased its equity ratio from 45 percent to 51 percent (which is the average for a similar group of 43 companies), Alabama Power’s ROE would be 11.73 using the approved adjusting point of 5.98 percent. Moreover, if Alabama Power’s equity ratio was 55 percent (like its peer utilities with similar credit ratings), the ROE would then be 10.87 percent.

• As a result of the lower WCE range and adjusting point (from 6.19% to 5.98%) for Alabama Power, together with other measures undertaken by the Commission and Alabama Power, there will not be a rate increase under Rate RSE for the 2014 rate year.

• The last rate adjustment for Alabama Power was October 1, 2011.


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