What happens when a politically powerful utility is allowed to spend its customers’ money without any public accountability for over thirty years?
In Alabama, billions went to upgrade coal-fired power plants that are approaching – or have reached – the end of their useful lives, while the Alabama Power Company, which provides power to most of the state, faced nothing more than a rubber-stamp from the Alabama Public Service Commission, which routinely approves adding such costs to the rate base, according to a new report.
The result, says the study, is that customers will pay for decades for Alabama Power’s continued reliance on coal without the company ever having to demonstrate it's making good use of their money.
The report is called “LEFT IN THE DARK: How the Alabama Public Service Commission Makes Customers Pay Billions of Dollars for Alabama Power Investments without Any Meaningful Public Review or Involvement.” http://ieefa.org/wp-content/uploads/2015/02/Left-in-the-Dark-Feb-2015.compressed.pdf
Author David Schlissel, of the Institute for Energy Economics and Financial Analysis, has written before on Alabama Power and the Public Service Commission. Schlissel’s report was prepared for the Southern Environmental Law Center (SELC), the Southern Alliance for Clean Energy (SACE) and the Greater Birmingham Alliance to Stop Pollution (GASP).
Dominated by ultra-conservative Republicans who virtually never oppose Alabama Power’s will, the Alabama PSC has not conducted a public rate-setting hearing since 1982 when it traded hearings for something called “Rate Stabilization and Equalization,” under which Alabama Power adjusts its charges each year without the inconvenience of evidentiary hearings or participation by the rate-paying public. Instead, the utility opens up its books to the PSC and its staff, which reviews the numbers privately and renders a decision.
In an earlier report, Schlissel wrote that this “extreme rate-making process” - held up as a national model by the Edison Electric Institute - was devised specifically “to shield the process from public involvement and scrutiny.” http://arisecitizens.org/index.php/component/docman/doc_view/948-arise-report-public-utility-regulation-without-the-public-3-1-13?Itemid=44
Even within the Southern Company family of politically-influential utilities in Georgia, Mississippi and northwestern Florida, Alabama Power is considered unusually dominant in its home territory, where it provides electricity to about 1.2 million residential, 197,000 commercial and 5,200 industrial customers in the southern two-thirds of Alabama. And while Georgia Power has boasted of beefed-up solar capacity and its costly new nuclear plant, and while Mississippi Power brings delegations of energy ministers to its still-incomplete $6 billion “clean coal” facility, Alabama Power’s plan for the future is evidently to double down on its aging coal fleet.
Big Investments, Big Profits
For which it is being rewarded with industry-leading profits. Nationwide, the average return on equity for utilities between 2008 and 2011 was 9.4 percent. However, Alabama Power was allowed to earn 13.3 percent - nearly 30 percent more - under the PSC’s formula rate process. Given this atypically generous return, it’s easy to see why Alabama Power is considered the cash cow in the Southern Company empire.
Fueling this inflated profit margin is the 11.6 percent return the company gets on investments it adds to the rate base, such as the more than $3 billion in environmental upgrades Alabama Power has made at existing power plants in past 10 years, all without having to offer any evidence in a public forum that these expenditures are the most cost-effective and least risky of available alternatives. The same applies to another $722 million in upgrades that will be added to rates by 2019.
“Moreover, placing an investment into rate base means that the Company is allowed to earn a return on that investment for decades and can also recover annual operating & maintenance and depreciation expenses,” Schlissel notes.
While other southern states, including Mississippi, Georgia and Florida, where Southern Company operates, must offer public evidence - including testimony delivered under oath and the opportunity to cross-examine witnesses - to justify such capital expenditures, Alabama Power’s customers can question corporate plans only during an informal off-the-record meeting of less than one day. Then that’s it for public access for another year.
Were hearings held, the company would have to justify spending so much money on so many geriatric coal plants, some of which are running at much-reduced capacity amidst the natural gas glut.
Propping up Old Coal
At Plant Gorgas, Unit 8 was nearly 54 years old when a scrubber was installed in 2008. It will turn 60 by the time a baghouse is added in 2016. Unit 9 was nearly 50 years old when a scrubber was installed in 2008, and will be 58 when it gets a baghouse in 2016, at which time Unit 10 will get one too, at age 44. Five other pricey upgrades at this and other plants involve units that are between 36 and 42 years-old.
While the generally agreed-upon maximum useful life for a coal plant is 50 years – the average age of coal plants retired over the past ten years is between 42 and 56 years - few run efficiently for that long. Alabama Power claims it can run its plants well past fifty, but the wisdom of making large, long-term investments in its coal fleet is dubious given low natural gas prices and increasingly stringent regulatory limits on carbon dioxide emissions. In fact, much of the company’s coal fleet is already operating well below capacity thanks to cheap gas, making upgrades an even worse deal. For instance, Plant Gorgas's Units 8, 9, and 10 ran at just 40 percent capacity on average since January 1, 2011 compared to an average of 67 percent for the previous six years.
Most important for the long-term impact on ratepayers – and the environment - are the Integrated Resource Plans that utilities prepare every few years outlining their priorities going forward. These include estimates of power needs stretching decades into the future, what fuels will be most economic and least risky, which plants to retire, and what energy efficiency measures to take. “In many states, including a majority in South, the IRP process means making public critical information, open evidentiary hearings and/or right to submit detailed comments before the IRP is approved,” writes Schlissel.
An Outlier Utility
For instance, sister company Georgia Power’s 2013 IRP was some 190 pages “and contained significant detail on the supply-side and demand-side resource alternatives that had been considered by the Company in developing its proposed resource plan,” Schlissel explains. The Tennessee Valley Authority, which covers northern Alabama, Tennessee, and Kentucky, “also has a multi-step public IRP process in which representatives of its customers can participate.”
Not so Alabama Power, which in early 2014, released “a 15-page document that included only summary descriptive language about the Company’s 2013 Integrated Resource Plan. The very limited narrative included in this summary did not include any detailed data information on such important issues as what Company expects its future needs will be or any economic analyses showing that the resource plan adopted by Alabama Power is more cost- effective and less economically risky for ratepayers than other alternative scenarios.”
While Alabama Power locks its customers into coal – and into paying for it – Southern Power, its unregulated merchant affiliate, owns no coal whatsoever. Unlike Alabama Power, Southern Power has spent the last 15 years building up its gas generation capacity in the south, and is steadily buying up and investing in gas and solar power around the country.
With almost every other utility – even within the Southern Company family – going a different way, Alabama Power remains a last bastion of enforced ignorance, making decisions that seem to make little long-term sense for the environment or its customers, who, so far anyway, it has succeeded in keeping in the dark.