Private utility companies need to trim their guaranteed profit margin paid monthly by customers who have no choices in the marketplace, says Foster Campbell, chairman of the Louisiana Public Service Commission.
His is an idea that is not widely embraced but could have an impact in Louisiana.
“We’re elected by consumers to protect consumers from these monopolies. You’d assume that every commissioner in the country would agree,” said Campbell, who has been pushing the idea among utility regulators nationally since publishing an article in March in their association publication.
Nationally, investor-owned utility companies make an average 10.66 percent “return on equity” or ROE, Campbell said. In Louisiana, dropping that ROE by 2 percent would mean a savings of about $50 a year for the average residential customer, he said.
Campbell argues that the prime interest rate is 3.25 percent. The wellhead price of natural gas, which fuels most of the generators that make electricity in Louisiana, is $2.35 per thousand cubic feet and is predicted to remain low for several years.
“All the ingredients that go into making the ROE are down — the cost of money, the cost of fuel — nobody these days is getting a 10 to 11 percent profit, and it’s guaranteed,” Campbell said.
Nationally, Campbell admits, his idea has fallen on largely deaf ears. Louisiana’s four other elected PSC commissioners say they don’t fully embrace Campbell’s call to lower the guaranteed profit from about 10 percent to about 8 percent.
They all agreed, in separate interviews, that ROE should be carefully studied when the individual utilities go through the periodic review that determines their customers’ monthly electric rates. Entergy Gulf States Louisiana L.L.C., in January begins the audit that by the end of 2013 will set the rate to paid by the company’s 380,000 customers from Baton Rouge to the Texas border.
Utility companies that operate without competition in their service area charge a rate, approved by regulators, that includes the cost of making and transporting electricity plus a profit, called ROE.
“ROE may well need to be adjusted,” said PSC Commissioner Lambert Boissierre III, of New Orleans, whose district includes several neighborhoods in Baton Rouge. “But it needs more comprehensive study before we move. It’s more than interest rates.”
PSC Commissioner Clyde Holloway, of Forest Hill, agreed. “I haven’t signed on to what he (Campbell) wants to do, but I’m not against it either. We should look into it totally.”
“I’m pretty sure the ROE will be reduced,” said PSC Commissioner Jimmy Field, of Baton Rouge.
Private utility companies take very little financial risk, Field said. Customers already reimburse spending for many of the infrastructure improvements as they are built, and pay for unexpected costs, such as restoring the lights after a storm. The charges appear on Entergy Gulf State’s monthly bills, for instance, as “LURC 2005 Hurricane Offset.”
The appropriate time to consider the profit margin is during rate reviews, not by unilaterally lowering the amount as Campbell suggests, Field said, echoing the sentiments of fellow PSC members.
“Every rate case is analyzed for the proper ROE,” said PSC Commissioner Eric Skrmetta of Metairie. “So we don’t need to do a sweeping action of a preset number.”
Each utility company has a complex array of issues, needs and financial resources, he said. Plus, utility companies in Louisiana are competing for financing with the companies in other states, he said.
“If we do not pay a similar rate of return, the banks will be less interested in investing capital in the state of Louisiana,” Skrmetta said.
The ROE is what gives financiers confidence that their investments will be returned, and translates into better terms, he said.
A higher cost for money means higher rates for customers, he said.
“The key is to strike that balance point,” Skrmetta said.
Bill Mohl, president and chief of executive of the Entergy companies operating in Louisiana outside of New Orleans, said the level of investment will triple over the next 20 years as utility companies work to keep up with the increasing demand of electricity and to improve the system that moves the power from the generator to the consumer.
That means a privately owned utility will have to raise money to finance the building of new plants, transmission systems and other infrastructure.
“Utilities need to be able to attract capital,” Mohl said, and the return on equity plays a large role in a company’s ability to raise that financing at a lower cost.
On a national level, Campbell recalls a deafening silence greeted his in June speech before Southeastern Association of Regulatory Utility Commissioners. “I am concerned that we as regulators are neglecting a fundamental duty to our constituents to examine these key factors of utility profit levels to ensure that rates are as low as reasonably possible,” Campbell told his regulatory colleagues.
One commissioner, from Alabama, spoke up in response to his speech, Campbell recalled, and that was to criticize the idea.
Campbell said he’s preparing for a similar reaction should he get the speaking assignment he seeks later this month at the National Association of Regulatory Utility Commissioners committee meetings in Portland, Oregon.
But Campbell, who ran fourth in the 2007 governor’s race on a platform of replacing income taxes with an energy processing fee, says he is used to pushing ideas that are unpopular with big industry.
“You call it tilting at windmills,” Campbell said, challenging a reporter during a recent interview. “I call it representing the one million people in my district.”