State regulators Tuesday approved a settlement that would lower Entergy’s profit margin, pay a refund and roll back rates for about 92,000 natural gas customers in Baton Rouge.
Under the terms of the settlement, the rate paid for natural gas each month will drop about 2.5 percent, testified Matthew Kahal, of Columbia, Md., the regulatory economist hired to advise the Public Service Commission on the case. That calculates to about 51 cents per month for a typical residential customer buying 40 ccfs, or units of hundred of cubic feet, according to the PSC staff estimates.
In addition, Entergy will refund a modest amount, probably less than a dollar for the typical residential customer. The exact amount depends on when the settlement is implemented.
The key issue is the profit margin, called “return on equity,” or ROE, which was reduced from 10.5 percent to 9.95 percent for Entergy Gulf States Louisiana LLC under the agreement.
Because privately owned utilities operate as monopolies within their service districts, they are regulated by the PSC. The private businesses are allowed to recoup the costs of making and transporting power plus a profit.
PSC Commissioner Foster Campbell, of Bossier Parish, argued that given low interest rates and costs, the ROE has been set at too high of a percentage. He argued for a much-lower profit margin. This settlement is the first to address the return on equity question.
During the summer of 2012, the PSC asked its staff to evaluate the 10.5 percent ROE authorized. Entergy argued that it needed to agree with any adjustment to the profit margin.
Kahal said he had found that a fair profit margin would have been 8.9 to 9.9 percent. PSC staff sought 9.5 percent profit margin and Entergy had hoped to keep the ROE at 10.5 percent. The administrative law judge recommended a 9.4 percent profit.
Kahal said that in return for agreeing to a higher profit margin, Entergy agreed to phase-in the settlement soon rather than wait until 2014.
He estimated that if a 9.4. percent ROE was adopted and took effect next year, the reduction would have been about $350,000. But with immediate effective date, the higher rate of return for Entergy means the rate reduction for customers calculates to about $678,000.
Entergy, as part of the settlement, agreed to refund the collection of the higher profit margin starting in April until the date the new agreed percentage takes effect, which should be about $83,000 depending on when the settlement is implemented.
“That’s just the way the math works,” Kahal said.