Alabama residents overcharged for electricity by Alabama Power

Despite cheaper production costs, Alabama Power bills higher than Georgia Power

By Ben Raines | braines@al.com
January 20, 2013 at 6:11 AM, updated January 20, 2013 at 8:41 AM

Though it costs less to produce power in Alabama, the state’s residents and businesses pay more for electricity than customers in neighboring Georgia.

The price difference is substantial, according to an AL.com analysis of the annual reports of Alabama Power and Georgia Power, sister companies owned by Southern Co.

Between 2006 and 2011, Alabama Power produced the electricity sold to residential and commercial customers for $1.1 billion less than Georgia Power would have spent to make the same amount of electricity.

But despite that savings, Alabama Power charged its residential and commercial customers $1.5 billion more for electricity than Georgia Power would have charged during the six-year period.

	2006	2007	2008	2009	2010	2011	Grand total
Difference in Alabama’s higher rates versus Georgia Power rates for commercial and residential	$181 million	$279 million	$330 million	$316 million	$377 million	$33 million	$1,517,725,500

Alabama Power executives said that it was not appropriate to compare the sister companies, as AL.com has done. The businesses are too different and too complex for such a comparison, the executives argued, and the differences tend to even out over long periods of time.“We feel strongly that the way you’ve proposed to review and compare us to Georgia Power provides a very misleading picture and misrepresents our company,” read an emailed statement from Michael Sznajderman,  spokesman for Alabama Power.

The higher prices in Alabama mirror a pattern seen with the other major utilities regulated by the Alabama Public Service Commission.

Recent investigations by AL.com have shown that customers of Alabama’s two largest gas utilities pay more than twice as much for natural gas as customers in Mississippi pay. Alagasco, the state’s largest gas utility, is allowed to charge customers three times as much as a Georgia utility for operations and maintenance costs. Overall, those extra charges cost customers about $260 million in 2010.

Rates and profits for both Alabama Power and the state’s two largest gas utilities — Alagasco and Mobile Gas — are set by the Alabama Public Service Commission.

Informed of the new AL.com analysis, Alabama PSC president Twinkle Cavanaugh described the Alabama Power rates as “in the heart of the Southeast average.”

Recently, Cavanaugh and fellow Commissioner Jeremy Oden rejected a call from Commissioner Terry Dunn to begin a formal review of rates charged by the companies.

Cavanaugh called the idea of the formal review of all three companies “half-baked.” She has said she plans an informal review of Mobile Gas sometime this year.

Industrial rates lower in Alabama

Alabama Power argues that it is unfair to look specifically at the rates paid by residential and commercial customers. Instead, company officials said, “the most honest and truthful way to compare Alabama Power vs. Georgia Power is to look at our total retail price.” The total retail price used by Alabama Power includes industrial rates, which are substantially cheaper in Alabama than Georgia.

Officials also said they prefer to look at the 10-year period of 2001 through 2011, instead of the six years initially analyzed by AL.com.Alabama Power’s “total retail price” was lower than Georgia Power’s 5 out of 10 years since 2001, most recently in 2011.Again, the total retail price was lower primarily because the company  charged industrial customers $891 million less than Georgia Power would have charged during the 10-year period. Its residential and commercial customers paid $1.7 billion more than its sister company would have charged during the same span.

Sznajderman’s statement noted that “Alabama Power’s total retail price remains below the national average and has been below the national average for years.” He also noted the company is in the top 25 percent nationally for customer satisfaction.

	2006	2007	2008	2009	2010	2011	Grand total
Alabama Power’s  “total retail price” compared to Georgia Power. Alabama Power was higher in each comparison year except 2011.	$70 million	$261 million	$213 million	$275 million	$328 million	-$86 million	$1,061,709,600

LOWER FUEL COSTS BUT HIGHER BILLS

What the Alabama and Georgia power companies label as fuel cost is the average cost to the company of producing a kilowatt of power in any given year. Alabama Power had lower fuel costs than Georgia Power every year from 2006 to 2011.

Given Alabama’s cheaper fuel costs, other factors are clearly responsible for the higher prices charged to customers.

Utility regulators often talk about “gross margins” when comparing companies. The gross margin is the amount the utility charges to customers, minus the fuel costs, and provides the best comparison of what it costs companies to deliver power to homes and businesses.

The gross margin consists of all the charges related to sending power into customers’ homes, and providing customer service and support. It includes costs for transmission lines, meters, employees, service trucks and other expenses. Alabama Power attributed part of its higher gross margin to having fewer customers in urban areas than Georgia Power, which meant the company needed more power poles, transmission lines, and other equipment.

Regulated utilities such as Alabama Power and Georgia Power are allowed to make money on the gross margin charges. It is the gross margin charges that are regulated by the Alabama Public Service Commission, which reviews them annually.

When fuel costs are removed from the equation, Alabama Power’s gross margin was hundreds of millions of dollars higher than Georgia Power’s in each year analyzed by AL.com.

To see the difference the higher gross margin for Alabama Power made, simply compare the rates charged to customers minus fuel costs. For residential service in 2010, Alabama Power’™s gross margin was 1.8 cents per kilowatt hour higher than Georgia Power’™s. For commercial, the difference was 2.6 cents. To see what that amounts to in dollars and cents, multiply the gross margin advantage figures by the amount of power sold to residential and commercial customers. Alabama residents paid an extra $367 million compared to what ratepayers in Georgia would have paid in 2010. Commercial customers paid an extra $382 million.

Alabama Power officials said the company rejects any analysis that separates fuel costs from non-fuel costs. “One cannot simply analyze these components in isolation,” Sznajderman said in his response.

“Comparing our two companies by trying to separate fuel costs from our base rates is a misleading way to analyze how our businesses work. Fuel costs and base rate costs are integrally tied together in how electric utilities run and finance their operations,” read Sznjderman’s statement. “They should be considered together, along with other portions of the bill, such as taxes and fees. Combined, they comprise the total price, which is what our customers pay, and what customers care about.”

Based on its higher gross margins, Alabama Power charged $2.5 billion more to deliver power to residential and commercial customers from 2006 to 2011 than Georgia Power would have charged to deliver the same volumes during the period.

Value of Alabama Power’s higher gross margin compared to Georgia Power
for delivery to residential and commercial customers
2006	$137 million
2007	$386 million
2008	$366 million
2009	$537 million
2010	$750 million
2011	$393 million
Total	$2.56 billion

HIGHEST RETURNS AROUND

Since 1983, the Alabama Public Service Commission has allowed Alabama Power to earn a return on equity of 14.5 percent.

In the return on equity calculation, the equity is the amount of money common shareholders have invested in the company, which is listed in the annual reports. In 2011, that value for Alabama Power was about $5.3 billion.

That year, Alabama Power reported net income of $708 million.

Alabama Power says the 14.5 percent figure overestimates the company’s actual return on its investment. When debt and other factors are included, the company’s total investment in 2011 was about $12 billion, Sznajderman said, and its return on that investment was closer to 8 percent.

To see the difference the higher gross margin for Alabama Power made, simply compare the rates charged to customers minus fuel costs. For residential service in 2010, Alabama Power’™s gross margin was 1.8 cents per kilowatt hour higher than Georgia Power’™s. For commercial, the difference was 2.6 cents. To see what that amounts to in dollars and cents, multiply the gross margin advantage figures by the amount of power sold to residential and commercial customers. Alabama residents paid an extra $367 million compared to what ratepayers in Georgia would have paid in 2010. Commercial customers paid an extra $382 million.

Alabama Power’s 14.5 percent return was far above the 10.15 percent allowed by Georgia regulators in 2010. It was also far above the average of 10.57 percent return on equity requested by power companies around the nation in 2012 during rate-making hearings in other states, according to a 2012 study by the Edison Electric Institute, a trade group for investor-owned utility companies that counts Alabama Power among its members.

AL.com could find no record of an electric utility anywhere in the nation with a higher return on equity than Alabama Power.

On a page in its annual corporate filing titled “Financial Goal Results,” Southern Company describes Alabama Power’s Return on Equity as having an “achievement percentage” for the company of 178 percent, while Georgia Power’s lower Return on Equity rates a 73 percent. Cavanaugh, the PSC president, did not specifically address the question when asked by AL.com if it made sense for Alabama Power to earn a higher rate of return than its sister company in Georgia.

Instead, she described job creation and keeping industrial rates low among her top priorities.

“I will continue to do all that I can to keep our utility rates low to maintain the jobs we have, and to keep Alabama competitive as we recruit new business,” read her emailed statement. “There’s no doubt whatsoever that our comparatively low energy costs have given us an incredible industrial recruitment edge over states throughout the industrial Northeast and the Rust Belt regions.”

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