New bill paves way to electric company rate hikes

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The Missouri Legislature passed a bill this session that would allow two state-regulated electric utilities, including Empire District Electric Co., to seek a special "fuel cost-recovery" rate increase.|ret||ret||tab|

The legislation, an amended version of Senate Bill 387, allows Empire, based in Joplin, to ask the Missouri Public Service Commission (PSC) for a rate increase to cover the cost of natural gas it uses to generate electricity, or gas used to make the power the utility purchases from other sources.|ret||ret||tab|

The bill is important to Empire because it depends on natural gas for 40 percent of its power generation, including its new State Line generating unit that is nearing completion.|ret||ret||tab|

Empire has about 145,000 customers in southwest Missouri and parts of Arkansas, Kansas and Oklahoma. The legislation also applies to Citizens Electric Cooperative of St. Genevieve in eastern Missouri.|ret||ret||tab|

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The politics of power|ret||ret||tab|

The legislature's action marks the first time an electric utility has been given the power to seek a single-cost rate increase since 1979. That's when the Missouri Supreme Court ruled that an automatic fuel cost adjustment, permitted by the PSC at the behest of utilities, was outside the PSC's authority under state law.|ret||ret||tab|

The court, in a lawsuit filed by a consumer group, said the practice violated the law that requires the PSC to consider the total picture of market conditions and a utility's financial operation in setting rates that are fair to consumers and provide a reasonable and prudent return on investment to the utility.|ret||ret||tab|

Critics of the new legislation, adopted shortly before the General Assembly adjourned, contend it gives utilities an unfair advantage over consumers providing a tool to short-circuit the more rigorous scrutiny used in basic rate-setting, which could lead to consumer overcharges.|ret||ret||tab|

Empire and the bill's sponsor, Sen. Wayne Goode, D-St. Louis, say that in light of volatile natural gas prices, the new policy is beneficial for both consumers and the utility. They add the legislation has safeguards that ensure a rate add-on would not be automatic, and it provides for customer refunds should a rate prove to be too high relative to ongoing market changes.|ret||ret||tab|

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Impact|ret||ret||tab|

If signed into law by Gov. Bob Holden and used immediately and successfully by Empire, the cost-recovery bill could translate into higher electric bills for Empire customers as soon as this summer, opponents say.|ret||ret||tab|

Empire has a pending rate increase case before the PSC, and a decision is expected by fall. The natural gas cost-recovery legislation, along with other bills approved by the General Assembly, is under review by the governor's staff, said Jerry Nachtigal, the governor's spokesman.|ret||ret||tab|

After the legislation was passed, Carolyn Smith of Springfield, a lobbyist for Missourians for Affordable Reliable Electric Service, called it "nothing more than a state welfare program" for Empire.|ret||ret||tab|

"We have a system that is a balance between utilities and customers involving risk and cost," Smith said. "But this bill shifts the balance so that consumers take more of the risk."|ret||ret||tab|

The final version of the bill wasn't as bad as previous fuel cost-recovery proposals, said John Coffman, deputy counsel in the Missouri Office of the Public Counsel, which represents consumers in utility rate cases.|ret||ret||tab|

However, he said, "We are still distressed that this bill passed because it is anti-consumer."|ret||ret||tab|

By rewarding a single fuel, it discourages a utility from other efficiencies and encourages more reliance on a possibly costlier fuel, he said.|ret||ret||tab|

"It sets a bad precedent, and in that way it is unfair to consumers," he said.|ret||ret||tab|

Smith said the action sets the stage for other regulated electric utilities to go back to the Legislature and ask for similar treatment on their fuel costs.|ret||ret||tab|

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Industry perspective|ret||ret||tab|

Bill Gipson, Empire's executive vice president, said a separate fuel adjustment rate setting is standard policy in 35 other states that regulate investor-owned utilities like Empire. |ret||ret||tab|

It is done in Missouri for regulated natural gas suppliers, he noted, and it makes sense to give electric utilities the same treatment.|ret||ret||tab|

He said the utilities, including Empire, that were defendants in the 1979 decision, have been trying ever since to get the law changed.|ret||ret||tab|

Gipson said it is wise to have such a policy that could temper the impact of gas costs. |ret||ret||tab|

The bill gives Empire the opportunity to seek the fuel cost recovery, he added, but permitting authority and oversight powers given to the PSC keep it from being an automatic rate add-on situation.|ret||ret||tab|

"We think this is a consumer- friendly bill, the Empire executive said, noting that the company would also have to "eat the costs" if they went beyond the scheduled rate for the period in question.|ret||ret||tab|

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Existing policies|ret||ret||tab|

Stuart Conrad, a Kansas City attorney who lobbied against the bill on behalf of some industrial companies including Empire customer Praxair, a company in Neosho that produces industrial gases said the legislation was "entirely unnecessary" because the PSC already has a system for dealing with utilities in financial distress.|ret||ret||tab|

Last winter, amid the turbulence of natural gas price increases, Empire used that system, asking the PSC to grant it an interim rate relief surcharge estimated to be worth $16.8 million for the March through September period this year. |ret||ret||tab|

The request came following Empire's filing in November for a regular rate increase.|ret||ret||tab|

At the time of the plea for an interim raise, Empire President and Chief Executive Officer Myron McKinney said in a statement, "Since last spring, the price of natural gas to fuel our gas-fired plants has increased in excess of 100 percent. |ret||ret||tab|

"Additionally, the cost of power we must purchase for use by our customers has undergone significant changes as well. Because of these significant increases, we believe immediate rate action is necessary, and the rate request filed in November 2000, if allowed to progress at a normal pace, could take as much as 11 months."|ret||ret||tab|

But in early March the PSC turned down the request, saying Empire had not proven it was in a financial emergency, the general standard for justifying an interim surcharge.|ret||ret||tab|

"Empire does not allege that it is not earning a positive return, or that its earnings will be negative in the period before new rates are determined," the PSC said, referring to the pending rate increase request.|ret||ret||tab|

In that case, the utility asked for a $41.4 million rate hike, which amounts to 19.3 percent, with the need based mainly on higher natural gas prices, the commission said.|ret||ret||tab|

"Neither does Empire allege any risk that its ability to provide safe and adequate service will be impaired in that period," the PSC said in denying the interim surcharge. "Finally, Empire does not allege inability to finance its operations."|ret||ret||tab|

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Opposition|ret||ret||tab|

In February, after the legislative bill permitting the fuel cost adjustment was introduced, the Office of Public Counsel sent out a letter to legislators opposing the bill, saying Missouri's four investor-owned electric utilities, including Empire, were in sound financial condition.|ret||ret||tab|

Citing official records, the public counsel said Empire's earnings per share in 2000 were 21 percent higher than in 1999.|ret||ret||tab|

In late April, Empire announced that earnings for the year ending March 31, 2001 were $23.5 million compared to $17.2 million the previous year. That amounted to a 35 percent increase in earnings per share, the company said. |ret||ret||tab|

The gain included a substantial income tax benefit related to costs incurred in the failed merger attempt with UtiliCorp United Inc. That proposal fell apart in early January.|ret||ret||tab|

"Empire has a tendency to cry wolf too early and too often," Stuart Conrad said.|ret||ret||tab|

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Sponsorship|ret||ret||tab|

Goode, the sponsor of the fuel adjustment rate bill, said Empire came to him late last year to talk about its desire for the special cost-recovery legislation.|ret||ret||tab|

Known as a consumer advocate and outspoken critic of natural gas generation as being too risky, Goode said "it was a close call" on whether he wanted to take up Empire's cause. |ret||ret||tab|

When he looked at its picture closely, he said, he thought it was justifiable.|ret||ret||tab|

Since Empire was heavily dependent on natural gas for its power generation, including the expected infusion into its new generating unit at State Line, the company might likely experience distress, he said.|ret||ret||tab|

Goode said he was also impressed with Empire's history as one of the lowest cost electricity producers in the country, and he was concerned that if it didn't have the cost-recovery mechanism, its bond rating could be adversely affected.|ret||ret||tab|

If this was the case, why did he think the PSC turned down the interim rate increase?|ret||ret||tab|

"I don't think the PSC wanted to set a precedent," Goode said. "The financial rating adjustment bore out that Empire was right."|ret||ret||tab|

The senator's original bill included UtiliCorp, but it was narrowed to Empire and Citizen's Electric to make it more palatable. |ret||ret||tab|

He also made sure that it had language allowing the PSC to first reject such a mechanism as not being in the interest of rate payers.|ret||ret||tab|

Further, he put language in the bill requiring the PSC to set a rate based on informed review, and to establish a "true-up" process providing for a customer refund on over-collection resulting from changes in market conditions and operations that played out after the rate was set.|ret||ret||tab|

Goode said he didn't believe the PSC's rejection of Empire's emergency rate had any affect on the progress of the cost-recovery legislation.|ret||ret||tab|

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The vote|ret||ret||tab|

There was notable opposition from the consumer sector. But most legislators apparently didn't see things the same way as the critics, because the bill had high- voltage support. It passed the Senate, 31-0, on May 2 and breezed through the House, 128-28, on May 17.|ret||ret||tab|

Even Goode was surprised. He said he believes the outcome was due to his history of credibility on utility issues, and those not well-versed on them trusted his judgment.|ret||ret||tab|

As for the opposition, Carolyn Smith said, "I think it was a lack of understanding of how the (regulatory) system works."|ret||ret||tab|

For instance, she said, one lawmaker she contacted prior to action on the bill flatly told her that Empire would go bankrupt if it didn't get the legislation.|ret||ret||tab|

"I think the legislation will be a good test," Goode said. "We'll see how responsible Empire is."|ret||ret||tab|

Just prior to the legislation's final passage May 17, Empire, the PSC staff and the Office of Public Counsel agreed on a proposed settlement in the pending rate case that could be just as beneficial for Empire, but with appropriate checks and balances, Coffman said.|ret||ret||tab|

Hearings in that case were scheduled to get under way May 29 and continue for as long as June 8, if necessary.|ret||ret||tab|

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