UTILITY PROFITS REDUCED: Return on equity is key part in formulaPosted on by admin
Louisiana’s largest electric company dodged a regulatory bullet last month, just getting nicked instead.
Entergy Louisiana and Entergy Gulf States Louisiana have a combined one million electric customers in Louisiana, including many of the people I represent on the Public Service Commission in north-central and north-east Louisiana.
The two companies are operating units of parent Entergy Corp., based in New Orleans. They asked the PSC in February for authority to raise electric rates by a total of nearly $200 million.
Commissioners instead voted 3-2 in favor of settlements negotiated by PSC staff and the companies that granted ELL a $10 million increase and no increase for Gulf States. I voted “no” on both cases for reasons, which I will explain below.
The debate was noteworthy in that it included a discussion of utility profit levels, expressed as “return on equity” or “ROE” for short. Since Entergy’s two Louisiana utilities are monopolies with no competition in the areas they serve, the PSC sets their profit levels when setting their utility rates.
I have argued for nearly three years that ROE levels set by the Louisiana commission are too high. The cost to borrow money has been low for years, and this is a key part of the formula for calculating ROE.
In settling the two cases, Entergy and PSC staff agreed to lower the ELL return on equity from 10.25 percent to 9.95 percent and the Gulf States ROE from 10.65 percent to 9.95 percent.
Our staff said this was the first time in more than 30 years that a Louisiana electric utility had been granted an ROE of less than 10 percent.
I argued for a 9 percent ROE for both companies. I cited research indicating that several states were pressuring utility profits down, including Texas, California, Ohio and Mississippi. Most recently, the Public Utility Commission of Texas granted Entergy Texas a 9.8 percent ROE.
These states have recognized the low-interest-rate environment and are starting to lower utility profit levels as a result. More than a third of the rate cases decided by states last year featured return-on-equity levels of less than 10 percent.
The lowest return on equity that was authorized was 9.25 percent. The average among ROE levels granted at less than 10 percent last year was 9.67 percent.
Why is ROE important? A regulatory commission that permits utilities to earn inflated rates of profit is allowing its constituents to be overcharged for their utilities. Case in point: The investor-owned utility in Louisiana that consistently charges the highest electric rates is CLECO, the Central Louisiana Electric Co., based in Pineville.
It’s no coincidence that CLECO is authorized to earn a 10.7 percent return on equity, the highest electric ROE granted by the Louisiana PSC.
I was disappointed that the other members of the Public Service Commission would not go along with my request to drive Entergy’s ROE down to 9 percent.
But my constant lobbying for lower ROE over these past three years did not completely fall on deaf ears: PSC staff used my arguments to force Entergy to accept 9.95 percent when the company started the cases in February asking for 10.4 percent for both of its utilities.
How much utility profit is too much? I don’t know the answer; that’s why I will continue to seek a thorough investigation of ROE by the Louisiana PSC.