Power demand dropping? Must be time to raise prices!

Michael Giberson

News headline reflects the stark difference in pricing strategy between competing businesses and regulated monopolies: “Xcel: Slack demand signals need for rate hike.”

The sub-headline reads, “The utility, which posted a profit increase, will ask Minnesota for approval to raise rates.” Profits are up? Must need to raise prices. Reading the article heightens the feeling that regulated monopolies just think differently.

  • “Xcel Energy Inc. reported a 17 percent jump in earnings per share for the third quarter but warned that electricity sales remain slack and that it will seek a Minnesota rate increase.”
  • “Cost-cutting efforts launched earlier in the year and rate hikes in four states boosted the company’s bottom line in the latest quarter, executives said. Yet the demand for power across the company’s eight-state service area remained slack for a utility long accustomed to growth.” — so the problem is that they’re “accustomed to growth” but don’t see it coming?
  • “Xcel intends to file a request next week with the Minnesota Public Utilities Commission for a 2013 electric rate hike, with an interim increase to be sought on Jan. 1. Madden offered few details, but said higher rates are needed to pay for investments in Xcel’s two nuclear power plants in Minnesota and to cover other cost increases.” — So they want to cover new, higher costs, which is normal…
  • “He said Xcel also will file requests this year for … electric rate hikes in Texas, New Mexico and North Dakota. … Xcel also said it won’t need to invest as much in pollution control equipment at its Texas coal-burning power plants. [Xcel] can now defer $470 million in Texas emission-control upgrades for at least five years.” — And they need a rate hike to cover new, lower costs, too.
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4 thoughts on “Power demand dropping? Must be time to raise prices!

  1. I hope someone is reading the Market St. Railway Supreme Court case (324 U.S. 548 (1945)) to these guys. Specifically:

    “…it may be safely generalized that the due process clause never has been held by this court to require a commission to fix rates on the present reproduction value of something no one would presently want to reproduce, or on the historical valuation of a property whose history and current financial statements showed the value no longer to exist, or on an investment after it has vanished, even if once prudently made, or to maintain the credit of a concern whose securities already are impaired. The due process clause has been applied to prevent governmental destruction of existing economic values. It has not and cannot be applied to insure values or to restore values that have been lost by the operation of economic forces.”

  2. The need to raise prices in the face of declining demand is an artifact of the commission having set rates which recover only a portion of the utility’s fixed costs in the fixed portion of the rate. This causes utilities to under-earn in periods of low economic activity and.or mild weather; and, to over-earn in periods of high economic activity or abnormal weather. The commissions and the press are perfectly happy to pillory the utilities when they over-earn, but appear to be less happy to deal with cases of under-earning. If utilities are to be expected to deal with the risks of under-earning during periods of low economic activity, while not being permitted to over-earn during periods of high economic activity, their allowable rates of return will have to be adjusted to compensate for the additional risk they are expected to incur.

  3. That is legally true, but seems a bizarre justification for what is fundamentally anti-economic logic. I’d also note that the cases where commissions reduced rates in response to over-earning are few and far between, so it is far from parallel. As a former utility commissioner once told me “You can come up with a pretty good guess on a utility’s actual ROE based on the the time since their last rate filing.”

  4. Arguably, utility regulation is anti-economic; and, it is frequently bizarre. That can particularly be the case when a utility holding company operates in several states and the argument is made, as above, that overall the holding company’s earnings are adequate.

    Commissions order refunds in response to over-earning, since reducing rates would require rate case. Commissions do not order surcharges in cases of under-earning.

    Utilities do not file rate cases unless a rate INCREASE is necessary, because rate cases consume huge amounts of staff time and are very expensive. Commissions do track earnings between rate cases; and, they are very quick to “blow the whistle” if ROE gets too much higher than that allowed in the last rate case.

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