The profit margins that federal regulators set for utilities should be decreasing, given the long downward drift of interest rates and the shrinking cost of capital.
Bizarrely, the opposite is happening: Utilities are raking in stunning profits at the expense of consumers.
Now the first in a raft of cases asserting that the Federal Energy Regulatory Commission (FERC) is letting utilities gouge customers by setting egregiously high rates of return may finally get a hearing.
Since utilities are legal monopolies with no market to discipline their pricing, only the vigilance of regulators stops them from causing irreparable economic harm by stifling growth, draining wealth from customers and distorting investment. Court rulings say FERC commissioners must “guard the consumer against excessive rates.”
The legal standard for setting utility rates is known as “just and reasonable.” Profits and prices are supposed to be balanced so both investors and customers get fair treatment.
FERC commissioners, however, disregard the just and reasonable standard, routinely ignore evidence and act more as agents of utilities than fair-minded regulators.
Who are these commissioners? Acting Chairman Cheryl LeFleur was acting CEO of the National Grid utility company. Philip D. Moeller has been the chief Washington lobbyist for utilities Alliant Energy and Calpine. Commissioner John R. Norris is a utility lawyer. Commissioner Tony Clark is a career regulator whose biography emphasizes that “he oversaw regulatory proceedings that permitted more than $5.5 billion in new investment in North Dakota through expanded wind, coal and oil and gas infrastructure.”
Absent from the commission is anyone who represents the rights of consumers.
The commissioners, all likely future employees of utilities, have erected what so far are impenetrable barriers to challenging FERC’s blatantly illegal conduct. That may appear to be a harsh judgment, but the record supports this.
In the first case among those underway, FERC awarded Bangor Hydro-Electric Co. of Maine a profit of 10.57 percent on equity invested in a transmission line.
By contrast, over the past 17 years the after-tax return for all nonfinancial domestic businesses averaged 8.85 percent, the federal Bureau of Economic Analysis reported last month, with a 4.3 percent average rate for utilities. And high-quality corporate bond yields are currently 4.58 percent, Treasury Department data show — well below the 30-year average of 7.48 percent.
Interest rates investors earned over past 30 years on mature bonds issued by solid companies (Aaa)
FERC’s policy is a “‘heads you win, tails I lose’ giveaway formula for big business," consumer advocate Ralph Nader, a Connecticut resident, told me. “Instead of reflecting true costs, the agency takes the lower interest rate costs of New England transmission owners and perversely proceeds to increase prices that consumers have to pay.”
A broad coalition of New England attorneys general and regulators, public power agencies and industrial customers agrees, saying that the Bangor profit is so high it is arbitrary — it was not based on facts, standards or reason.
“There is no evidence supporting” the extraordinarily high rate of profit authorized in this case or some others, said David Pomper of Spiegel & McDiarmid, the Washington law firm representing the coalition.
FERC has set after-tax rates as high as 12.89 percent. Because customers must also pay the utility’s taxes, that means an astonishing nearly 20 percent pretax profit rate.
Fat profit margins cannot be challenged by customers or consumer advocates when FERC sets rates without conducting hearings to examine utility rates.
Utility-rate consultant Paul Chernick testified in a 2011 rate transmission line case that “normally, a high allowed or target return would be associated with a high risk investment, entailing a significant chance of low or no return for the investor. This is not true for FERC-regulated transmission. FERC has rarely found any transmission or generation investment to be imprudent or otherwise unrecoverable.”
Investments with little risk of loss typically earn much smaller profits than risky ones. That’s the same reasoning used by banks when they charge low rates on mortgages combined with a big down payment, while charging high rates of interest on unsecured debt, such as credit card debt. FERC’s policy amounts to demanding that Bangor customers bear credit card rates of return for taking less risk than mortgage lenders.
Utilities tell investors FERC is their friend. Northeast Utilities bragged to investors that its operations enjoy a “high level of rate certainty” because when regulators set transmission line profit margins there are “no general rate cases.” Translation: Fat profit margins cannot be challenged by customers or consumer advocates when FERC sets rates without conducting hearings to examine utility rates.
The rate-setting process is rigged against consumers, argues Martha Coakley, the Massachusetts attorney general, who is leading the coalition in the Bangor case.
Ignoring the evidence
In setting the high rate of profit for the proposed transmission line, FERC ignored numerous witnesses and documents. Instead it relied on a single witness, Ellen Lapson, an independent financial analyst who offered a naked opinion with no economic analysis. Lapson admitted she did not even do her own research, but instead let the utility’s lawyer choose the documents she was to review.
Wait, it gets worse: On cross-examination Lapson confessed, “I didn’t actually review all these documents … I get into them and read one or two.”
Other witnesses provided page after page of detailed economic analysis, which FERC disregarded in favor of Lapson’s mere opinion, solid evidence that FERC operates outside the law the commissioners are sworn to uphold.
FERC bias not only favors electric transmission line owners. Gordon Gooch, former general counsel of FERC’s predecessor agency, showed in a formal complaint that 47 interstate pipelines collected $552 million in excess profits in 2010, and the next year 51 pipelines collected $828 million in excess profits.
Gooch challenged FERC’s practice of granting pipelines automatic rate increases, a practice known as indexing, which means there is no rate case in which customers can file a challenge. The latest annual rate increase is more than 8 percent, while inflation last year was 1.5 percent.
Index increases also compound over time. Five years of compounding increases rates 51 percent, even though evidence suggests operating costs for pipelines are falling.
FERC rejected Gooch’s argument. It ruled that since he was not a direct customer of a pipeline, just someone who buys gasoline and uses natural gas to boil water for coffee, he had no legal standing to challenge pipeline profits. The court of appeals agreed.
Ray of hope
There is a single ray of hope that FERC will at least discuss fairness to customers. President Barack Obama nominated Norman C. Bay, FERC’s enforcement director, to be the new chairman. The nomination prompted fierce attacks from Powhatan Energy Fund, which Bay’s staff accused of electricity market manipulation.
Bay, though, would be just one vote out of five.
Here‘s a question to ask your senators and representatives: Where are the congressional investigations into FERC-approved price gouging?