07
May
2002
MidAmerican Energy Company (MEC) sent notices to its customers on March 14, 2002, advising them of its intention to increase natural gas rates by an average of 4.3 percent, generating an additional $26.6 million for the company.
Before MEC can actually implement a rate increase, it must first get approval from the Iowa Utilities Board (IUB), which regulates utility companies in Iowa. The process is arduous and complex. MEC must justify its request for an increase by collecting one test year's worth of data as a basis for analyzing the request. One of the arguments against the increase is that the test year it used, 2001, was an extraordinary year with unusually high volume of natural gas at unprecedented high cost for usage.
But the usage is not part of the equation in analyzing the proposed increase. Usage is a pass-through cost, meaning that whatever natural gas producers are charging MEC at the wellhead (the commodity price) is passed straight through to the customer. Law prohibits MEC from marking up the wellhead price in any way. However, included in the pass-through cost to consumers are the costs for storing the natural gas once it is purchased, and pipeline delivery charges to get the gas to the city's edge. Therefore, the rate increase request is independent of usage charges.
The rate consumers should concern themselves with relative to this rate-increase is the fixed service rate (meter readings, billing, customer service, installation, repair, etc.) of $9, coupled with the distribution rate (pipes, connections to the house, etc.) of each monthly billing. These two portions account for approximately 25 to 30 percent of consumers' total monthly gas bill. For Iowa residential consumers, MEC states that the average percentage increase for residents would be 8.4%, but in reality, it could be much higher. The estimated dollar impact per month per MEC's example in its rate-increase notification letter (March 14, 2002) estimates a current monthly rate of $70.05, with an increase of $5.88, totaling $75.93 as the proposed monthly rate, or a 8.4 percent increase. In MEC's example, the rate increase is compared against the entire gas bill, which includes usage (the cost of the natural gas commodity, the pipelines delivery charge, and any storage costs). Natural gas usage should not be part of the equation because the rate increase only affects the fixed service and distribution portions of consumers' billing. Using the above example, 25 percent of the current monthly rate of $70.05 equals $17.51. What is the percentage increase when compared to the actual portions of the billing that the rate increase affects? It is approximately a 34 percent increase.
As part of its compliance with Iowa Code on utility rates, the IUB and MEC hosted a public hearing to obtain comments from its consumers on Monday, May 6, at West High School. Approximately 30 people attended, with only one locally elected official present?Cindy Winkler, Iowa State Representative (D-Davenport)?for the meeting. Several citizens spoke against the rate increase, citing concerns that ranged from economic to social to moral.
Davenport senior citizen Richard Fallow expressed his deep concerns: "The average American is falling behind. He or she does not have the increase in revenues to match the increase in costs. Senior citizens are finding it impossible to pay bills and eat the way they should, or buy the medications they need."
Fallow pointed out that many Americans have lost confidence in the large corporations because of "unreliable financial information."
MEC representative, Todd Raba, Vice President of Natural Gas Distribution Services, responded, "MidAmerican works hard to keep costs down. Our last natural gas rate increase request was in 1998. This request is for 4.3 percent over three years, or 1.5 percent per year. The Consumer Index increases by 3.5 percent annually...This increase will make rates more equitable across the state."
According to Raba, the west side of Iowa is paying significantly higher rates than the east side for the same services due to pricing structures in place when at least three different utility companies in Iowa merged. The rate increase, which will be substantially higher for Scott County and surrounding areas than the western part of the state, is designed to raise rates across the board, increasing some areas more than others to bring the state into equilibrium.
A key question posed by Iowa's Consumer Advocate (a consumer advocacy agency that is challenging the rate increase on behalf of Iowans), however, challenges this rationale. According to Jennifer Easler, Consumer Advocate attorney, "There is no way to distinguish cost of services between the two systems [the east and west sides of the state]. MidAmerican does not account for them. They view it as one system relative to costs. Therefore, it is extremely difficult to even analyze the premise that the rates are truly inequitable. There is no comparison for the cost side of the two systems, only the revenue side."
The litmus test that MEC's request for a rate increase must pass involves broad language in the Iowa Code (Section 476.8) for the IUB to consider. It states that the utility must provide reasonably adequate services, and the IUB is responsible for setting just and reasonable rates of return on investment. The Iowa Supreme Court further charged the IUB with balancing the interests of the utility stockholders with those of consumers. The question becomes: what is a reasonable rate of return on services provided against the risk assumed? The answer varies.
During the natural gas price hikes of 2000-2001, because MEC is a regulated monopoly, it was able to pass on the entire cost increase to consumers. And because utilities traditionally enjoy higher profits in cold winters, the increased volume resulted in record profits for MEC. Meanwhile, according to both the IUB and Consumer Advocate's office, approximately 25,000 consumers had their utilities shut off due to inability to pay their high bills.
In reconciling MEC's rate increase request, the IUB must consider what level of risk MEC actually incurs in order to determine an appropriate rate of return. MEC is asking to be allowed to earn a rate of return of 12 percent. Raba explained that the gas side of MEC's business "only earned 3.9 percent last year." However, the electric side of MEC earned 12 percent and then some?an additional $46 million that it was required to rebate to consumers as part of a shared profit agreement that ends in 2005.
While most of America is lucky to earn 5 percent in the current investment marketplace, MEC's request for 12 percent appears excessive. As a monopoly that provides infrastructure services (services necessary to survive), consumers have no choice but to accede to whatever rate increases are imposed by MEC. The only entity preventing consumer abuse by Iowa's utilities is the IUB. Its responsibility is an awesome one. However, the public has another formidable ally in the Consumer Advocate, who consistently watchdogs the utilities, presenting vital evidence to the regulatory agencies for their consideration. It has challenged both MEC's permanent and interim rate increase requests. A decision will be made by the IUB in June as to whether MEC will be allowed to impose a temporary "interim" rate increase of 3.3 percent prior to IUB's final decision by next January 15, 2003, on MEC's permanent rate increase of 4.3 percent.
If consumers want to do something meaningful to oppose the rate increase, write to the Iowa Utilities Board with your comments at 350 Maple Street, Des Moines, IA 50319. They will become part of the official record for this rate increase case. The evidentiary hearing is scheduled for September 16, 2002. Nothing is more valuable than public input in these matters. Visit the IUB's web site at www.state.ia.us/iub, or email them at iubcustomer@max.state.ia.us. The toll free phone number is 877-565-4450.
Before MEC can actually implement a rate increase, it must first get approval from the Iowa Utilities Board (IUB), which regulates utility companies in Iowa. The process is arduous and complex. MEC must justify its request for an increase by collecting one test year's worth of data as a basis for analyzing the request. One of the arguments against the increase is that the test year it used, 2001, was an extraordinary year with unusually high volume of natural gas at unprecedented high cost for usage.
But the usage is not part of the equation in analyzing the proposed increase. Usage is a pass-through cost, meaning that whatever natural gas producers are charging MEC at the wellhead (the commodity price) is passed straight through to the customer. Law prohibits MEC from marking up the wellhead price in any way. However, included in the pass-through cost to consumers are the costs for storing the natural gas once it is purchased, and pipeline delivery charges to get the gas to the city's edge. Therefore, the rate increase request is independent of usage charges.
The rate consumers should concern themselves with relative to this rate-increase is the fixed service rate (meter readings, billing, customer service, installation, repair, etc.) of $9, coupled with the distribution rate (pipes, connections to the house, etc.) of each monthly billing. These two portions account for approximately 25 to 30 percent of consumers' total monthly gas bill. For Iowa residential consumers, MEC states that the average percentage increase for residents would be 8.4%, but in reality, it could be much higher. The estimated dollar impact per month per MEC's example in its rate-increase notification letter (March 14, 2002) estimates a current monthly rate of $70.05, with an increase of $5.88, totaling $75.93 as the proposed monthly rate, or a 8.4 percent increase. In MEC's example, the rate increase is compared against the entire gas bill, which includes usage (the cost of the natural gas commodity, the pipelines delivery charge, and any storage costs). Natural gas usage should not be part of the equation because the rate increase only affects the fixed service and distribution portions of consumers' billing. Using the above example, 25 percent of the current monthly rate of $70.05 equals $17.51. What is the percentage increase when compared to the actual portions of the billing that the rate increase affects? It is approximately a 34 percent increase.
As part of its compliance with Iowa Code on utility rates, the IUB and MEC hosted a public hearing to obtain comments from its consumers on Monday, May 6, at West High School. Approximately 30 people attended, with only one locally elected official present?Cindy Winkler, Iowa State Representative (D-Davenport)?for the meeting. Several citizens spoke against the rate increase, citing concerns that ranged from economic to social to moral.
Davenport senior citizen Richard Fallow expressed his deep concerns: "The average American is falling behind. He or she does not have the increase in revenues to match the increase in costs. Senior citizens are finding it impossible to pay bills and eat the way they should, or buy the medications they need."
Fallow pointed out that many Americans have lost confidence in the large corporations because of "unreliable financial information."
MEC representative, Todd Raba, Vice President of Natural Gas Distribution Services, responded, "MidAmerican works hard to keep costs down. Our last natural gas rate increase request was in 1998. This request is for 4.3 percent over three years, or 1.5 percent per year. The Consumer Index increases by 3.5 percent annually...This increase will make rates more equitable across the state."
According to Raba, the west side of Iowa is paying significantly higher rates than the east side for the same services due to pricing structures in place when at least three different utility companies in Iowa merged. The rate increase, which will be substantially higher for Scott County and surrounding areas than the western part of the state, is designed to raise rates across the board, increasing some areas more than others to bring the state into equilibrium.
A key question posed by Iowa's Consumer Advocate (a consumer advocacy agency that is challenging the rate increase on behalf of Iowans), however, challenges this rationale. According to Jennifer Easler, Consumer Advocate attorney, "There is no way to distinguish cost of services between the two systems [the east and west sides of the state]. MidAmerican does not account for them. They view it as one system relative to costs. Therefore, it is extremely difficult to even analyze the premise that the rates are truly inequitable. There is no comparison for the cost side of the two systems, only the revenue side."
The litmus test that MEC's request for a rate increase must pass involves broad language in the Iowa Code (Section 476.8) for the IUB to consider. It states that the utility must provide reasonably adequate services, and the IUB is responsible for setting just and reasonable rates of return on investment. The Iowa Supreme Court further charged the IUB with balancing the interests of the utility stockholders with those of consumers. The question becomes: what is a reasonable rate of return on services provided against the risk assumed? The answer varies.
During the natural gas price hikes of 2000-2001, because MEC is a regulated monopoly, it was able to pass on the entire cost increase to consumers. And because utilities traditionally enjoy higher profits in cold winters, the increased volume resulted in record profits for MEC. Meanwhile, according to both the IUB and Consumer Advocate's office, approximately 25,000 consumers had their utilities shut off due to inability to pay their high bills.
In reconciling MEC's rate increase request, the IUB must consider what level of risk MEC actually incurs in order to determine an appropriate rate of return. MEC is asking to be allowed to earn a rate of return of 12 percent. Raba explained that the gas side of MEC's business "only earned 3.9 percent last year." However, the electric side of MEC earned 12 percent and then some?an additional $46 million that it was required to rebate to consumers as part of a shared profit agreement that ends in 2005.
While most of America is lucky to earn 5 percent in the current investment marketplace, MEC's request for 12 percent appears excessive. As a monopoly that provides infrastructure services (services necessary to survive), consumers have no choice but to accede to whatever rate increases are imposed by MEC. The only entity preventing consumer abuse by Iowa's utilities is the IUB. Its responsibility is an awesome one. However, the public has another formidable ally in the Consumer Advocate, who consistently watchdogs the utilities, presenting vital evidence to the regulatory agencies for their consideration. It has challenged both MEC's permanent and interim rate increase requests. A decision will be made by the IUB in June as to whether MEC will be allowed to impose a temporary "interim" rate increase of 3.3 percent prior to IUB's final decision by next January 15, 2003, on MEC's permanent rate increase of 4.3 percent.
If consumers want to do something meaningful to oppose the rate increase, write to the Iowa Utilities Board with your comments at 350 Maple Street, Des Moines, IA 50319. They will become part of the official record for this rate increase case. The evidentiary hearing is scheduled for September 16, 2002. Nothing is more valuable than public input in these matters. Visit the IUB's web site at www.state.ia.us/iub, or email them at iubcustomer@max.state.ia.us. The toll free phone number is 877-565-4450.
