Utilities levy an absurd tax upon the rest of their fellow-citizens –Adam Smith

What’s next door to Georgia Power, also a Southern Company, and raising rates on customers who are using less electricity? Alabama Power.

Rebecca Smith wrote for WSJ 21 March 2013, Return Rates for Utilities Get Harder Look

Households getting electricity from Alabama Power Co. are using 6% less than five years ago. But their monthly power bills still have increased by an average of 8%, partly because of a lucrative rate agreement that the utility brokered with state regulators 30 years ago.

“an absurd tax upon the rest of their fellow-citizens”
—Adam Smith

The deal allows Alabama Power, the state’s largest electric utility, to adjust its rates annually to maintain a return on equity, a measure of profit, of 13% to 14.5%. Now it is coming under fire from consumer advocates and one state utility commissioner, who argue that the utility’s profit levels are too high.

Similar disputes are breaking out across the U.S., as regulators take a harder look at utility profits, given low interest rates that have changed the cost of financing power plants. Regulators typically set an upper limit on profits because utilities function as monopolies and regulators fear that they otherwise might gouge captive customers.

Shocked, shocked to hear monopolies might gouge customers! But Adam Smith wouldn’t be shocked:

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

—Adam Smith, Wealth of Nations, 1776

The WSJ Journal article continues:

In 92 major rate decisions last year, regulators, on average, granted gas and electric utilities returns of 10%, compared with 10.21% the prior year and 11% a decade ago, according to research and consulting firm Regulatory Research Associates.

“Only” 10% profit and utilities are complaining about it, as the rest of the article describes. What benefits do utility customers derive from these utility profits?

David Schlissel, an economist at the Institute for Energy Economics & Financial Analysis in Boston, examined Alabama Power’s finances for a state consumer group and concluded the current rate formula has benefitted shareholders more than consumers.

Oh. But even that is not the whole story, because Alabama Power’s stock dividend yield is only 5.35% and Southern Company’s is only 4.19%. You can get 5.55% from Georgia Power preferred stock, but that’s still nowhere near 10% or 14.5%. Where does the difference go? Well, according to Alabama Power’s NOTICE OF 2013 ANNUAL MEETING & INFORMATION STATEMENT, its eleven Directors get $40-45,000 cash a year plus $30,000 in SO stock and $1,800 for each Board meeting attended, plus $1,200 for each Board Committee or other Board business-related meeting. There’s a handy table on page 7 of how much each director has been paid. They don’t add it up, but the total is probably less than a million dollars. So where’s the real money going?

On page 29 there’s another table, of executive pay, starting with Alabama Power CEO C.D. McCrary at $777,167 salary, $3,054,840 Stock Awards, $703,232 Option Awards, $1,028,204 Non-Equity Incentive Plan Compensation, $2,437,448 Change in Pension Value and Nonqualified Deferred Compensation Earnings, $44,722 All Other Compensation, for a total of $8,045,613 for 2012. Which is up 50% from 2011. Plus the other executives and their raises. Plus the executives of Southern Company and their raises. And let’s not forget the investment banks floating bonds.

Alabama Power customers, if you have had enough spare cash left to buy some stock and you did so by March 13th, you can go ask about all this at the annual shareholders meeting on April 26th in Birmingham.