By Ezra Bitterman
Albany Times Union

ALBANY — As utility companies continue to increase energy bills, the companies and regulators overseeing them are facing increasing scrutiny from lawmakers and New Yorkers desperate for solutions. 

Capital Region residents are facing higher bills after the Public Service Commission — the seven-member board that approves electric and gas rates — approved a three-year plan from National Grid which will raise monthly bills about $22 for the average customer. More than 220,000 people are more than 60 days behind on paying their National Grid bills.

Customers of Con Edison, New York State Electric and Gas, and Rochester Gas and Electric will likely see bill increases in the near future. 

What’s drawn the ire of many state lawmakers is how tepidly the Public Service Commission allows utility companies to rake in profits as ratepayers are seeing their monthly bills climb.

“There’s pretty broad consensus that the Public Service Commission is deeply broken, I would argue, beyond repair,” said state Sen. James Skoufis, a Hudson Valley Democrat. 

A number of experts in utility financing who were interviewed for this story generally agree utilities get too high a rate of return but it’s unclear how much money can actually be saved by shrinking it.

Utility companies operate within a regulated monopoly meaning they provide power and heat to customers without competition. For more than a century, the Public Service Commission has acted as a foil to the companies, ensuring they deliver reliable service without taking advantage of consumers.

When utilities want more money from customers they must enter a proceeding with the Commission. That process is viewed as deeply broken by a host of policymakers and consumer advocates in New York. 

Unconstrained profit 

But to understand the consternation over utility companies’ perceived overcharging of customers, it’s important to understand the basics of how the companies make money.

Certain expenses, including the cost of energy itself and employee salaries, are just pass-throughs. Utilities buy the power, then charge the customer what they paid for it.

Large-scale investments in the grid use a combination of debt from the private market and cash from company shareholders. No investor would put money into a business without expecting something back, so the Public Service Commission agrees to a return on equity for investors. 

National Grid requested a 10% return on equity in its most recent utility rate hike, but settled with the commission for 9.5%, which could net around $100 million for shareholders. The approved rate of return is below the national average, according to Standard and Poor’s research. Whenever National Grid uses its investors’ money to make upgrades to the electric or gas system, customers pay not only for the improvements but also the profits going back to shareholders.

“Most of those small businesses (in my district) would kill for never mind a nine or 10% profit margin, they’d kill for a 3, 4, 5% profit margin,” Skoufis said.

The senator has proposed legislation that would put a 4% cap on a utility company’s return on equity.  

Experienced utility analysts broadly agree that utility companies’ return is too high, but say 4% would be a disaster. Most businesses have a cost of equity, which is the return needed to attract investors. The auto industry is volatile, so an expected return of more than 11% is needed, according to New York University data. Utilities could easily deliver a fair rate of return to shareholders with around 6%, the same dataset showed. 

Utilities and auto companies getting close to the same rate of return to attract investment is nonsensical because “there’s an insane level of difference in risk between them,” said Albert Lin, a long time consultant in the utility sector.  

Utilities have almost no risk of catastrophic collapse. If a major storm were to destroy National Grid’s upstate infrastructure, it could ask the Public Service Commission for ratepayer money to replace it and, in theory, still net a return on investment. 

“It seems to me, based on a tremendous amount of compelling evidence available to regulators, that the returns utilities are earning is out of scale with the risks they face,” said Cameron Brooks, an expert on utility regulation.

Profits made on shareholder investments make up 15 to 20% of the average utility bill, according to a national analysis done by the Rocky Mountain Institute. The same report found companies were able to access capital in the 1980s when approved rates of return were lower. 

Some legislators are pushing for more carefully thought out changes. Assemblywoman Didi Barrett, chair of the Assembly Energy Committee, has proposed legislation that would require state regulators to create a rigorous, public facing return on equity calculation which “recognizes that regulated utilities are entitled to make a fair and reasonable return, while emphasizing that the existing process of ratemaking must be fundamentally restructured.”

Read more at timesunion.com