Colorado co-ops: Unreasonable ROE is costing customers more than $2.4m/year

Four rural electric cooperatives in Colorado have filed a Section 206 complaint with FERC, arguing that Public Service Company of Colorado‘s (PSCo) existing return on equity (ROE) is unjustly costing customers more than $2.4m per year.

Grand Valley Rural Power Lines, Holy Cross Electric Association, Intermountain Rural Electric Association (IREA) and Yampa Valley Electric Association filed the complaint against the Xcel Energy (NYSE:XEL) subsidiary on Aug. 30, asking that FERC order the ROE be lowered to 9.04% from 10.4% in the highest case (Docket No. EL13-86).

The cooperatives purchase power and energy from PSCo pursuant to a power purchase agreement (PPA). The rates charged under each PPA include cost-based production formula rates with a fixed ROE.

“This ROE has a significant impact on the development of the charges that are assessed pursuant to the formula rate,” the cooperatives said. “As is the case with all costs incurred by the complainants in providing electric service, it is their member-consumers who ultimately pay the bill.”

Lowering the ROE to 9.04% would result in over $2.4m in cost savings to customers, comprising a $259,325 reduction to Grand Valley customers; $631,666 reduction to Holy Cross customers; $561,039 reduction to Yampa Valley customers; and a $960,845 reduction to IREA customers.

In addition to arguing that the existing ROEs – 10.1% for IREA and 10.4% for the other three – are unjust and unreasonable, the cooperatives said FERC’s failure to act on other recent Section 206 complaints about ROEs was a “very troubling development.”

“This failure to act denies ratepayers timely relief from unjust and reasonable rates, contrary to the purpose of the FPA [Federal Power Act],” they said in the complaint.

When Congress amended the FPA as part of the Energy Policy Act of 2005, it added wording to Section 206 intended to assure prompt action by the commission in acting on complaints, the co-ops said. These changes included specific timelines for FERC to observe. These timelines are not triggered until the commission sets a complaint for hearing, but the 15-month limitation on refunds is triggered, the co-ops said.

“Needless to say, this development is of grave concern to the complainants in this case and should be of grave concern to ratepayers in general,” the co-ops said. “The willingness of the commission to leave these ROE complaints in limbo suggests that it may be giving consideration to the arguments of individual utilities and associations of utilities to the effect that record low interest rates are skewing the results of the commission’s DCF [discounted cash flow] methodology such that it is producing unreasonably low required returns.”

The current ROEs were the result of a negotiated settlement (ER11-2853) initiated in 2011. IREA negotiated the 10.1% rate with no moratorium on future rate changes, and Grand Valley, Holy Cross and Yampa Valley negotiated the10.4% ROE with a two-year rate moratorium that barred them and PSCo from seeking to make a change in rate effective before Sept. 1.

In April 2012, PSCo filed a FERC rate proceeding (ER12-1589-000) to reduce its then-effective 10.5% ROE to 10.25%, as required by terms of the settlement that gave rise to the 10.1% and 10.4% ROEs. FERC accepted the rate change on June 19, 2012, which the co-ops contested on June 21, 2012, arguing instead for a 9.15% ROE. FERC thereafter conditionally accepted the rate change, suspended the effective date for five months and set the matter for hearing.

“In view of the commission’s decision to suspend the rate change in Docket No. ER12-1589 for five months and set for hearing the complaint in Docket No. EL12-77-000, the complainants conclude that the evidence submitted by complainants in the form of Mr. [J. Bertram] Solomon’s testimony satisfied the requirement to make a prima facie showing that PSCo’s then effective 10.5% ROE was unjust and unreasonable,” the co-ops said.

The four Colorado cooperatives secured Solomon, executive consultant of GDS Associates, an engineering and consulting firm, to run a DCF analysis. Solomon found that PSCo’s cost of common equity capital is in the range of 6.37% to 11.30%, and recommended the ROE be lowered to 9.04%, the median of the DCF determined range of investor-required ROEs for his preferred proxy group of comparable utilities.

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.