By Zak Sonntag
Casper Star-Tribune 

Rocky Mountain Power wants to reward shareholders; some say 10% is excessive and propose lower amounts


November 9, 2023

Via Wyoming News Exchange

CASPER — The Wyoming Public Service Commission (PSC) last week wrapped its intensive hearing on Rocky Mountain Power’s (RMP) general rate increase proposal — a process replete with heady testimony, incisive cross examination, and impassioned public comment.

The proposal heaved into public discourse a plethora of technocratic concepts — like multi state protocols, debt to equity ratios, and sharing band incentives — underscoring the challenge ahead for the PSC, which finds itself at the unenviable collision point between a powerful corporation and a revved up citizenry.

In some regards, the clearest takeaway may be the head-spinning technicality involved in regulating a “natural monopoly,” where small decisions have big implications, and whose high complexity can make it feel like an insiders-only arena.

It’s one of the reasons Wyoming residents are suspicious the company is obfuscating a money-hungry motive; hence, thus far the public is disinclined to take RMP at face value.

“Rocky Mountain Power’s justification always follows the same approach: ‘This is a complicated problem. We don’t expect you to understand it, and we don’t like asking for the increase but we have to and we can’t explain it to you because it’s too complicated,’” said Tom Van Kleef, small business owner, speaking at a public hearing in October. “When any powerful organization states it’s too complicated a problem to discuss, it generally means they don’t want to explain why they’re asking for your money.”

Though it’s easy to imagine that a powerful company would seek to squeeze customers, after a long week of hearings, it’s also easy to see that the world of public utilities can be earnestly knotty.

The point was clear during the hearing’s final days when the commission took up an issue as technical as it is divisive: how much should the utility be allowed to profit? The question implicates things like the Federal Reserve rate, proxy group comparisons, and a whole bunch of economic modeling, all in an effort to establish the fair “cost of capital.”

The official term is Return on Equity (ROE), which is the amount the utility will pay its shareholders. The company is seeking approval for a 10% ROE, which it says is needed to attract the capital necessary to meet an “obligation to provide safe and reliable service to customers within the prescribed service territory” amidst a unique moment in the marketplace, according to Ann Bulkley, Principal at The Brattle Group, testifying on behalf of PacifiCorp.

Some say 10% is too high. The Wyoming Industrial Energy Consumers (WIEC) along with the Wyoming Office of Consumer Advocate (WOCA) are pressing the commission to accept a lower rate: WOCA has proposed a ROE of 9.55%; WIEC has proposed a ROE of 8.60 %. These are not small differences.

Analysis showed that a single basis point in this case amounts to around $160,000, meaning the difference between WIEC’s 8.6% and RMP’s 10% would translate to as much as a $22.4 million difference in revenue requirement.

The parties diverge in their recommendations due to differences in how they implement and interpret common economic models.

“The cost of capital analysis is sort of part art and part science. The science part is running the models, the art part is what inputs you use and how you interpret the results,” said Ivan Williams, Supervising Attorney for the PSC.

In some cases, parties diverged in their interpretation of results.

Intervenors, for instance, described the equity market for utilities as “robust,” insinuating a lower ROE would suffice, whereas the company argued the market was flagging as a result of competition from a high Federal Reserve rate and concern over wildfire risk, citing a Bank of America study.

In other cases, it was the inputs and models themselves parties disagreed on — including arguments on the usefulness of a “multistage Deferred Cash Flow” (DCF) model” in contrast to a Constant Growth DCF — leading the company to accuse Intervenors of straying too far from common ground.

“It is clear that no other state regulatory commission across the country believes that the cost of equity is in the range established by (WOCA’s) multi-stage DCF model,” said Buckley.

In short, it’s the type of stuff way above the average resident’s pay grade, which highlights the importance of competent bureaucrats and the need for expertise in the public sector.

But it’s also true that the PSC does not have complete discretionary authority.

“The Public Service Commission ultimately in charge of making these decisions is bound by case law, regulatory precedent, regulatory principles, and other standards that they have to abide by when evaluating the reasonableness of any request,” said Anthony Ornelas, Director of WOCA, which is intervening in the case. “The idea that the commission can flat out deny a request just because is not consistent with how a monopoly utility is regulated and how oversight is accomplished.”

Next up

On Nov. 20 the commission will issue a brief summarizing legal issues pertinent to the case, and hold a public hearing on those findings on Nov. 28.

This story was published on November 8, 2023.

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