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Regaining the Advantage: West Virginia’s Electric Rates

As published in West Virginia Executive magazine, Fall 2011
11/23/2011

The cost of energy—particularly the cost of electricity—comprises a significant portion of the total cost of production for industrial and manufacturing companies. The West Virginia Energy Users’ Group (WVEUG) is a statewide association of large, energy-intensive industrial, chemical, manufacturing and institutional concerns through which its members pool their resources to put as much downward pressure as possible on electric rates through active participation in litigated rate cases and investigations before the Public Service Commission of West Virginia.

WVEUG has been in existence for more than two decades and has been consistently active for the last 15 years. Twenty West Virginia companies currently make up the membership of WVEUG, including PPG Industries, E.I. du Pont de Nemours, Bayer, ArcelorMittal, Quad Graphics and U.S. Silica. These members represent a broad cross-section of business and industry in West Virginia both geographically—throughout the entire state—and from a business sector perspective, with members representing steel, aluminum, chemical, air separation, gas processing, publishing and recycling entities. Collectively, WVEUG members consume more than 4 billion kilowatt-hours (kWh) of electricity per year, which is approximately 15 percent of the total electricity consumed in West Virginia. These same companies also provide thousands of West Virginia jobs and contribute millions in state taxes and to state and local economies and charities.

For WVEUG members and other industrial companies and manufacturers assessing whether to build a new plant, maintain an old one or expand existing facilities here in West Virginia, the short list of key decision-making considerations includes taxes, transportation costs, labor costs and, of course, the cost of energy. Competitive viability is at the core of this analysis. In fact, in addition to obvious international, national and regional pressure, some companies also face competitive pressures on an intra-company basis, meaning a company may own two facilities in disparate geographic locations competing with each other to produce the same product. For example, if a plant in West Virginia’s Northern Panhandle can distinguish the economic vitality of its location in comparison to a sister facility near the Gulf of Mexico, it may well win the production opportunity.

For many years, West Virginia was well-positioned to offer large manufacturing and industrial companies an advantage in this decision-making process: low-cost electricity. Just a few years ago, West Virginia’s major monopoly electric utilities—Monongahela Power Company, Potomac Edison Company, Appalachian Power Company and Wheeling Power Company—offered low electric rates for their largest customers in the range of $30/megawatt-hour (mWh). West Virginia was consistently in the top 10 of states with low electric rates, and the upshot is that for many years West Virginia held a competitive advantage in attracting and maintaining big business as it related to its low cost of electricity. This is no longer true.

In 2009, American Electric Power’s public utility subsidiaries in West Virginia, Appalachian Power Company and Wheeling Power Company, requested from the Public Service Commission a 43 percent increase in rates, a request of more than $430 million in increased annual revenues to be borne on the backs of captive ratepayers. As proposed, that request—the largest request by far in the history of rate regulation in West Virginia—would have increased electric rates for some industrial ratepayers by nearly 80 percent.

WVEUG, along with the Public Service Commission’s staff and Consumer Advocate Division, argued to reduce the level of recovery and extend it over a longer period of time. Ultimately, a portion of the utility’s request was approved by the commission for recovery over a period of years. American Electric Power was allowed to increase its rates by about $130 million, an increase that had been preceded by large rate increases in 2006, 2007 and 2008 and has been followed by rate increases in 2010 and 2011. In total, American Electric Power’s rates have increased by more than half a billion dollars since 2006. Industrial and manufacturing customer rates in West Virginia have increased by as much as 70 percent in that same time frame.

This story is similar with respect to the electric rates for FirstEnergy affiliates Monongahela Power Company and Potomac Edison Company, which have increased by nearly 50 percent in the last few years. Large customers in West Virginia paid rates just a few years ago in the range of $30-$40/mWh, and those rates are often well over $50/mWh for most large customers. West Virginia’s industrial rates were, as recently as 2007, among the lowest in the nation, and they are now in the middle of the pack.

To be clear, utilities are entitled to recover prudently incurred costs plus an opportunity to earn a return on the related investment. The fact is that the costs to serve customers have generally risen as a result of, among other things, increased coal costs, increased environmental compliance costs associated with the Clean Air Act and EPA regulations, the lack of new generation plants, increased costs to promote renewable energy and the vagaries of a wholesale market for electricity that is clearly imperfect. Further, due to the economy and influenced by increased electric costs, the demand for electricity has decreased, which means that those higher costs need to be spread over fewer billing units, which compounds the effect of rate increases.

Although neither WVEUG nor the state advocates can alter the fact of increased costs for utilities in West Virginia, those parties have succeeded in mitigating the rate increases proposed by the utilities over the last several years, and some creative methods have been applied to achieve such mitigation.

As noted above, AEP’s $400 million-plus request was reduced and spread over four years. Similarly, a rate increase request from Allegheny Power on behalf of Monongahela Power and Potomac Edison in 2009 was decreased to $40 million from an original request of $122 million with an adjustment to increase base revenues by another $20 million while at the same time offsetting that second increase with a comparable reduction in fuel surcharge revenues.

In the Trans-Allegheny Interstate Line case, known as TrAIL, WVEUG was instrumental in negotiating a West Virginia Economic Incentive Credit of 0.65 mills/kWh for large customers on the Allegheny Power system, which was approved by the commission as part of a settlement among parties to the case, including WVEUG, the staff, the consumer advocate, Monongahela Power and Potomac Edison.

Recently, in the case before the commission regarding the merger of Allegheny Energy into FirstEnergy, the parties, including WVEUG, were able to broker a settlement that obligated Allegheny Power to provide rate credits of $7.5 million to all ratepayers over two years.

More can be done. West Virginia should ensure that large electric customers have the ability to negotiate creative ratemaking alternatives and special contracts with utilities in the state to preserve and expand their facilities. Such arrangements should not necessarily be limited to traditional, direct utility service but should be open to contemplation of market-based solutions where appropriate. West Virginia should scrutinize utility parent company decisions that may favor out-of-state affiliates over their utility affiliates in West Virginia. West Virginia should also ensure that utilities are limited in their ability to pass through costs to customers via single issue surcharges that do not allow for a full and fair review of all utility costs and potentially offsetting revenues.

West Virginia has always prided itself on being an energy state. It can and should regain its prominence as a low-cost supplier of electricity for the sake of business, industry, jobs and the West Virginia economy. WVEUG will continue to fight to make this happen.

For more information, please contact:

©2016 Spilman Thomas & Battle, PLLC
Michael J. Basile / Responsible Attorney
800.967.8251