During a presentation for investors last June, CenterPoint Energy vice president Tracy Bridge boasted that for years the company was making more money than actually permitted by state regulators.
See, back in 2011 the Texas Public Utility Commission, which regulates the rate power transmission companies like CenterPoint can charge, authorized a 10 percent return on equity for CenterPoint, meaning regulators determined that CenterPoint shareholders should be allowed to earn up to $1 of profit for every $10 they own in the company. At that investors meeting last summer, Bridge pointed to a PowerPoint slide on the screen. "[Y]ou can see across the top of the blue bars that, for the last three years, we've been earning well in excess of that authorized return."
Yet, despite PUC records showing CenterPoint over-earned in the millions -- some $46 million in "excess revenue" in 2013 alone -- the company will today ask state regulators for a $16.7 million rate hike, which the company says will amount to an extra 31 cents per month for the average ratepayer.
Excess profits for years, and now a rate increase? How is that possible?
Over the past decade, state lawmakers have adopted numerous ways for for-profit utilities to raise their rates, says Thomas Brocato, an attorney and regulatory expert who works with the Gulf Coast Association of Cities. In 2011, the Lege created the so-called Distribution Cost Recovery Factor, which allowed for companies to set higher customer rates in order to recover some of they money they invested in upgrades to the system (think transformers, poles, wires, and the like). This is what CenterPoint will be applying for today to raise rates.
There is a hitch, however. Utilities that are earning excess profits -- companies like CenterPoint that have blown past the approved return-on-equity set by PUC -- aren't eligible for a rate increase. So what's a state-sanctioned monopoly like CenterPoint to do?
CenterPoint claims it is now under-earning, and that its return-on-equity is now below the PUC-approved threshold of 10 percent. Since PUC rate cases are relatively formulaic, and since CenterPoint has been predicting for quite some time that its profits will be below the company's regulator-approved return on equity, there's no reason to think the company isn't technically under-earning at this point. (Why else apply for a rate increase?)
But how did CenterPoint go from excess profits in the millions to "under-earning" in such a short time? From the looks of it, the company went on a spending spree.
CenterPoint's own reports show the company spent $340 million on capital investments in 2011. The company anticipates it will have spent $780 million on capital investments in 2014, more than double the amount CenterPoint was spending on capital improvements just three years prior.
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All of this begs the question: Why is CenterPoint spending so much cash all of a sudden? In an emailed statement, company spokeswoman Alicia Dixon told us that CenterPoint's capital expenditures spiked because of "strong customer growth" and due to company efforts "to modernize our grid for reliability and resiliency." As for that latter part, we'll just have to take the company's word for it right now. But "strong customer growth"? The company went from about 2.15 million metered customers in 2011 to 2.29 million in 2014. That's about 6 percent customer growth over three years, compared to capital expenditures that more than doubled during that time period.
Perhaps this is all just part of the business model. CenterPoint gets to over-earn for years without state regulators getting involved -- but in doing so, it's tethered to a lower rate. So, when it wants to raise rates, the company spends like hell, lowers its return on equity and scores a rate increase to recoup some of that spending.
Bracato with the Gulf Coast Association of Cities says he'll be closely watching CenterPoint's request for a rate increase, but that there's really not much ratepayers can do about it. "Certainly if we find anything inappropriate, we'd bring it to the PUC's attention, but, candidly, we are limited in what we can do," he told the Houston Press. "It is surprising, to say the least, that a utility can over-earn millions each year, nothing happens, and then suddenly they show under-earnings and get a $16 million rate increase."
"But that's the law in our state."