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Progress wants 'tip' for service

In its request to a state agency for a base rate increase, the utility says it "should be recognized and rewarded for its efforts."

By LOUIS HAU
Published April 30, 2005

Tipping yourself for good service is a novel concept that has yet to catch on at most businesses.

But it's an idea Progress Energy Florida Inc. appears eager to promote.

On Friday, the St. Petersburg utility filed a request with the Florida Public Service Commission seeking permission to raise its base electricity rates by about $5 a month for the typical household. The requested rate increase is roughly in line with the St. Petersburg utility's projection in January when it revealed its intention to seek a base rate hike, its first since 1993.

In its filing with the PSC, Progress said the increase would generate about $206-million more in base-rate revenue a year, enabling it to generate an authorized rate of return on common equity - a measure of profitability - of 12.8 percent.

Of that annual return, about half a percentage point would be earmarked for neither current nor projected operating costs. Instead, the company said in its filing, the resulting money goes to the company "for its outstanding efforts in maintaining low base rates, providing superior customer service, and achieving greater reliability levels for its customers."

Progress said it "should be recognized and rewarded for its efforts" and that setting aside a portion of its annual rate of return for itself would be "an appropriate incentive to the Company for continued superior performance."

State public counsel Harold McLean, whose office represents the interests of Florida utility customers, condemned the proposal as a request for "a government-sanctioned tip" and said he will urge the PSC to reject it.

He noted that Florida Power & Light of Juno Beach recently asked for a similar provision in its request for a base-rate increase.

"I think it's absolutely audacious that they're asking for it," McLean said.

According to Progress' filing, about half of the $206-million generated each year by the rate hike would cover the cost of new power plants required to meet the needs of its expanding customer base.

About $30-million would be devoted to improving reliability and customer service, while about $22-million would be for the cost of power-plant depreciation and to set aside money for the cleanup of closed power plants to restore those plant sites to their original condition.

In addition, the base rate hike would cover the cost of Progress' plan to sharply increase the amount it adds every year to its storm-damage reserve fund to $50-million from $6-million.

Progress' storm reserves were depleted by last year's hurricanes and the company said in its filing Friday that its reserve fund won't reach adequate levels "for many years, if ever" at its annual accrual rate.

Progress appears likely to face stiff opposition from consumer advocates on these items as well. McLean said the 12.8 percent annual rate of return was too high for a regulated monopoly.

(In exchange for granting electric utilities a monopoly in their respective markets, the state has the authority to regulate their earnings.)

Although Progress is already earning a rate of return roughly comparable to what it is seeking through its base rate hike, McLean argued that the company's continued revenue gains because of robust customer growth require a remedy that would return a greater share to customers.

McLean suggests two solutions: lower Progress' authorized rate of return or institute a new revenue-sharing agreement with the company.

Under a revenue-sharing pact signed in 2002 that will expire at the end of this year, the company is allowed to generate a certain level of revenue every year. At least two-thirds of any revenue in excess of these annual thresholds must be returned to customers.

If the PSC and Progress don't opt for a new revenue-sharing pact, McLean said the company's annual rate of return should be lowered to about 9 percent, which he said would be appropriate for a company that he argued faces very little business risk.

In addition to facing no competition in their markets, he noted that utilities have been allowed by state regulators to pass through to customers an increasing portion of their operating expenses via special "adjustment clauses" for items such as the cost of fuel, environmental-compliance programs, conservation programs and power-plant security.

McLean also pointed out that Progress and other utilities have argued that they should be permitted to pass through all of their storm costs as well, a position that McLean and other consumer advocates oppose.

"What are their risks?" McLean said. "Do they think people are going to stop buying electricity? The regulatory process has pushed all the risk to customers."

Progress spokesman Aaron Perlut countered that the company's base rate has declined over the years, most recently through a 2002 agreement that sought to return to customers a share of the cost savings from Progress' formation through Carolina Power & Light's 2000 acquisition of Florida Progress Corp.

"There is no question that we are privileged to serve one of the fastest growing regions in the country," he said. "The challenge is that while we've added 350,000 new retail customers since 1994, we've also had to accommodate those customers, their energy demands and the infrastructure that serves that demand."

A 12.8 percent rate of return would enable the company "to provide a high level of service that our customers have experienced over the years . . . while at the same time earning a reasonable rate of return for our shareholders, whose investments are crucial to providing the capital needed to sustain and grow the utility infrastructure."

Progress serves about 1.5-million retail customers in Florida, including about 706,000 in Pinellas, Pasco, Hernando, Citrus and Hillsborough counties.

Louis Hau can be reached at 813 226-3404 or hau@sptimes.com

[Last modified April 30, 2005, 00:50:14]