Alabama Power has earned more than $1 billion in profits from 2014-2018 compared to the industry average, according to a review of publicly available data. The profits on top of industry average, and allowed by the Alabama Public Service Commission, total to just over $700 per Alabama Power customer account over the years 2014-2018.

Public Service Commissions are Reducing Returns for Utilities, but Alabama Stays High

The electric utility industry’s allowed return on equity (ROE), a measure of profitability, has steadily declined for years, due in part to the record low cost of capital since the Great Recession of 2007. The average awarded ROE for electric utilities in 2018 was 9.51%, “the lowest annual average in our 30 years of data,” according to the Edison Electric Institute (EEI), the trade association for investor-owned electric utilities.

Alabama Power has consistently earned one of the highest ROEs in the industry, making it among the most profitable utilities in the country. Alabama is the sixth poorest state in the nation, according to U.S. Census data compiled by the anti-poverty group Alabama Possible.

The difference between Alabama Power’s ROE and the average awarded ROE as reported by EEI amounts to hundreds of millions of dollars in excess profits collected from ratepayers each year. In other words, if Alabama Power’s ROE had instead been the average awarded ROE for the industry each year, Alabama Power customers would have saved $1.02 billion since 2014.

YearAlabama Power ROE
(S&P)
Earnings
(in millions)
Average Awarded ROE per EEIEarnings at Average Awarded ROE
(in millions)
Profit Above National Average
(in millions)
20140.1303$800.000.0992$609.14$190.86
20150.1276$811.000.0985$625.97$185.03
20160.1303$839.000.0975$627.75$211.25
20170.1262$866.000.0974$668.36$197.64
20180.1269$945.000.0951$707.92$237.08
Totals$4,261.00$3,239.14$1,021.86
Table 1. Return on Equity, Earnings, and Profit Above National Average by Alabama Power 2014-2018.

Alabama PSC Uses Novel Calculation to Hide Alabama Power’s Profitability from the Public

Due to intense public scrutiny over Alabama Power’s profit margin, the Alabama Public Service Commission (PSC), which regulates the company’s rates and profits, changed how it calculated the company’s return in 2013. The PSC changed Alabama Power’s earnings calculation from an industry standard return on equity (ROE) to what it termed the “Weighted Retail Return on Common Equity” or WRRCE. 

Alabama Power’s maximum allowable WRRCE is 6.15%, which, when factoring the utility’s capitalization from equity, equates to an ROE of more than 12%. The Commission allows Alabama Power to earn a 0.07% performance bonus, for a total WRRCE of 6.22%. The company’s actual ROE came in at above 12.5% from 2014-2019, according to S&P data. Alabama Power’s actual ROE was substantially higher than the rest of the utility industry. 

WRRCE was a novel calculation not in use by any Commission in the country. Commissioner Twinkle Cavanaugh predicted at the time that other states would adopt Alabama’s approach. No state has copied the use of the WRRCE. Instead, ROEs have been reduced throughout most of the country, according to EEI data.

The Commission requested that Alabama Power file a report every six years to the PSC staff and the Office of the Attorney General to review the new WRRCE and the utility’s comparison to peers against a variety of metrics. The first such review was supposed to take place for the years 2013-2019 however, no filing has been made public in the docket as of the date of publication. 

The development of the WRRCE allowed the PSC to appear to take action against Alabama Power’s high allowed return. However, the WRRCE simply allowed the PSC to dismiss concerns of their allowance of Alabama Power’s excess profit by pointing to a much lower number while not changing the underlying issue of excessive earnings. At the time, Republican Commissioner Terry Dunn, who served on the Commission from 2011 – 2015, called the WRRCE informal hearings “just a dog and pony show. It was all staged. The people that you saw get up, they were reading off the same script.”

Correction: A previous version of this post stated that Alabama Power’s profit margin on top of the industry average equated to just under $800 per Alabama Power customer account over the years 2014-2018. The average was $715. We regret the error.

Header image source: Alabama Power

Posted by Daniel Tait

Daniel Tait is a Research and Communication Manager for the Energy and Policy Institute.