what public service?

What Public Service?

How the Alabama Public Service Commissions misplaced priorities put utility profits over people.

May 2015

Greater Birmingham Ministries: What Public Service?

Page 1

Established 45 years ago in the wake of Birminghams Civil Rights Movement, Greater Birmingham Ministries has worked throughout its history to serve people, build community and pursue justice. Dr. Martin Luther King challenged us to turn our attention to the poor and to fight institutional policies that harm them. One of the primary ways weve done so has been addressing the huge burden placed on low-income families by excessive utility rates. Our efforts to secure fair and affordable bills for Alabamians have ranged from challenging disproportionately high gas rates in impoverished neighborhoods to fighting for much-needed discounts and relief for the poor and qualifying elderly. GBM lives by the mantra, if you see something, say something. Well, we have seen something. Over the years, as weve worked to help struggling Alabamians fight for more equitable electric rates, weve watched as the Alabama Public Service Commission has increasingly distanced itself from actual public service. Now more than ever, the PSC institutes policies that are in no way equitable or economical for customers. Instead, they boost the bottom line of monopoly utilities, and in doing so harm Alabama families, especially in low-income communities where the inability to pay utility bills can lead to eviction and homelessness.

This most recently came to light in December 2014, when the PSC signed off on an electricity rate hike of 5% for Alabama Power customers. This was business as usual; the decision was made swiftly, with next to zero discussion of whether the expenditures the utility said it needed were prudent or even necessary. In our effort to shed light on the imbalance of the PSCs decision-making, this report contrasts the lucrative gains that PSC decisions facilitate for Alabama Power the states biggest and most well-connected utility against the growing burden they place on customers, especially low-income earners, who are paying more than ever for services that have little to do with helping them save on their electricity bills. The analysis compares rate and financial information gathered from 2007, the year before America and Alabama plunged into recession, through the sluggish recovery and the concluding mandate of the December 2014 rate meeting.

Given the economic plight facing Alabamians during this period, one might expect the priorities of elected officials who are supposed to be looking out for the people of the state to reflect the times. Bottom lines, however, paint a different picture. Rather than helping Alabamians, the PSCs decisions have paved the way for Alabama Power to profit handsomely while people and businesses continue to struggle, a clear signal that the system is built around deeply flawed priorities and processes that have little to do with public service.


Page 2

A Rough Road for Alabamians

From the time the housing bubble burst and the recession took hold to the end of last year, Alabamians

have faced a growing mountain of job losses, declining incomes and housing struggles. Taken together,

the data are a stark indicator of how widespread the states plight was and continues to be. Its difficult to fathom, then, that leaders who are elected to bring balance and fairness to electricity billing have turned

a blind eye to the circumstances of the people who put them in office and done little to offer any relief.

At the beginning of 2007, unemployment in Alabama was 3.9%. As of December 2014, it was 6.1%, with 45,000 more Alabamians still jobless than had been seven years previously. Unemployment

peaked at 11.9% in September 2009, with more than a quarter million Alabamians out of work.1

Overall poverty in Alabama jumped significantly from 2007 to 2013,2 increasing the number of Alabamians living below the poverty line by 139,000 people and boosting the overall poverty rate

from 16.6% to 18.9% of the population.3 At the end of 2013, more than one out of every four

children under 18 in Alabama lived in poverty.

Adjusted for inflation, median household income in Alabama dropped substantially between 2007 and 20134, from $47,424 to $41,381, leaving families with the equivalent of $504 less every

month to make ends meet.5

As a percentage of income, Alabamians pay more of their hard-earned dollars for

electricity than any other state in the

country. In 2013, just under 4% of the

median households income in Alabama was spent on electricity, more than double the

least costly states.6

Funding for Low Income Heating and Energy Assistance (LIHEAP) in Alabama

exploded as a result of the economic

downturn. From 2007 to 2010, federal

assistance to help people pay for

electricity and heating more than tripled from $22.2 million to $69.0 million before

severe budget cuts slashed funding to $48.9

million in 2014.7 In 2010, at the peak of federal LIHEAP assistance, funding was distributed to

109,700 Alabama households. As of 2014, 38,500 fewer households received aid, despite the

upswing in poverty.8

The number of Alabama households on food stamps (SNAP) jumped sharply in the six years from 2007 to 2013, increasing by more than 96,000 to 280,174, a rise of 53%.9 Almost one in six

Alabama households received federal food stamp assistance in 2013.


Page 3

On the Rise: Rates, Profits & Pay

Meanwhile, a review of PSC decisions and Alabama Power financials between 2007 and 2014 reveals a

systematic pattern of commissioners signing off on rate increases which permit, among other things,

profit and executive pay increases that are notably out of touch with the economic hardships facing many

Alabamians. Through the recession and into the nations economic recovery, the PSC has allowed

Alabama Power to continue squeezing money out of customers through rates that climbed

consistently upward between 2007 and 2014.10 The steady increase is notable given that customers

already are paying some of the highest electricity bills11 in the country, behind only Hawaii and Maryland

in 201312. In the Southeast, residents in Florida, Georgia and North Carolina had higher average

residential rates (per kilowatt-hour) in 2013, but they all pay lower monthly bills than Alabama because

they have utilities and regulators that help them use electricity more efficiently.

From 2007 to 2014, the PSC OKd plans that saw Alabama Powers average retail

revenues go up across all classes of customers (residential, commercial and industrial) by

18.6%, meaning for every kilowatt-hour sold,

customers paid an average of 1.45 cents more;

Alabama Power had 56.9 billion kilowatt-hours

in sales in 2014. But the biggest hit was to

Alabama business owners and families, who

each saw average rates (commercial and

residential, respectively) climb 22%.13

In 2007, residential customers paid on average $1,525 to Alabama Power over the course of the

year for electricity. By 2014, the average annual

out-of-pocket costs had risen by $250 a year to

$1,775 because of rate increases, even though

people were using less electricity.

The rate hike approved by the PSC in December 2014 will add another $75 a year to the

average residential customers bill. According to the company, the increase is necessary to cover increased costs of doing business, including

adding pollution-control retrofits for aging coal-burning power plants.

At the height of the recession in

2009-2010, with unemployment

hanging above 10% and almost a

fifth of Alabama living in poverty,

the PSCs rubber-stamp resulted in Alabama Powers annual electricity

rates for families rising by an

average of $256. Meanwhile, the

companys CEO got a $1 million raise, the average pay of other top

executives jumped by 53%, or

$447,000, and dividends rose by

$63 million, a 12% increase.


Page 4

In addition to covering the cost of compliance with pollution-control laws, raising rates is also a surefire

way to boost profits. Alabama Powers net income after taxes and dividends rose steadily from 2007

to 2014, increasing every year but one, from $580 million to $761 million, a generous increase of

31%. Much of that profit is attributable in the companys own words to higher retail revenue coming from rate increases:

In 2007, the company reported that despite the challenges of rising costs, earnings after taxes were up $62 million (12%) over the prior year, primarily due to an increase in retail base rate revenues resulting from an increase in rates. (Page 5)

In 2008, the company reported strong financial performance despite a weakening economy and rising costs, with a $36 million increase in profits (up 6.3%) attributable primarily to an increase in retail base rate revenues resulting from an increase in rates. (Page 3)

Financial performance remained strong in 2009, despite the challenges of a recession. The reason for

the $54 million increase in net profits (8.7%), the

company said, included a corrective rate package providing for adjustments associated with customer

charges. (Page 3)

In 2010, Alabama Powers net income after dividends increased by $36 million (up 6.2%), a financial

improvement the company said was primarily due to an increase in retail base rate revenues resulting from

an increase in rates carried over from 2008. (Page 3)

Net profits were almost flat in 2011, but even the

small $1 million increase was attributed to increased

revenue from rate pass-throughs to customers to cover

costs for new construction. (Page 3)

In 2014, Alabama Powers net income after dividends increased $49 million, or 6.9%, from the previous year. The increase, the company said, was partially due to an increase in revenues from

costs charged to customers to meet pollution-control requirements.14 In other words, the company

made a profit by charging customers to keep pollution out of the air. (Page 4)

In contrast, the PSC requires Alabama Power to put minimal emphasis on programs that are proven to

save families and businesses money. According to the American Center for an Energy-Efficient

Economy, energy efficiency programs cost utilities a half to a third as much as generating energy.

Programs aimed at helping customers use electricity more wisely put money back in peoples wallets and are especially attractive to low-income customers who must spend a larger proportion of their income on

electricity. According to ACEEE, each dollar invested in efficiency yields $1.24-$4 in benefits for

customers through things like lower energy costs during peak usage such as heat waves and avoided costs from building new power lines.15

In most states, utilities commissions balance the interests of customers with those of utilities, and because

of their low cost and clear benefits for customers, energy efficiency programs are low-hanging fruit for

commissioners to approve. In Alabama, however, hands-off oversight of Alabama Power by the PSC tips

Alabama offers very limited energy efficiency options.

Alabamas regulators have not encouraged or required

Alabama Power to pursue energy efficiency, and as a

result, the utility has yet to

implement a comprehensive

set of programs. ACEEE


Page 5

the balance in favor of more traditional and established profit generators, namely keeping electricity use,

and thus revenue, high. Without a PSC to force the issue, Alabama Power has done very little on the

energy efficiency front. In 2006, Alabama ranked 46th out of the 50 states in energy efficiency programs, according to ACEEE. In 2012, it still ranked 40th, with little improvement in utility spending on

efficiency.16

In the midst of the companys income gains, net profits were being directed to areas that had little to do with helping customers cut their use of electricity or save money on monthly electricity bills

during hard times. Earnings were spent partially on boosting the salaries and other compensation for the

companys top executives,17 as well as beefing up dividends for shareholders.

Average salaries and compensation18 for the companys top five executives increased 55% between 2007 and 2014, up from $1.1 million to $1.7 million.19

Pay for the companys top executive20, CEO Charles McCrary (who retired in March 2014 after 13 years at the helm of Alabama Power), increased at an even higher clip, ballooning from $2.1 million

in 2007 to $4.4 million in 2014, a generous 112% increase. In 2012, his total compensation was

actually as high as $5.6 million, 168% higher than it was five years earlier.

In 2014, Alabama Power actually paid for two CEOs. In addition to McCrarys salary, the company also paid incoming CEO Mark Crosswhite $2.7 million.

Despite the tough economy, times also were lucrative for Alabama Power board members. Their average annual pay increased 42%, from $54,947 in 2007 to $ $77,961 in 2014.

Alabama Power also took care of its parent company, rewarding Southern Co. with cash dividends on common stock that were $85 million higher in 2014 than in 2007, an 18% rise. More to the point,

at the height of the recession in 2011, dividends soared to $774 million, a 33% increase over 20 10.


Page 6

Conclusion

Amid harsh economic conditions in which Alabamians have been struggling to make ends meet, there has

been little relief from the hardship of their electricity bills. In fact, bills have climbed steadily even as the

economy tanked. But rather than balancing the interests of families and businesses trying to wade through

lean times, the Alabama Public Service Commission, through its rubber-stamping of Alabama Power

returns, provides the backbone for a system that is highly skewed in favor of profits over people. Revenue

from customers bills, instead of being directed to programs and projects that might benefit Alabamians, is funneled into company coffers, boosting executive pay and fattening dividends.

One can hardly fault a company for striving to maximize profits, however. Instead, the true blame for the

inequities in the current system rests squarely on the shoulders of the Alabama Public Service

Commission, which facilitates the largesse, even though its mission is supposed to be ensuring a regulatory balance between regulated companies and consumers in order to provide consumers with safe,

adequate and reliable services at rates that are equitable and economical.21

No one is questioning the safety, adequacy and reliability of electricity in Alabama. Its patently clear, though, that the Public Service Commission has instituted policies that are in no way equitable and

economical for customers. The PSCs decisions harm Alabama families, especially those of low income, at the same time they boost the bottom line of a monopoly utility that the elected commissioners are

supposed to hold in check for the people of Alabama the people who put them in office.

Alabamians should be asking tough questions about elected officials and how they so overtly favor utility

priorities, which are clearly not in the best interests of families and businesses, especially in light of the

handsome rewards the company is allowed to earn by the PSC compared to other utilities. PSC policies

allow Alabama Power to earn returns on equity in the range of 13-14%22, more than a third higher than

the industry average of 10% or less. In an investment analysis, Morningstar actually said Alabamas rate-making structure with the PSC is about as good as it gets for electric utilities.23

This imbalance is condoned by the PSC and its consumer-unfriendly policies. The PSC has tried to

convince the public that it is looking out for customers but it is not. Case in point: two of the three current

Public Service Commissioners promised in late 2013 that their tinkering with rate formulas would lead to

savings of $30 to $110 a year.24 Then when the commission met in December 2013 to decide rates for

2014, they did not go down, and then last year they went up. The decisions the PSC makes are clearly

tilted strongly in favor of maintaining Alabama Powers monopoly exploitation of customers.

Alabama Power customers should expect more of the same imbalance in the future, at least according to

outside analysts. In assigning an A+ credit rating to $300 million in bonds issued by Alabama Power, for

example, financial analysis firm Fitch said late in 2013 that its rating reflects the view that the utility will continue to generate strong credit metrics over the next three years driven by a gradual improvement in

industrial sales and rate increases under the current set-up allowed by the PSC.25


Page 7

Endnotes

1 U.S. Bureau of Labor Statistics. http://beta.bls.gov/dataQuery/find?st=0&r=20&fq=m:[Unemployment]&fq=state:[Alabama]&more=0. Unemployment statistics are seasonally adjusted.

2 Poverty data are available through the end of 2013. 3 U.S. Census Bureau, Small Area Income and Poverty Estimates (SAIPE), http://www.census.gov/did/www/saipe/data/interactive/ 4 U.S. Census data on median household income is available only through the end of 2013. Amounts cited are in 2013 inflation-adjusted dollars via http://data.bls.gov/cgi-bin/cpicalc.pl. 5 U.S. Census Bureau, Median Household Income by State, Single-Year Estimates, http://www.census.gov/hhes/www/income/data/historical/household/2013/h08.xls 6 Data compiled from the U.S. Energy Information Administration: http://www.eia.gov/electricity/sales_revenue_price/xls/table5_a.xls 7 http://neada.org/wp-content/uploads/2014/02/FY2014_LIHEAP_Appropriations_Statusb.pdf and U.S. Census Bureau above. http://liheap.org/assets/fact_sheets/2014/Alabama_Fact_Sheet_2014.pdf. 8 Data compiled from reports to Congress and statistics from the U.S. Department of Health and Human Services, Administration for Children and Families. http://neada.org/wp-content/uploads/2013/08/CRSLIHEAPProgramRL318651.pdf and http://liheap.org/cms/assets/uploads/2014/05/Alabama-2015.pdf. 9 Supplemental Nutrition Assistance Program. Data from the U.S. Census Bureau, American Fact Finder, Date File DP03 for the years 2007-2013. http://factfinder2.census.gov/faces/nav/jsf/pages/searchresults.xhtml 10 Alabama Power Annual Reports, 2007-2013. http://www.alabamapower.com/about-us/financials.asp. 11 Rates are the amount a utility charges, defined as cost per amount of electricity delivered (typically measured in cents per kilowatt-hour). Bills are the final amount a customer pays based on the rate times the amount of electricity used. 12 Data from the U.S. Energy Information Administration: http://www.eia.gov/electricity/sales_revenue_price/xls/table5_a.xls. 13 Cited data reflect Alabama Powers reported average kilowatt-hour revenue earned per residential, commercial and industrial customer. 14 Increased revenue under Rate CNP Environmental, which allows the company to recover costs and earn a return on investments in environmental controls. 15 The Best Value for Americas Energy Dollar: A National Review of the Cost of Utility Energy Efficiency Programs, American Council for an Energy Efficient Economy, March 2014, http://aceee.org/research-report/u1402 16 ACEEE did not publish an energy efficiency report card in 2007. Alabama ranked 39th in 2013. 17 All data for executive compensation compiled from annual company proxy statements, federal Securities and Exchange Commission

Filing DEF 14C, available online at: http://www.sec.gov/edgar/searchedgar/companysearch.html. 18 Total compensation consists of cash earnings (base salary plus bonus plus non-equity incentives), equity (stock and stock options), and other awards. It does not include the change in pension value. 19 Total compensation includes stock and option awards; salary, bonuses and other cash incentives; and non-cash benefits. It does not

include increases in the value of individual pension plans. 20 For consistency, calculations of CEO pay do not include pay for Mark Crosswhite, who took over as CEO of Alabama Power in March 2014. They only include data for Charles McCrary, who retired in March 2014, but was compensated for the entire year of work. 21 http://www.psc.state.al.us/News/ComHist.html 22 Revised in 2013 by the PSC, the formula used to calculate Alabama Powers allowed profit is called weighted cost of equity. Alabama Powers ROE, according to annual reports, was: 13.73% in 2007, 13.3% in 2008, 13.27% in 2009, 13.31% in 2010, 13.19% in 2011, 13.1% in 2012, 13.07% in 2013, and back up to 13.52% in 2014. 23 Southern's Moat Still Strong Despite Regulatory Concerns, Morningstar, Nov. 1, 2013, http://news.morningstar.com/articlenet/article.aspx?id=617525 24 http://www.psc.state.al.us/Cavanaugh/PressRelease08-13-2013.pdf 25 Fitch Rates Alabama Power Senior Notes 'A+'; Outlook Stable, Business Wire, Dec. 4, 2013; http://www.businesswire.com/news/home/20131204006108/en/Fitch-Rates-Alabama-Power-Senior-Notes-Outlook#.U2QQJ61dUV8

Founded in 1969, Greater Birmingham Ministries is a multi-faith, multi-racial organization that provides

emergency services for people in need and engages the poor and the non-poor in systemic change efforts to

build a strong, supportive, engaged community and pursue a more just society for all people.

what public service?

Documents

actual public service

alabama power customers

utility bills

harm alabama families

greater birmingham ministries

wellconnected utility

utility profits

excessive utility rates