Utilities Seek Round of Rate Increases

By REBECCA SMITH Face with declining electricity sales and growing demands to invest in their power networks, utilities across the nation have launched a round of rate-increase requests that would raise bills for millions of consumers in the coming year. The last big rate increases, in the middle of the decade, mostly stemmed from higher prices for natural gas and coal -- fuels used to make electricity. This time, fuel costs are low but utilities are investing more money in their electricity networks, even as many utilities have reported sharp drops in electricity sales this year. In some cases, utilities are aiming to beef up the current, lower-voltage distribution system so it can handle more stresses -- like the kind expected from the charging needs of electric vehicles, which will begin entering the market next year. "Smart grid" spending is on the upswing, too, as utilities install millions of advanced digital meters on homes. "Utilities are playing catch-up" and putting more money into their distribution systems, which often have been a lower-margin part of the business, said Jim Robb, a senior vice president at Northeast Utilities System of Hartford, Conn. His company recently filed a rate case for Public Service of New Hampshire and likely will file a case for Connecticut Power & Light before the end of the year, Mr. Robb said. Pension obligations are another weight on the sector. Moody's Investors Service estimated that the industry faced as much as $40 billion in underfunded pension obligations at the end of 2008. Moody's warned in a recent report that rate increases stemming from increased utility spending could result in consumer pushback, as electric utility costs rise from the 3.5% of disposable household income they represent today to 5% to 10% of disposable income. Moody's said it is waiting for "the theoretical inflection point beyond which consumers will no longer tolerate annual rate increases without protest." The Energy Information Administration, in a report issued Wednesday, said retail electricity prices now exceed 10 cents a kilowatt hour in the U.S. The average price was 11.63 cents for residential customers, who pay the most, for the eight-month period ended in August. That compared with an average U.S. residential power cost of 11.36 cents for 2008, 10.65 cents for 2007 and 6.6 cents for 1999, a decade earlier. Xcel Energy Inc. recently got approval to increase rates $91 million a year in Minnesota, about two-thirds of the increase it had sought. It still has rate cases pending in South Dakota, Wisconsin and Colorado of roughly 10%, 5.6% and 6%, respectively. Xcel Energy recently reached agreement with staff of the Colorado Public Utilities Commission in the Colorado case which, if approved, would provide a $136 million annual increase, somewhat less than the $180 million increase, about 8%, it had sought. If the settlement is approved, it would lift residential bills by $4.66 a month and small-business bills by $7.16 a month. Duke Energy Corp. reached a settlement in South Carolina Nov. 24 in a case that would provide an overall 5.2% rate increase next February, if approved by state regulators. It would include more spending on energy-efficiency programs and higher pension contributions. Duke customers in North Carolina would see utility bills rise as much as 8.7% by 2012, if a rate settlement reached in that state is approved by regulators. For residential customers, it would consist of increases of 4.3% next year, 3.3% in 2011 and 1.1% in 2012. Industrial users would see costs jump the next-highest amount, or 8.2%, over that same period. Pepco Holdings Inc. has rate cases pending in Delaware, Maryland, New Jersey and the District of Columbia. Requested rate increases for residential customers range from 2.6% for Delmarva in Maryland to 6.1% for Potomac Electric Co. in Washington. In addition to increasing revenues to cover such things as higher pension costs and losses from delinquent accounts, the utility is trying to get "decoupling" provisions in place that make its revenues less sensitive to fluctuating power sales. Mark Browning, director of rates at Pepco Holdings, said the mechanisms differ but all meet the utility's objective "to be able to push conservation and help customers reduce energy use" without seeing earnings decimated. In general, utilities are seeking returns on equity of 10.5% to 11.5%. Write to Rebecca Smith at rebecca.smith@wsj.com