March 24, 1975
Page 8391
SURVEY RULES HUGE UTILITY RATE HIKES
Mr. MUSKIE. Mr. President, we have seen a lot of protests recently by consumers outraged at enormous increases in their utility bills.
A survey of State regulatory commissions released today by my Subcommittee on Intergovernmental Relations and Senator METCALF's Subcommittee on Reports, Accounting and Management tells us why.
That survey shows that fuel adjustment clause rate increases granted to electric and gas utilities cost American consumers an estimated $6.5 billion during 1974, more than the total rate increases approved in the previous quarter century.
Those fuel adjustment increases requested the bulk of nearly $10 billion in rate increases granted to utilities last year, our survey revealed.
As Senator METCALF and I said in a joint statement releasing the survey:
It is unlikely that even the strongest supporter of the fuel adjustment clause ever envisioned such an enormous cost increase – $6.5 billion – in a single year.
Although some states require previous public hearings before fuel cost increases can be added to utility bills, in most cases the cost pass-through is not subject to prior review.
Mr. President, the unforeseen effect on rates of the fuel adjustment clause during 1974 poses a serious problem of huge rate increases for which there is little or no public accountability.
The dramatic findings of our survey underscore the need for a careful review of automatic adjustment clauses.
Our subcommittees will begin their review on April 14, 15, and 17 when we launch hearings on title VII of S. 595, the President's omnibus energy bill.
As we begin those hearings, we are concerned that the impact of the President's proposal would be a further weakening of utility rate regulation and a broadening of the use of automatic cost adjustment clauses.
We intend in those hearings to examine carefully the rationale behind the President's proposal and the impact they will have on the consumer.
We will hear testimony from administrative officials, State utility commissioners, consumer groups, representatives of the utilities industry, and other experts at those hearings. In addition, we encourage interested parties throughout the country to send written testimony to our subcommittees for inclusion in the hearing record.
Mr. President, we have conducted similar surveys in 1969, 1970, and 1971. But never before have the results been as dramatic as this one. I ask unanimous consent that a copy of the survey and the accompanying analysis prepared by Douglas N. Jones and Susan Dovell of the
Congressional Research Service, be printed in the RECORD.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
FUEL ADJUSTMENT CLAUSE ACTIONS IN THE ELECTRIC AND GAS UTILITY INDUSTRIES, 1973-74: A STATE-BY-STATE STATISTICAL ANALYSIS
(By Douglas N. Jones and Susan Dovell)
INTRODUCTION BY SENATORS EDMUND S. MUSKIE AND LEE METCALF
Last November, we asked State regulatory commissions to provide our subcommittees with information on electric and gas utility rate increases granted and pending. This query was similar to surveys we conducted in 1969, 1970, and 1971.
In addition to the data on rate increases, this time we asked the commissions to provide us with information on the increases attributable to fuel adjustment clauses (FAC). This information is of special importance. It is through the operation of fuel adjustment clauses that utilities are allowed to pass through to consumers increased fuel costs without commission review.
Although the use of FAC in utility tariffs has become widespread in recent years, no comprehensive data on the impact of fuel adjustment clauses has been compiled previously.
Twenty-nine of the commissions responding had fuel adjustment clauses which were generally automatic. Four – California, Florida, New Jersey and Wyoming – reported their fuel adjustment clauses require hearings before the increases can take effect. Four other responding commissions – in Oregon, Washington, Montana, and Idaho – did not have fuel adjustment clauses.
MAGNITUDE OF THE INCREASE
The survey documents what consumers already know. Utility bills have increased enormously in the past year, although consumption of electric power increased less than one percent and consumption of natural gas actually decreased 4.2 percent.
By any measure, the magnitude of the utility rate increases during 1974 was enormous. In fact, during last year alone, consumers paid more than one and a half times as much to cover utility rate increases as they did over the entire previous quarter-century. From 1948 to 1973 the increases granted electric and gas utilities by state and local jurisdictions totaled $6 billion, according to a recent report by the utility rate department of Ebasco Services, Inc. of New York.
As of March 1, 1975, thirty-seven commissions responded. The data they submitted was analyzed by the Congressional Research Service, Library of Congress. The analysis was done by Dr. Douglas N. Jones and Susan Dovell of the Economics Division.
Data submitted by the commissions covered the first ten months – in some cases eleven months – of 1974. On the basis of the response from about three fourths of the commissions – which were generally representative of the various states regarding size, geographic location and economic activity – CRS estimated the amount of the general rate and FAC increases in the nation as a whole during the entire year.
Most of the energy corporations regulated by State commissions are investor-owned utilities (IOUs). In many states, municipal power systems, public utility districts and privately-owned rural electric cooperatives are not regulated by the commissions. Rate increases by those systems which are not regulated by and do not report to the State commissions are not included in this data. They account for about one-fifth of the retail sales of electricity and six percent of the retail sales of natural gas.
FINDINGS
The survey found that electric and gas utility bills increased nearly $10 billion last year – two- thirds because of fuel adjustment clauses – and that more increases are probably on the way.
The major findings of the survey are:
1. The general rate increase and increase due to the fuel adjustment clause totaled $9.6 billion. This figure was projected from the $6.6 billion reported by the 37 state commissions responding to the survey.
2. More than $3 billion in general rate increase requests were pending before the commissions which responded. Historically, commissions have granted about two-thirds of rate increase requests.
3. Four-fifths of the increased rates were for electricity, the rest for natural gas.
4. Two-thirds of the increases resulted from higher fuel costs passed through to consumers because of fuel adjustment clauses.
5. The rate increase because of fuel adjustment clauses – $6.5 billion in 1974 – was more than four times as large as the increase of $1.5 billion in 1973 because of the same clauses.
6. In many states, rate increases because of fuel adjustment clauses were even more dramatic. For example, the 1974 increases over 1973 were 1,400 percent in the District of Columbia, 900 percent in New York, 750 percent in Maine and Tennessee, more than 500 percent in Florida, Maryland and Michigan and more than 300 percent in California, Connecticut, Indiana, West Virginia and Wisconsin.
7. General rate and fuel adjustment increases granted during the 10-11 month survey period $100 million in 12 of the 37 reporting jurisdictions. They are (amount of fuel adjustment increase in parentheses)
8. Twenty-nine of the commissions responding had fuel adjustment clauses which were generally automatic. Four – California, Florida, New Jersey and Wyoming – reported their fuel adjustment clauses require hearings before the increases can take effect. Four other responding commissions – in Oregon, Washington, Montana, and Idaho – did not have fuel adjustment clauses.
MAGNITUDE OF THE INCREASE
The survey documents what consumers already know. Utility bills have increased enormously in the past year, although consumption of electric power increased less than one percent and consumption of natural gas actually decreased 4.2 percent.
By any measure, the magnitude of the utility rate increases during 1974 was enormous. In fact, during last year alone, consumers paid more than one and a half times as much to cover utility rate increases as they did over the entire previous quarter-century. From 1948 to 1973 the increases granted electric and gas utilities by state and local jurisdictions totaled $6 billion, according to a recent report by the utility rate department of Ebasco Services, Inc. of New York.
In 1970, for example, Ebasco Services, Inc. reports that the national total of electric and natural gas rate increases was $660 million. In the first 10 or 11 months of 1974 seven states – California, Florida, Illinois, Michigan, New Jersey, New York, and Pennsylvania – had rate increases which each exceeded the national total for 1970.
The 1974 increase and pending requests amounted to almost one percent of our gross national product, and as a result was a significant contribution to inflation.
Since some two-thirds of the 1974 increase was due to the fuel adjustment clause, we must consider its total effects.
Adjustment clauses for fuel and other costs, such as taxes, have been available to some utilities for decades. However, 125 gas and electric utilities began using fuel adjustment clauses during the '70's, 63 of them in 1974 alone.
One important – and ultimate – effect is that fuel adjustment clauses remove much of the incentive to operate more efficiently and control costs. They encourage use of fuels covered by the clause and construction of plants burning those fuels, and thus discourage development of alternative energy sources. They move the major component of operating expenses – fuel costs – from rate case proceedings where the utility is subject to cross-examination by commission staffs and protestants. And there is mounting evidence that some utilities are adding improper charges to the fuel adjustment clauses.
For example, coal from Appalachian Power's captive mine has been marked up in price for FAC purposes. The West Virginia Public Service Commission found that the utility, a subsidiary of American Electric Power, obtained more than $2 million by this method during the first nine months of last year. In Connecticut an obsolescent efficiency factor in the fuel clause used by United Illuminating cost consumers an estimated $7 million annually.
Ohio Edison chose to buy high-priced spot market coal rather than enforce its contract with a supplier who had agreed to provide coal at a lesser cost. Transportation expenses were found included in Virginia Electric and Power's fuel adjustment clause. The Peoples Counsel of the Maryland Public Service Commission has charged that Potomac Electric and Power Company included 17 extraneous items, including executive salaries, in its fuel adjustment clause.
Until now only partial data regarding utility rate increases have been available. The data published by the Federal Power Commission and industry sources deal only with the one third attributable to general rate increases and omit FAC increases, which are twice the size of the previously-publicized general rate increases. This is an unjustifiable omission.
The collection of data on energy companies by government agencies is an imperfect art. Statistics regarding gas utility profitability are especially difficult to obtain. The FPC has not yet published its 1973 statistics on electric utilities. The 1974 annual reports of electric utilities to the FPC have not yet been filed and it is not possible at this time to determine the rate of return for the industry for 1974. However, for the year ending in October 1974, at the net income of investor-owned electric utilities increased 6.4%. Their dividends declared on common stock increased 6.4%. Their dividends on preferred stock increased 20%. Twenty six major IOUs have announced increases in dividends since July 1974.
This lack of information must be viewed in light of the huge cost increases of 1974 and the President's proposal for further weakening of utility rate regulation.
The cost increase in 1974 represents a major new investment – paid for dearly by consumers – in the utilities industry. Yet there is too little accountability for this new investment.
It is unlikely that even the strongest supporter of the fuel adjustment clause ever envisioned such an enormous cost increase – $6.5 billion – in a single year. Although some states require previous public hearings before fuel cost increases can be added to utility bills, in most cases the cost pass-through is not subject to prior review.
The clause was developed to relieve the problem of "regulatory lag" caused by lengthy rate increase consideration. But its unforeseen effect on rates in 1974 poses a serious problem of huge rate increases for which there is little or no public accountability. As the public already knows, it is much harder to roll back prices than to stop their increase before it occurs.
The President in Title VII of S. 594, the Omnibus Energy Bill, has not faced this problem. Instead, he proposes broadening rate escalators. His proposal would:
Require the use of fuel adjustment clauses by all regulatory commissions, not just those which already have them;
Require state regulatory commissions to put rate increases into effect five months after they were requested;
Require federal and state regulators to include construction work in progress and pollution control equipment in the rate base.
Because regulatory commissions typically allow a certain percentage of return on a utility's rate base, the effect of addition to the rate base, such as the President has proposed, is to decrease the rate of return, or to permit the utility to obtain additional revenue for the rate of return to remain the same. The electric utilities' rate of return in 1972 and 1973 reached an all-time high. This is despite the fact that in 1970 and 1971 the FPC permitted R & D expenditures and land held for future use to be included in the rate base, thus permitting higher earnings at a constant rate of return. Earlier this year, the Congressional Research Service estimated that including construction work in progress in the rate base would cost utility customers some $5 billion a year.
The five-month deadline for regulatory commission action on rate increase requests would severely affect many States. Typically, small States and many large States have few resources available to thoroughly review rate increase requests. With only five months to act, customers often would have imposed on them cost increases that were not thoroughly reviewed and may be unjustified.
Overall, the President's proposal would add another 20 percent to utility customers costs, according to the National Association of Regulatory Utility Commissioners.
The President's proposal is simply not justified by the evidence we have today. In his haste to help utilities solve their financial problems – many of them unrelated to fuel costs – he proposes new and uncontrollable financial burdens on the American public.
Instead of embarking precipitately on a major abandonment of State regulation, we must know much more about the operation and effect of the fuel adjustment clause. Has it been abused widely? Has it or will it contribute to an adequate or too-generous rate of return? At this point, we do not know.
Clearly, the enormous rate increases of 1974 pose a major problem in public policy. They cannot be solved with precipitous solutions, such as the President proposes.
If it is assumed that the ratio of amounts granted to amounts requested continues to be 2/3, then an additional $3.6 billion of pending general rate increases would be granted (2/3 of $5.4). This added to the $3.1 "already granted" would bring the general rate increase total based on 1974 data to $6.7. Adding this to the extrapolated fuel adjustment charge total increases ($6.5) results in a final figure from 1974 data at $13.2 billion. While not an annual rate (since the granting of some pending rate increases will take place in 1975), it is the likely aggregate outcome of requests originating in 1974. That sum ($13.2 billion) is of the order of magnitude of 1 % of 1974 GNP, and can therefore be regarded as contributing an increment of almost one percentage point to the inflation rate. To the extent that the higher energy costs induce a reduction in energy use the inflationary influence would be lessened but the depressive economic impact would be intensified to the same degree.
Source: Economics Division, CRS study data, "Fuel Adjustment Clause Actions in the Electric and Gas Utility Industries, 1973-1974: A State-by-State Statistical Analysis," by Douglas N. Jones and Susan Dovell, March 4.1975.
FUEL ADJUSTMENT CLAUSE ACTIONS IN THE ELECTRIC AND GAS UTILITY INDUSTRIES, 1973-74
I. Introduction
Probably the three biggest public policy issues in the electric power field today are the financing of new capital investment, the efficacy of declining block rate pricing in utility company tariff schedules, and the operations of so-called Automatic Adjustment Clauses – most particularly the Fuel Adjustment Clause (FAC). This report deals with this last issue and is based largely on data gathered from a questionnaire sent to the fifty state regulatory bodies plus the District of Columbia.
Recall that definitionally an AAC is a provision in a utility company's rate schedule which allows a change in a particular cost item to be automatically (i.e., without commission hearings) reflected in the rates charged customers. By far the most common and now most burdensome AAC is that on fuel cost changes, though utility companies continue to propose other AAC's for changes in labor, taxes, interest, and other costs of doing business. Cases on the subject date back to World War I, but the introduction of AAC's into the public utility sectors was generally resisted until after World War II. Even after that time (and until quite recent years) FAC's were generally limited to industrial rate schedules and did not apply widely to residential consumers.
That has now changed and nearly all states have AAC's and FACs in one form or another with the blessing of the Federal Power Commission (though not the Federal Communications Commission in their jurisdiction). The main purpose of an AAC is to reduce so-called "regulatory lag" during periods when costs are rising rapidly: the main objection is that such arrangements may be incompatible with vigorous and effective rate regulations in the public interest.
In November 1974, Chairman Muskie and Metcalf of the Subcommittee on Intergovernmental Relations and Subcommittee on Budgeting, Management and Expenditures (Subcommittee name changed to Reports, Accounting and Management at the beginning of the 94th Congress), respectively, of the Senate Government Operations Committee sent a joint letter to the State regulatory commissions (as mentioned) with an accompanying questionnaire. (A sample letter and questionnaire appear as Appendix A.) Covering roughly the period since the oil embargo the data sought were on four aspects of electric and gas utility customer rate increases: rate increases requested and granted; rate increases pending; increases attributable to the existence the fuel adjustment clauses; and commission oversight regarding the operation of FAC's. In addition some data on the rate of return for utilities within their jurisdiction and the relating of FAC revenue increases to kilowatt hour costs were requested. By March 1, 1975, responses were received from 37 commissions. These detailed data by state by utility company appear in Working Tables V-VII as Appendix B. II.
[Tables omitted]
Summary and interpretation of responses.
Compilation of the data in the seven tables contained in this report is, so far as is known not elsewhere to be found. Neither the Federal Power Commission nor anyone else has collected comprehensive economic data on the results of FAC workings 1973-1974 in the electric power industry, though the steep rise in customer monthly electric bills over this period was widely complained of. A 73 % response to the questionnaire is, of course, a very respectable statistical return.
Table I presents electric utility general rate increases requested, granted, and pending by state for the 37 responding jurisdictions. Here we find that during 1974 $2.352 billion in general rate increases (for those reporting) was requested of which $1.681 billion was granted. Pending at this writing is $2.647 billion more in increases. The corresponding figures for the gas utilities are presented in Table 11 – $672 million requested, $505 million granted, and $979 million pending.
Since there was no discernible pattern to states not responding (e.g., size, geographic location, economic activity), it seems fair to extrapolate from these figures to get orders of magnitude for general rate increases for the nation as a whole. This would bring the totals for the electric utility industry to $2.987 billion requested, $2.135 billion granted, and $3.362 billion pending. For gas utilities the national totals would be $85 million requested, $641 million granted, and $1.234 billion pending.
Table III displays electric utility rate increases (by states responding) attributable to the fuel adjustment clauses for 1973-1974. Note that total revenues for 1973 were $17.566 billion, and that FAC revenues made up $1.069 billion or 6.1 % of that total. For the 10-11 month period of 1974 FAC revenues had more than tripled to $3.828 billion. And this was in a year during which electric power consumption grew by less than one percent. Note too that the FAC revenue figure for 1974 is a billion dollars greater than the amount pending under general rate increases for that year ($3.6 billion vs. $2.6 billion) and two billion dollars greater than the amount granted for general rate increases ($3.6 billion vs. $1.6 billion).
Within the overall totals the percent change in FAC revenues for individual states 1974 over 1973 was often still more dramatic, e.g., over 1400 % for the District of Columbia, 900% for New York, 750% for Maine and Tennessee, and over 500 % for Florida, Maryland, and Michigan (Column 5, Table III).
Finally, if the FAC revenues for 1974 are proportionately larger for the 14 commissions that did not reply, the national total would be $4.608 billion. These are large numbers indeed: recall for comparison that the first-round effect of the new foreign oil prices for that period was a dollar outflow of perhaps $18 billion.
Table IV contains the same information for gas utility rate increases through fuel adjustment clauses. Total revenues reported were $5.813 billion for 1973 with FAC revenues comprising 8.7% of that total or $504 million. In 1974 FAC revenues jumped over 50% from 1973 to $762 million (Column 5). Here again the change for individual states varied a great deal with Connecticut showing a 5700% increase, the District of Columbia a 600% rise, and Michigan a 400% jump. Extrapolated proportionately to a total for the nation the new FAC revenue figure would be $981 million.
While not estimated here, it is worth pointing out that since only a 10-month period was covered in most returns from the questionnaire in the matter of FAC revenues for 1974 these totals for both the electric and gas utilities could be increased by, say, 20% in order to get a year long total (assuming that the remaining two months of 1974 would see the granting and operation of the same proportion of FAC generated revenues).
For ready reference to state-by-state data regarding the above discussion, summary tables of Working Tables V-VII have been provided in the appendix at the end of each table.
Substantial (though less complete) data from the questionnaire were gathered on the rates of return of electric and gas utilities throughout the country and the effect in cents per kilowatt hour and cents per therm of FAC actions. While difficult to summarize (the actual data are found in Appendix B, Tables V-VII), several points can be made.
The allowable rate of return for utilities requesting and granted rate increases in 1974 ranged from a few in the 5%-and-below level to a few in the 10%-and-above level with most in the 8-to-10% level of earnings. Where reported, the actual rate of return in 1974 was below the allowable rate more often than not (Table V).
With respect to those companies with rate increases pending before state utility commissions the picture is somewhat different (Table VI). The requested rate of return is, of course, almost invariably higher than the allowed rate of return with the difference often as much as two percentage points higher and in at least one case 4½ percentage points higher. Nor should these numbers be thought to be of little significance when it is recalled that a change from an 8% rate of return to a 10% rate of return is a 25% increase of earnings.
Not surprisingly when FAC revenue data are translated into kilowatt hour and therm costs for 1973 and 1974 the results show a similar pattern to that discussed. This is to say that frequent examples abound of an FAC making up a half to a full cent/kilowatt hour on electric operating revenues of, say 3.5 cents/kilowatt hour sold. Further the change between 1973 and October 1974 as to the unit cost of electric and gas utility operations attributable to FAC's is dramatic (Table VII). Data for utility companies in New York, Pennsylvania, Connecticut, Maryland, Michigan, and West Virginia are cases in point. Five and ten-fold increases have been common in this comparison with most at least doubling or tripling.
Whether or not 1975 sees a continuation of these changes remains to be seen.
Some qualifications to FAC's
The temptation is to lump all fuel adjustment clauses together when discussing generally their consequences to consumers and the regulatory process. This, however, would be to miss certain distinctions that may alter those consequences state to state.
A few commissions say they allow no FAC's in the tariffs of regulated utilities – Minnesota, Oregon, Washington, Montana, Idaho. Still others don't regulate at all – Nebraska, and South Dakota. A number of states – California, Florida, New Jersey, Wyoming – say they do have fuel adjustment clauses, but they are not automatic and hearings must be held.
Even in those states where FAC's are automatic, differences in their operation are to be found. Many have monthly commission reviews, some reviewing electric utilities only and some electric and gas utilities. Some have no automatic FAC on gas; only on electric. Some allow tracking increases in the case of gas utilities buying from distributors; some give only REA electrics an automatic purchased power cost adjustment. One state (Connecticut) requires that hearings be held when the charges under FAC's reach 20% of total monthly charges billed. As noted earlier, most FAC's are of recent origins, but some date from before 1920, a few from the 1940's, more from the 1950's, and most since 1970.
All this is merely to say that while the existence of FAC's in utility company tariffs has become extremely widespread, they should not be thought of as universal or uniform.
Postscript
The immediate occasion for the renewed debate over automatic adjustment charges is amply illustrated by this study – the frequency of appearance of automatic fuel adjustment clauses in utility rate schedules and the force of their impact on the rate paying public. It is doubtful whether the strongest supporter of FAC's ever contemplated that some $4.5 billion in electric power rates and another billion dollars in gas utility rates would be passed through to consumers in a single year's operation. How much of this total would have been approved had full and formal state regulatory commission hearings been held will always remain an open question. But the difference between that phantom figure and the known numbers that resulted from this study is one measure of the cost to the public of the functioning of automatic adjustment clauses outside normal commission proceedings.
APPENDIX A
NOVEMBER 19, 1974.
Mr. ARCHIE SMITH,
Chairman,
Rhode Island Public Utilities Commission,
Providence, R.I.
Dear Mr. SMITH: With last winter's energy crisis and our continuing national concern with the cost and supply of energy, the activities of State Regulatory Commissions have become more critical and increasingly subject to public scrutiny. In every State, the regulatory Commission have had to make the difficult decisions that maintain the careful balance between the needs of the utilities and the interest of consumers.
The Subcommittee on Intergovernmental Relations is vitally interested in the role of State Regulatory Commissions and has, in past years, collected and maintained information useful to the Subcommittee in fulfilling its responsibility to study State governments and consider legislation which affects their activities.
So that we might continue to utilize this important information and further understand the role and activities of the State Commission which you head, we would appreciate it very much if you would complete the enclosed questionnaire as it applies to energy utilities.
It would be most helpful if you could return the completed questionnaire to the subcommittee by the close of business on December 1, 1974. If you have any questions or difficulties regarding the questionnaire, please call David Johnson, Counsel to the Subcommittee on Intergovernmental Relations at 202/224-4718.
Thank you very much for your assistance in this important matter.
With best wishes,
Sincerely,
EDMUND S. MUSKIE,
Chairman, Subcommittee on Intergovernmental Relations.
LEE METCALF,
Chairman, Subcommittee on Budgeting, Management and Expenditures.