‘Average’ customer’s bill would increase by $11/month
TULSA – Public Service Co. of Oklahoma (PSO) filed an application with the Oklahoma Corporation Commission on April 30 to update its prices in order to recoup approximately $700 million in new investments.
The adjustment is needed to reflect the costs of securing and transforming the electric grid, meeting federal environmental requirements, and serving its customers, company executives said.
PSO’s new investments, part of the company’s grid Security, Transformation and Efficiency Plan (STEP), are already in service and providing benefits to customers but are not included in current prices, said Stan Whiteford, PSO’s region communications manager.
PSO’s current rates have been in effect for a little over two years, since March 2019.
The requested rate hike is based on a “test year”: the company’s experience during calendar year 2020, when PSO’s rate of return on its rate base was 7.33%.
STEP, company executives said, is designed to 1) strengthen the electric grid, resulting in fewer and shorter power outages; 2) result in cleaner air and greater use of efficient and environmentally friendly power sources like low-cost natural gas and Oklahoma wind energy; and 3) provide new programs and offer customers new service options and integrate technology.
PSO’s application includes a request to boost the company’s annual revenue requirement by $172.4 million, or about 10.67% overall, to reflect new investments and increased costs.
This would increase electricity prices for the typical residential customer by just over 1 cent per kilowatt-hour, or approximately $11 per month, on average. A typical residential customer uses 1,100 kWh of electricity a month, Whiteford told the Ledger last December.
Company officials said that, if approved, the new rates would remain competitive with state and regional averages and approximately 24% below the national average.
Costs to comply with federal environmental requirements constitute approximately one third of the requested increase. The remainder of the costs are associated with transforming and securing the grid, integrating technology, and maintaining and improving system performance in extreme weather, said Peggy Simmons, PSO president and chief operating officer.
For example, Therace Risch, senior vice president, chief information and technology officer for American Electric Power Service Corp., said the total amount of information technology-related capital included in PSO’s rate base since its last case in 2018 is $65.33 million. AEPSC is a wholly owned subsidiary of American Electric Power Co. (AEP), the parent company of PSO.
‘DECARBONIZING,’ MODERNIZING
Matthew Horeled, PSO’s vice president of Regulatory and Finance, said the “driving forces” behind the company’s request for a change in its base rates include measures to “decarbonize” its grid and modernize its system through advanced metering infrastructure.
PSO is investing $908 million in three new Oklahoma wind farms in western Oklahoma that will provide clean, renewable energy.
Wind power already produces 22% of the energy PSO delivers to its customers, Whiteford said. When all three new wind farms go online by early next year, wind power will generate 34% of the energy PSO delivers, he said.
PSO and its partners retired the Oklaunion 650-megawatt coal-fired power plant located outside of Vernon, Texas, last fall.
And PSO has announced it intends to shut down the No. 3 unit at the company’s Northeastern power plant at Oologah in 2026 as part of a settlement with the U.S. Environmental Protection Agency, the Oklahoma Department of Environmental Quality, the U.S. Justice Department, and the state Secretary for the Environment. That will put PSO in compliance with the federal Regional Haze Rule and with the Mercury and Air toxics Standard rules enacted as part of the federal Clean Air Act.
In a related matter, PSO’s parent company, AEP, announced on April 22 that it would close its Rockport Plant in southwest Indiana – one of the 10 largest coal-fired power plants in the U.S. – by 2028. Nick Akins, AEP’s chairman, president and CEO, said in a conference call that the company may close the plant even sooner, depending on market conditions.
Coal-fired power plants had an average “capacity factor” in 2011 of 63%, which means they were running at nearly two-thirds of the maximum that is technically possible. The average plunged to 40% last year, with many plants sitting idle for much of the time as their owners chose to use less expensive options.
Of the 10 largest coal plants, ranked by generating capacity, the one that used the least, with a capacity factor of 18%, is Rockport.
Coal has more than double the emissions of natural gas per unit of electricity generated from burning the fuels. Nuclear power and renewables such as solar and wind have zero emissions, but nuclear and wind operations do have serious issues with disposal of wind turbines and the cooling water and fuel rods from nuclear plants.
PSO’s TAXES IN RATE BASE
PSO’s local, state and federal taxes are incorporated into the company’s rate base.
Income taxes have grown “due to the tax effect of the increased level of rate base,” and PSO’s property taxes have increased “due to higher levels of taxable plant,” Horeled said.
That’s because companies have a constitutional right “to the opportunity to earn a fair return, and taxes are part of every business’s cost to operate,” explained Brandy Wreath, director of the Corporation Commission’s Public Utility Division. Investor-owned utilities such as PSO are for-profit companies, and failure to include taxes in their calculations “would be the equivalent of a violation of the ‘takings clause’,” Wreath said.
The “takings clause” of the Fifth Amendment to the United States Constitution decrees, “Nor shall private property be taken for public use, without just compensation.”
INDUSTRY USAGE DOWN, RESIDENTIAL UP
The coronavirus pandemic that moved into Oklahoma in March 2020 affected PSO, too, Horeled related: Commercial and industrial load decreased while residential load increased, he said.
After PSO’s last rate case, which was decided in 2018, industry became the company’s largest customer class. However, the public health crisis and its accompanying recession “caused a dramatic decline in commercial and industrial class electricity sales that was partially offset by a significant increase in residential sales,” said Chad Burnett, director of economic forecasting for AEPSC.
When businesses closed, consumption in the commercial sector dropped but consumption in the residential sector increased as Oklahomans “spent more times in their homes,” Burnett wrote.
PSO’s retail load declined by 2.7% in 2020, “which was the worst year for load growth since 2009,” Burnett said.
PSO shed some debt in recent years, Horeled pointed out. In the test year that ended March 31, 2018, the company’s capitalization consisted of 51.86% long-term debt and 48.14% common equity. By Dec. 31, 2020, the end of the company’s latest test year, capitalization consisted of 46.95% long-term debt and 53.05% common equity.
PSO’s cash flows “have been under pressure in recent years,” in part because of the company’s inability to accelerate recovery associated with retirement last year of the Oklaunion coal-fired power plant near Vernon, Texas.
To mitigate the negative impacts on its cash flows, PSO lowered its dividend to $11.3 million in 2019 and to $0.00 in 2020, Horeled related. PSO’s senior unsecured debt rating by Standard & Poor’s and by Fitch is A-.
ECONOMIC DEVELOPMENT RATE PROPOSED
PSO wants the Corporation Commission to endorse the company’s request to include an economic development rate (EDR) in its latest application.
When a company is considering where to locate, “it considers many factors, including local utility rates, labor force availability, local tax rates, and other factors that are important to a particular business,” Burnett noted.
Oklahoma Gas & Electric Co., Liberty Utilities, Entergy and Southwest Electric Power Co., which cover areas in Oklahoma, Arkansas, Louisiana, Kansas, Missouri, and the regulated portion of Texas, “all have economic development rates,” which “puts PSO at a competitive disadvantage,” Burnett wrote.
PSO’s EDR would provide a limited term credit to its billing demand charges during the first 36 months of operations, Burnett explained.
The company’s EDR would provide a slightly bigger incentive for larger employers (those that would bring 100 or more jobs to the service territory).
PSO’s economic development rate is designed for customers “whose operations will promote sustained economic development and job creation,” Burnett said. It is available only to customers who have already been offered and accepted an incentive by a local, regional, or state economic development agency to locate a new facility, or expand existing facilities, he said.
The customer:
• must agree to a minimum of seven years in its contract for electric service;
• if a new customer, must have a demand of 1,000 kilowatts or more;
• if an existing customer, must increase demand by 1,000 kW or more;
• a new customer or expansion must create at least 15 full-time-equivalent jobs maintained over the term of the contract;
• demonstrate to the company that “absent the availability of the EDR,” the qualifying expansion or new load would be located outside of PSO’s service territory or would not happen at all.
DISTRIBUTION SYSTEM EXPENSES LISTED
PSO is an electric utility company serving more than 562,000 customer accounts in 232 cities and town across 30,000 square miles of eastern and southwestern Oklahoma, said Steven F. Baker, vice president of PSO’s Distribution Operations.
The company reports it has 484,000 residential, 64,000 commercial, 6,800 industrial, and 8,300 other customers.
Distribution Operations has three districts – Lawton, Tulsa and McAlester – and is staffed by approximately 460 employees and about 600 contract employees, Baker said.
During the “test year” of 2020, the year that is cited to justify the latest rate increase, PSO’s operation and maintenance expenses for distribution activities were $83.38 million, roughly equivalent to O&M expenses in the two preceding years, Baker informed the Corporation Commission. The 2020 expenses included:
• $4 million in meter expenses plus $310,633 for maintenance of meters;
• $3.3 million in overhead line costs;
• $3.9 million in underground line expenses plus $1.8 million for maintenance of underground lines
• almost $130,000 for maintenance of line transformers;
• $43,490 in street lighting and signal system expenses plus $72,268 for maintenance of street lighting and signal systems;
• $10 million in miscellaneous distribution costs;
• $1.5 million for maintenance of station equipment;
• $50 million for maintenance of overhead lines, much of that for right-of-way clearance and herbicide spraying.
The “vegetation management” program is “paramount in preventing [power] outages…” Baker said. Other activities in that maintenance category include various inspection programs for poles, cross arms, conductor, fuse cutouts, lightning arrestors, regulators and reclosers, he said. Those inspection programs help PSO to “identify the distribution infrastructure that is in need of replacement,” Baker said. “This proactive approach allows PSO to replace equipment before failure…”
PSO invested approximately $462 million in its distribution system between Oct. 1, 2018, through Dec. 31, 2020, ledgers reflect.
Asset improvement expenses included nearly $133 million for tools and software that were used to implement cyber security for protection of the utility communication infrastructure, Baker wrote.
Capital projects completed during service restoration after unplanned events included replacing power poles, re-conductoring full-length spans – such as the 7,620-volt electric line in Lawton that PSO contractors upgraded last month north of Gore Boulevard along 7th Street to the alley between Euclid and Ferris, then east to 2nd Street – and replacing transformers damaged during a storm or other weather-related event, plus repair of street lights and outdoor area lights. Those costs in 2020 totaled $15.6 million, Baker said.
STORMS, AGING DEGRADATION
PSO experienced several major weather events since its last rate case, including a major storm on May 17, 2019; a thunderstorm and high winds in the Tulsa District on July 11, 2020; and an ice storm in the Lawton and Tulsa Districts on Oct. 26, 2020.
Damages to PSO’s transmission and distribution systems in the ice storm last October included:
• poles replaced due to damage: approximately 250
• cross arms replaced: 713
• downed spans of conductors: 308
• transmission Line outages: 61
• distribution transformers changed out: 63
• damaged conductor replaced: more than 89,000 feet (nearly 17 miles)
• damaged switches/cutouts replaced: 214
PSO has a “significant under-recovered” balance of $27.1 million from storm damages as of Dec. 31, 2020, said Heather M. Whitney, director in Regulatory Accounting Services for AEPSC. PSO has requested that it be allowed to amortize those expenses over three years, she said.
System aging and degradation have “a profound effect on the reliability” of the electric distribution system, Baker reported. “Utilities fight a constant battle against aging and degradation and must devote significant resources to revitalization efforts in order to hold the line on the average condition of the grid components.”
PSO must increase its investments to “revitalize the structural strength of the electric system to offset the effects of equipment aging and degradation,” Baker wrote.