The Utilities Squeeze

...National Reports THE UTILITIES SQUEEZE BY STEVE LAWRENCE Largely as a result of increased fuel costs, the electric rates of the nation's biggest utilities have risen by over 50 per cent m the past year, provoking a storm of consumer protest At the same tune, many power companies have watched their stock prices plummet far below the market average, depressed as it is To add injury to insult, utilities throughout the country have had their traditional triple-A bond ratings slashed to single-A—the difference between paying 9 5 per cent and 11 per cent to borrow in today's tight money market This difficulty of raising capital, combined with the organized opposition of environmentalists, has forced the postponement or cancellation of plans for new power plants In short, the utilities industry is in deep trouble The trouble has been brewing for several years, but it came to a head last April 22, when New York's Consolidated Edison—the nation's largest privately owned power company and a bellwether of the entire industry—skipped a dividend for the first time in its 89-year history "Despite the fact that more than 20 major electric utilities have raised their dividends in the first half of 1974,' financial analyst Richard Toole told the New York Times, "the one negative action by Con Ed has created a new risk in utility investing " Consequently, solid companies like Georgia Power and Philadelphia Electric have been unable to sell stocks or bonds to finance new construction projects Others have had to accept higher interest charges, which they are passing on to their customers Thanks to voluntary conservation induced in part by higher electric bills—many areas have gotten by so fai without expanding capacity Lower consumption, however, is having the perverse effect of further contributing to the rise in rates For aside from fuel, most of the overhead of a utility is fixed, so a decrease in total volume produces an increase in unit cost Thus subscribers are penalized for heeding appeals to "save a watt" On the other hand, if consumers start using more electricity, compelling utilities to build new power plants, rates will go up even higher And if demand reverts to its normal 6-7 per cent annual growth, as most informed observers predict, many companies will be hard pressed to keep up with it Nowhere is this more true than in New York, where Consolidated Edison presents an extreme example of the problems besetting the industry at large Though there seems to be no possibility of reducing the cost of producing electricity in the foreseeable future, there are ways the burden Steve Lawrence, a new contributor, reports on energy and the environment for the New York Post on consumers could be eased For one thing, as Con Ed has begun printing on its monthly bills, 23 per cent of the revenue it collects from customers goes to state and local government in the form of taxes This is the highest rate levied on any power company in the country, yet the New York Legislature boosted utility taxes again in the session that ended last May Similarly, government officials showed no sympathy when Con Ed Vice Chairman Louis Roddis pointed out that subscribers' bills could be chopped 15 per cent if the city and state would forego $70-80 million in one-time windfall fuel sales taxes Of course, lightening the tax load on power companies would mean shifting it somewhere else?to an increased income tax, say which would not be very popular politically But the inherently regressive character of a high tax on electricity raises the question of whether utilities should be so heavily assessed Still, the Legislature did come to the aid of the consumer last spring by allowing the State Power Authority to buy two unfinished Con Ed power plants—a nuclear generator at Buchanan, New York, and an oil-fired faculty in Queens—for $500 million This relieved the company's cash squeeze and saved its customers the expense of borrowing another $300 million to complete the projects The state will float a bond issue to cover the costs, and will sell the electricity produced back to Con Ed Public financing has long been advocated by many utility experts as a way to sharply cut rates Government-owned power companies can obtain capital at about half the interest charged privately owned corporations, they are usually exempt from property taxes, and they pass along any profits to subscribers According to the Federal Power Commission, public utilities are also more efficient, spending some 6 per cent less on operating expenses than their private counterparts All this, the FPC estimates, makes public power about 33 per cent cheaper tor residential customers and 16 per cent cheaper for industry and businesses With Con Ed now reporting more than $5 billion m assets and pouring over $400 million into government treasuries annually, the state is not about to purchase the entire company But the arrangement whereby Con Ed turned individual generating plants over to the state may represent the kind of middle-ground solution that utilities will look to as an escape from their cur-lent financing crunch It has been suggested that if this works well, the Power Authority should take over most or all of Con Ed's future construction Meanwhile, seven other New York electric companies are trying to reduce their expansion costs by forming a consortium called Empire State Power Resources to sell joint bonds for new generating units Because of the reduced risk for investors, its interest rates would be lower easing the pressure on electric prices The consortium could be an important step toward regional planning for power production, too, a move utibty critics have urged for years Along with new financing proposals, the utilities and the agencies that regulate them have begun looking more closely at the way customers are charged for electricity Most companies are still using a rate structure that was developed m the days when they had surplus capacity and were trying to promote greater consumption Under this system, the price per unit declines as total volume increases Reversing the tilt to make subscribers pay progressively higher rates as they use more power would tend to discourage energy waste, especially by industry and business, and hold down growth in demand New York and a few other states have recently started "flattening' the rate structure so that heavy users, such as factories, will receive proportionately larger bills, while homeowners will get a slight break In particular...

...Con Ed is gradually being forced to abandon the bargain basement prices it has traditionally offered its biggest customers, like New York's Transit Authority, Housing Authority and World Trade Center This will end the special contracts of the past that made all the small subscribers in effect subsidize the "bulk" users Calculating what is a customer's fair share of the energy production cost is complicated by the fact that a utility has to have enough generators to keep up with demand during its peak usage periods For Con Ed these come on sticky summer days when air conditioners all over the city are running fiat out At other times, however, consumption drops so low that nearly half of the company's power plants he idle No other utility m the country faces this problem to the degree Con Ed does In Europe it is common practice to charge subscribers a higher rate for electricity they use during peak periods The idea is to make the peak-period consumer pay a larger share of the cost of maintaining the extra generating capacity required to meet those few hours of high demand, and to encourage others to spread the load over the rest of the day This concept is beginning to catch on here because the companies reahze that their anachronistic rate structures are inefficient in recovering operating expenses Groups like the Environmental Defense Fund have endorsed the scheme as a check against future plant expansion requirements Much of the blame for defective rate structures has to be laid in the laps of the state public service commissions To be fair, they are nearly always understaffed and underfunded But just as often they are too sympathetic toward and uncritical ot the companies they are supposed to regulate True, New York's PSC has turned down a tew rate-increase requests m the last decade—yet only rarely and mainly tor tiny upstate utilities The normal pattern is for the agency to approve rate hikes that exceed even what its own examiners recommend Besides failing to redesign rate structures to fit changing times and conditions the state commissions have been slow to react to the challenge posed by soaring fuel prices In most states, utilities are now permitted to pass this cost on to the customer dollar tor dollar, the regulators merely check the companies' vouchers to verify that they did indeed pay the amount claimed Thus there is no inducement for utilities to seek the lowest possible price for oil and coal or to use them most efficiently In Con Ed's case, last winter subscribers were stunned to find that the so-called "fuel rider' sometimes accounted for half their total bills New York's PSC has been so indifferent to Con Ed's operating costs that it has tenaciously refused to review the price tag on the utility's most expensive project—the construction of a giant power plant at Storm King Mountain north of the city on the Hudson River In the 10 years the company has been battling environmental groups over this facility, its costs have more than tripled Con Ed now estimates the final bill will be around $650 million, but knowledgeable outsiders place the figure closer to $1 billion Though the financing charges involved will unquestionably add substantially to the price of electricity, the PSC has taken a narrow view of its responsibility, saying it cannot challenge company management decisions or the existing FPC approval of the plant Nonetheless in response to the recent furor over rapidly escalating tales, the PSC has brought in a management consultant for a $1 3million, 18-month examination of Con Ed's operations For the first time in memory, too, the Commission noted that perhaps efficiency and productivity should be considered in setting the price ot electricity This is a radical idea in utilities regulation As many consumer groups have pointed out, the cost-plus formula traditionally followed by PSCs in deciding rate-increase requests offers no incentive to hold down expenses The companies are granted high enough prices to earn a set percentage of profit on their investment If they tall below that level, they march back to the agency, ask for more, and usually get the larger part of it The companies, of course, vehemently defend their record "At the end of 1973 we had the same number ot employes as in 1963," observes Con Ed Vice President John Thornton "And we were putting out 50 per cent more electricity, gas and steam " There are plenty of indications, though, that Con Ed is not quite the tightly run ship it has made itself out to be To begin with, there is the question of "unaccounted for" electricity All utilities have to write off a certain amount of "slippage"?people jump their meters, some power is lost in transmission, meters are read wrong, and so forth But a PSC study of power losses by 11 companies across the nation put Con Ed at the top of the list In fact, last year 9 02 per cent ot the power it generated was "lost" Then there are customer complaints Con Ed is the subject of 85 per cent of the cases brought to New York's PSC, and the total number seems to be increasing?35,000 complaints last year, up from 20,000 the year before The company says that's not so bad considering it has 2 9-million subscribers Yet the Commission hears mainly from those who have already gone to the company and failed to get their problems straightened out there Con Ed itself reported more than 312,000 complaints last year Most of them were from people with billing disputes Even Con Ed admits that it has had some problems" with its new computerized system The stones are endless Of customers who keep receiving ominous threats that their electncity will be cut off if "$0 00 is not remitted in 10 days" Of customers who plead for a bill, hear not a word for 16 months, and are then threatened with a service cut-off if several hundred dollars are not paid at once Of people who move into an apartment and are charged for the electricity used by the previous tenant Con Ed also seems unable to collect an enormous number of the bills it does get right Last March the company reported that 20 per cent ot its retail accounts, totaling $34 4 million, were more than six months past due Last year it wrote off more than 230,000 residential bills averaging $133 and 86 from large businesses averaging $960 The paying customers, of course, wind up subsidizing the deadbeats Finally, there is the electrical system itself Last year, after a series of transmission failures left several neighborhoods blacked out for up to 18 hours, Con Ed had to overhaul its underground cable maintenance program Earlier this year, plant conditions got so sloppy that the PSC ordered a general upgrading All ot these things add up to a deeply rooted credibility problem, one that is afflicting the entire industry Consumer resistance to rate hikes is intensified by the widespread belief that the utilities are not doing their best Unless the power companies can improve their management significantly, they will continue to find themselves facing strong public pressure for much tighter government regulation—if not takeover...