Small Business Bulletin 11/9/04

Small Business Bulletin 11/9/04

REPORT ON SCE&G RATE HIKE HEARING AT PSC

Small Business Chamber President Intervenes

For one solid week, November 1-5, the South Carolina Public Service Commission heard testimony to determine what, if any, increase in electric rates SCE&G would be allowed starting in 2005. The company put up 12 witnesses, the intervenors (those parties in opposition to the requested rate increase) had 4 witnesses and the PSC staff called 4 witnesses. SCE&G, the intervenors and the PSC staff general council all were allowed to cross-examine each witness.

The SC Small Business Chamber of Commerce president, Frank Knapp, was an intervenor. Other intervenors were the state Consumer Advocate, Columbia Energy (a private sector generator of electricity), the US Navy and the SC Energy Users Committee (representing large manufacturing businesses). Below is a brief overview of what was learned in the hearing about the rate increase proposal.

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Small Businesses Without Health Insurance Needed For Innovative Program

Details at the bottom of this newsletter

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On July 1, 2004, SCE&G filed for an $81 million rate increase that represented a 5.6% overall hike in electric rates for their South Carolina customers. The company’s filing included a detailed justification of why it needed the increase, which was primarily to recover construction costs on about half of its new Jasper County power plant. In 2002, the PSC had approved the first half of the plant’s cost to be included in the company’s rate base. Other controversial reasons given for the need for $81 million in increased revenue were to recover expenses related to a failed Regional Transmission Organization called GridSouth and to allow SCE&G to earn a rate of return on common equity of 12.45%.

Intervenors were given until October 18th to submit their expert witness testimony to dispute the company’s arguments for the rate increase. However, about a week before these testimonies were due, SCE&G contacted the PSC staff (which a new law prohibits from having contact with the PSC Commissioners who will rule on the case) and started negotiating to try to reach an agreement called a stipulation. Such a pre-hearing stipulation is not required by law.

So even before the PSC staff had the benefit of other expert opinion on the issues in this case, the staff and company hurriedly made a deal and announced it on October 18th. This agreement, if eventually approved by the PSC Commissioners, would allow SCE&G a 3.6% overall rate increase resulting in $51 million in additional revenue. All the additional costs of the Jasper County plant and virtually all the costs of the GridSouth project were allowed. The small revenue increase basically resulted from lowering the rate of return to 10.9%.

With SCE&G and the PSC staff now promoting the same agreement, the intervenors were faced with two formidable opponents. Mr. Knapp’s opening remarks chastised the PSC staff with “rushing to judgment” and agreeing to a stipulation that was prejudicial to the hearing and consumers in that the Commissioners have historically adopted staff recommendations.

Mr. Knapp questioned SCE&G president, Neville Lorick, as to why the company had requested $81 million in increased revenue if the company now admits that by “tightening its belt” it could live with only $51 million. Mr. Knapp compared the negotiations between the company and the PSC staff to selling a house. The seller (SCE&G) prices the house far above what it actually needs. The buyer (PSC staff) offers something less and the two parties negotiate. The seller typically ends up with an offer below the asking price but still above what it absolutely had to have. Mr. Knapp suggested that the stipulation had not gotten down to SCE&G’s absolute, bottom line increased revenue need.

Through cross examination of Labros Pilalis, who was retained by the PSC staff to recommend a rate of return for SCE&G, this expert witness acknowledged that he had determined that the company should be given only a 9.88% rate of return. This rate was consistent with the recommendations of the intervenors’ expert witnesses, a fact with which Mr. Pilalis was quite pleased. His recommendation was presented to the staff on October 13th several days after SCE&G and the PSC staff had already egun negotiating a deal.

On October 15th Mr. Pilalis was asked by the PSC staff if a 10.9% rate of return would be acceptable and he agreed. That one percentage point difference would enable SCE&G to receive $51 million in new revenue from its customers instead of only $13.6 million if Mr. Pilalis’s original recommendation had been used. Mr. Pilalis agreed with Mr. Knapp that SCE&G and the PSC staff could have first negotiated a $51 million revenue increase and then calculated that a 10.9% rate of return would be necessary to achieve that level of revenue.

Testimony was also presented that questioned why the balance of the Jasper County power plant construction costs should be passed on to the ratepayers. SCE&G is selling about the equivalent amount of power produced by the remaining half of the plant to North Carolina Cooperatives. Both the Consumer Advocate and Columbia Energy argued that this part of the plant was not used and useful to the South Carolina ratepayer at this time and thus should not be in the rate base. One expert witness testified that from the data made public regarding the North Carolina contracts, he did not believe that the revenue received from that contract was sufficient to offset the costs of producing the power from the Jasper County plant. A point that led Mr. Knapp to suggest that South Carolinians were subsidizing the power for North Carolina consumers.

SCE&G defended their request for recovering GridSouth expenses by saying that the project was in response to a Federal agency order in 2000 that was intended to expand the country’s electricity markets and give the Federal government more control over the transmission of electricity. However, SCE&G admitted that it never sought or received PSC permission for the expenses incurred from March of 2001 to June 2002, SCE&G had other alternative methods to comply with the Federal order, the GridSouth project was abandoned and therefore was never of use to South Carolina consumers and the Federal agency in question changed it’s policies shortly after the GridSouth project was launched. All intervenors suggested that SCE&G had made a bad business decision and that the $13 million in GridSouth costs should not be passed on to the ratepayers.

With the end of the PSC hearing, intervenors will have until December 1st to submit recommendations to the Commission. A ruling by the PSC Commissioners on the rate hike request will be given before the end of the year.

SMALL BUSINESSES WITHOUT HEALTH INSURANCE

NEEDED FOR INNOVATIVE PROGRAM

Health Care At Lower Cost To Be Tested

The SC Small Business Chamber of Commerce is helping to coordinate a first in the nation, employee health care program for small businesses without traditional group health insurance. This innovative program will be tested in six of the state’s counties: Beaufort, Darlington, Greenville, Greenwood, Horry and Sumter.

Small businesses in these counties that do not have a health insurance plan and which are interested in providing health care services for their employees at lower costs should contact the Small Business Chamber at 803-252-5733.