Editorial: PSC Needs to Put Gluttonous Giants on a Diet

St. Louis Post-Dispatch, March 8, 2014

To understand the latest dispute between Ameren Missouri and its biggest electricity customer, Noranda Aluminum, think about pie.

Ameren, the investor-owned monopoly utility company, is always hungry. It likes pie.

When Ameren wants to charge more for the electricity you use, it asks the Public Service Commission for more pie. Over the past six years, Ameren has been gluttonously successful in grabbing a 43 percent bigger pie.

When rates go up, the PSC does a couple of important things. First, it sets a profit target for Ameren which the company isn’t supposed to regularly exceed. Second, it divides shares of the pie among all the consumers. Those consumers, from big industrial users of the most power to senior citizens on a fixed income, generally negotiate and come to consensus on which part of the pie they will fund.

The biggest consumers, such as the New Madrid aluminum smelter owned by Noranda, get the lowest rates. Other big manufacturing companies, like Boeing and Anheuser-Busch InBev, also pay less per kilowatt hour. Residential customers pay the most per kilowatt hour because it is less efficient to distribute electricity to individual homes than big manufacturing plants.

Usually, the consumers, big and small, gang up on Ameren to try to make the entire pie smaller.

That context is important in understanding two recent filings with the Public Service Commission by Noranda.
The company, which is owned by private equity giant Apollo Global Management, is asking the PSC to lower its rate, already the lowest rate in the state. Noranda currently pays a little more than 4 cents per kilowatt hour of electricity; it wants to cut that by 25 percent, to 3 cents.

For comparison, the rest of us pay a little more than 7 cents per kilowatt hour. Noranda also wants the PSC to declare that Ameren has been making more money than it is supposed to.

In many ways, the first request is just another case of a big company exerting its oversized influence to obtain a taxpayer (or ratepayer) subsidy. How big? The rate cut would shift about $500 million over 10 years onto the rest of us. For what Ameren calls its typical residential electric customer, that increase could cause a monthly bill of $104.50 to go up by about $2.09.

That doesn’t sound like a lot. But it adds up. So it’s curious that consumer groups aren’t making much noise about Noranda’s rate-cut request.

Joan Bray, executive director of the Consumers Council of Missouri, says this about Noranda: “They have been on the side of consumers.”

Indeed, that’s true. Hence Noranda’s second filing, which accuses Ameren of eating an extra helping of pie.
On behalf of all consumers, Noranda is asking the PSC to determine that Ameren has earned more than the 9.8 percent profit level set during the utility’s last rate case.

Ameren, through its vice president of legislative and regulatory affairs Warren Wood, denies it is taking in more profits than allowed by the PSC.

“The complaint is without merit,” he told us.

OK, then, why won’t Ameren simply open up its books?

That’s what the consumers have been asking them to do for months. It is something Ameren has done previously when accused of overearning, most recently in 2012. In fact, lawyers for parties to Ameren’s most recent rate case already have seen the confidential financial reports that ultimately will determine whether the PSC tries to order Ameren to reduce its rates. It seems highly unlikely that Noranda would file an expensive PSC overearnings case without already knowing the answer it seeks.

In effect, Noranda is asking the PSC to (a) first reduce the overall portion of pie that Ameren gets to eat, and then (b) also reduce the aluminum smelter’s portion of its pie.

The smelter argues it needs a lower rate to compete, pointing to several consecutive quarters of net losses. It says its competitors in other states have obtained even larger rate cuts. Noranda suggests that unless it gets its rate cut, it will have to fire employees or shut down completely.
That argument isn’t without merit, but it’s hard to swallow when Leon Black, the chief executive officer of Apollo, made $546 million last year, more than any other private equity firm boss. Here’s how Crain’s business magazine described his obscene haul:

“Mr. Black’s pay, which was in cash, was about 25 times higher than the amount awarded to Goldman Sachs CEO Lloyd Blankfein or JPMorgan Chase’s Jamie Dimon, who are paid mostly with stock. It is more than double the New York Yankees’ payroll and, for those keeping score at home, 10,702 times more than median household income in the U.S.”

This is the very picture of income inequality in America. For Mr. Black, $546 million wasn’t enough. He needs to squeeze a few more pennies out of grandma next year or he’s going to take his aluminum smelter and go home.

It’s distasteful. And, yet, without Noranda, who keeps Ameren’s runaway greed in check?

Our hope is that the PSC dials back the gluttony of both behemoths.

Save some pie for grandma.