Trends in Electric Rates in the Midwest

by Charlie Higley

Citizens Utility Board of Wisconsinfor

Energy Utility BasicsWisconsin Public Utility Institute

October 3, 2012

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Overview

• What is CUB?

• What Are Electricity “Sales”?

• Declining Electricity Sales– Trends for U.S., Wisconsin

• Determining Electric Rates

• Drivers for Wisconsin Electric Rate Increases

• Midwest Electricity Rates 1997 to 2011

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Citizens Utility Board

• Member supported nonprofit organization; 9,000 members statewide.

• Represents residential and small business customers.

• Intervenes in utility rate cases, proposals for new power plants, power lines.

• Five full-time staff, $900,000 annual budget.

• Saved Wisconsin ratepayers $2 billion since 2006.

• Please Join! • www.wiscub.org, higley@wiscub.org or 608-251-3322 x. 14

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Definition of Electricity Sales

• Electricity “sales”– the number of units of electric energy sold in a

period of time.– e.g. number of kilowatt-hours sold in one year.– For We Energies, 2011 total retail sales in

Wisconsin were 27,163,986,000 kWh.

Declining Electricity Sales: United States

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Declining Electricity Sales: United States

Declining Electricity Sales: United States (cont.)

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Declining Electricity Sales: Wisconsin

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Declining Electricity Sales: Wisconsin (cont.)

Sales in 2012 versus 2011

• 2012 U.S. sales (thru June) are 2% less than 2011

• 2012 WI sales (thru June) are 0.5% more than 2011

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Declining Sales Can Lead to Higher Rates

• Declining sales means fewer kilowatt-hours to recover operating expenses, therefore, rates go up, all else equal.– Rates = operating costs/sales = $/kWh– Assume sales will decline by 5.0 percent next year.– Assume operating costs remain the same for next year.– Rates have to increase 5.26 percent to recover operating

costs.

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Determining Electric Rates

• To determine rates for 2013, a utility:– forecasts annual kWh sales for 2013– calculates 2013 revenues using 2012 rates– estimates 2013 costs of doing business (expenses)– estimates rate base– calculates earned rate of return – compares with “approved” rate of return– determines revenue deficiency– increases 2013 rates to cover revenue deficiency

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Fewer Sales, Same Costs = Rate Increase

• forecast of kWh sales in 2013• revenue using 2012 rates• estimate 2013 expenses • calculate operating income

(aka earnings or profit)• estimate rate base• calculate earned rate of return• compare with “approved” ROR

• determine earnings deficiency

• determine revenue deficiency

• increase rates to make up revenue deficiency

• 29,000,000,000 kWh• (29B kWh)($0.1) = $2.9 billion• $2.7 billion• operating inc. = revenues – expenses

$200M = $2.9B - $2.7B• rate base = $3.5 billion• ROR = $200M/$3.5B = 5.7%• approved ROR = 9.5%

approved earnings = (9.5%)($3.5B) = $334M

• earn. def. = $334M - $200M = $134M

• rev. def. = ($134M)(1.7 tax factor) = $223M

• rate increase = $223M/$2.9B = 7.7%

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Wisconsin Residential Electric Rates

Wisconsin Electric Rates: Other Drivers for Rate Increases• Wisconsin electric rates 1997 thru 2011:

– Residential: 90 % increase– Commercial: 86 % increase– Industrial: 97 % increase

• Main drivers:– New power plants: $7.5 billion since 2004– New transmission lines: $2.5 billion since 2001– New pollution controls: $2.1 billion since 2000– Fossil fuel prices since 2000:

• Coal 100 % increase• Oil 170 % increase• Nat. Gas 40% increase, but nearly 80 % increase by

2006

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Total: $12.1 billion

Inflation: 40 % increase

Midwest Electricity Rates (cents per kWh, from EIA)

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1997 State Residential Commercial IndustrialIllinois 10.43 7.93 5.29 Indiana 6.94 6.04 3.91 Iowa 8.21 6.61 3.95 Michigan 8.57 7.84 4.97 Minnestoa 7.23 6.23 4.33 Missouri 7.09 6.00 4.46 Ohio 8.63 7.67 4.16 Wisconsin 6.88 5.60 3.72

2011 State Residential Commercial IndustrialIllinois 11.81 8.64 6.46 Indiana 10.06 8.74 6.25 Iowa 10.50 7.90 5.21 Michigan 13.12 10.32 7.36 Minnestoa 10.97 8.58 6.51 Missouri 9.78 8.04 5.95 Ohio 11.44 9.60 6.21 Wisconsin 13.06 10.43 7.34

Midwest Electricity Rates (cont.)

• Wisconsin had lowest rates in 1997.

• In 2011, WI = 2nd highest Residential, Highest Commercial, 2nd highest Industrial

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Change State Residential Commercial Industrial1997 Illinois 13% 9% 22%

to Indiana 45% 45% 60%2011 Iowa 28% 20% 32%

Michigan 53% 32% 48%Minnestoa 52% 38% 50%Missouri 38% 34% 33%Ohio 33% 25% 49%Wisconsin 90% 86% 97%

Charlie HigleyCitizens Utility Board of Wisconsin

www.wiscub.orghigley@wiscub.org608-251-3322 x. 14