Let There Be Light, Part 2: Why There’s No Such Thing as Real Electricity Rates --  The Fuel Differential

August 10, 2016

Part 2 in the series about electricity compiled in 2015 and published now in The Planet for the first time. 

 

Here is the first question asked of Mike Simpson, chief executive officer of Sand Mountain Electric Cooperative (SMEC), and the only local power company CEO who consented to a face-to-face interview for this series:  “If you’re nonprofit, how come your rates are so much higher than the for-profit providers, which besides providing cheap electricity also generates a nice profit for its stockholders?”

 

Simpson’s answer was: They’re not. 

 

“Our rates are actually lower,” he said.

 

On its face, the answer seemed disingenuous.  Both Alabama Power and Georgia Power, its sister company across the state line, post their rates on their websites.  Georgia Power’s standard winter rate as posted was 5.3927 cents per kilowatt-hour (kWh) for the first 650, 4.6270 cents for 650-1000.  Alabama Power’s was 8.4232 cents per kWh  for the first 750, 7.2232 cents thereafter.

 

SMEC does not post its rates online, and neither do DeKalb County’s other two electric providers, the Fort Payne Improvement Authority (FPIA) and Marshall-DeKalb Electric Cooperative (MDEC).  But taking two “live” SMEC bills and dividing, on one, the pretax total of $235.87 by the 2446 kWh usage, we get a rate of 9.643 cents; and on the other ($130.89 for 1239 kWh), 10.2641 cents.  That’s higher than Alabama Power’s and about twice Georgia Power’s. 

 

But Simpson says that’s misleading:  The kWh rates posted by the for-profits, he said, are base rates that do not include “fuel costs,” which in reality make up about 30 percent of a typical light bill.  Like consumer gasoline prices, fuel costs – “I mean coal, natural gas, nuclear fuel, the stuff that it takes to actually run the generators,” said Simpson – vary widely from month to month. ​

 

Simpson (right) says what Alabama and Georgia Power actually charge the customer – and what SMEC, whose own base rate is 5.93 cents/kWh, charges as well – is kilowatt-hours times base rate plus fuel cost. 

 

Examination of “live” Alabama and Georgia Power bills confirmed this to be true.  Per-kWh averages varied depending on usage and customer charges (explained below), but by no mathematical gymnastics was a rate as low as advertised derivable. 

 

In the case of SMEC, and of DeKalb’s other two electric companies, the fuel surcharge is dictated by a schedule produced monthly by the Tennessee Valley Authority (TVA), from which all three buy their electricity.  “The fuel changes every month based on what TVA’s actual fuel cost is,” said Simpson.    

 

One reason for the fluctuating fuel costs is efficiency of generation, he said:  Under normal loads, TVA runs only its most cost-effective generators.  But when demand spikes during extremes of weather, TVA has no choice but to fire up additional units.  “So when it gets really hot or really cold, the fuel cost goes up because you’re running less efficient units,” he said.  

 

As for posting rates online and charging the customer something entirely different, that’s the industry standard, said Simpson.  “I don’t like the way it is because it’s so misleading,” he said.  “If you just look at the rate schedule, you look at that and what you actually pay and the difference is a lot, because the fuel is not in there.”

 

But if it’s bad, it’s also unavoidable, said Simpson, given the volatility of fuel prices.  SMEC is upgrading its own website to include pull-downs showing rate schedules, says the CEO, but as a practical matter, SMEC will encounter the same hitch as the IOUS:  “The problem is, how do you put the fuel in the rate schedule when it changes every month?”

 

Simpson gave a general breakdown of SMEC’s monthly power bill:  “When you pay a bill, TVA gets about 75 percent of it,” he said.  “We pay TVA for the power at the substation, then we charge our customers at the meter, and the difference is what it costs us to maintain the substations, keep all the rideway lines cut and cleared, keep all the poles upgraded and  changed out, build new system.”

 

SMEC recoups most of those costs with a flat customer charge of $25 a month, which is not factored out on the monthly bill but lumped in with the kWh usage on the top line.  That’s another reason the rate varies from month to month; with greater usage, the $25 is averaged out over more kilowatts.  

 

All the local power companies have their own base or customer charge, and all include it in the pretax total on your bill.  Alabama Power’s is $14.50; Georgia Power’s, $10; Fort Payne Improvement  Authority’s, $16; Marshall-DeKalb’s, $13.70.

 

Simpson compared rate averages with a collection of SMEC bills over a three-month period for his own house and for his mother’s, plus Alabama Power bills he paid for a child at college at Auburn.  Dividing the gross billing amount by usage, he derived cents-per-kilowatt-hour rates of 11.69, 10.09 and 9.99 cents for his mother’s SMEC household, 9.33, 9.12, and 9.41 cents for his own.  His usage was higher – pump for the swimming pool, he explained; one month’s bill was $470.55 – and thus his averages lower, given the flat $25 customer fee that applied to both households.

 

For the Alabama Power household in Auburn, usage was drastically less – all the bills were well under $100 – and even with the lower customer fee, the kWh averages came out 17.35, 13.82 and 14.05 cents.

 

On the whole, said Simpson, SMEC’s average cost to residential customers for fiscal year 2014/15 was 11.32 cents/kWh, a full cent under the figure shown for Georgia Power on the Georgia Public Service Commission’s website, 12.92 cents. 

 

“That’s pretty amazing considering we only have about 10 customers per mile in a rural area, and Georgia Power and Alabama Power serve cities like Montgomery and Birmingham and Mobile and Atlanta,” said Simpson.

 

The Alabama PSC did not have such a figure readily available for Alabama Power, though the agency’s Linda Gardner did note:  “The current typical FD [family dwelling] customer bill based on 1,000 kWh's is $131.42. That's an average of $136.01 in the summer months and $129.13 in the winter months.”  That average bill as expressed in kWh/cent (i.e, divided by 1000) is 13.142 cents.  

  

Comparing all local providers’ rates, based on actual bills as extrapolated to a common hypothetical usage of 1000 kWh,  FPIA came out cheapest at 10.662 cents, with the two co-ops next and within a few fractions of a cent of each other, the for-profits a couple of cents higher.  See the rates comparison below for further details.

 

Price Comparison of Area Residential Electricity Providers

 

            Try asking residential electricity providers about their rates as opposed to another company’s and you’re apt to hear the protest, “You’re not comparing apples to apples.”  That’s precisely what we have tried to do here, looking at actual bills and extrapolating from there what all these area providers would charge for a usage of 1000 kilowatt-hours.

            One provider may have a lower base or customer fee than another.  That’s the flat amount charged per household whether it uses any electricity at all that month, to recoup the basic infrastructure and maintenance costs of serving that home.  But the same provider may charge a higher per kilowatt/hour (kWh) rate than the other, or may charge more or less in winter versus summer, or for higher or lower increments of usage. 

            To further complicate matters, taxes differ from location to location.  Alabama Power and Fort Payne Improvement Authority bills list only a general sales tax, while Sand Mountain Electric customers are subject to state and possibly city license taxes depending upon location, and the sample bill provided by Boaz-based Marshall DeKalb Electric Cooperative includes a 3 percent “privilege inside tax” as well as the 2.2 Alabama license tax and 4 percent general sales tax. 

            And across the border, Georgia Power passes environmental compliance and nuclear construction costs along to its customers in additional surcharges.

            All those differences have been addressed in this extrapolation, which is based on winter bills and winter rates.  

            Sand Mountain Electric Cooperative:  Extrapolated from a real SMEC bill of $250.49 for $235.87 for 2446 kWh, of which $25 is the flat customer fee, plus Alabama license tax of $5.19 and gross receipts tax of 9.43, the billing amount for 1000 kWh would be $111.21 plus $2.45 Alabama license tax and $4.45 gross sales tax, for a total of $118.11.

            Fort Payne Improvement Authority:  Extrapolated from a real FPIA bill of $59.11,  consisting of $56.84 for 472 kWh, of which $16 is the base or customer charge, plus 2.27 sales tax, the billing amount for 1000 kWh would be $102.52 plus 4.10 sales tax, or a total of $106.62.

            Marshall DeKalb Electric Cooperative:  Extrapolated from a $139.54 bill for 1218 kWh, of which $13.70 is the flat customer charge and $11.75 taxes ($2.81 Alabama license tax, $3.83 privilege inside tax, $5.11 sales tax), the billing amount for 1000 kWh would be $107.37 plus $2.36, 3.22 and 4.29 for the respective taxes, totaling 117.24.

            Alabama Power:  Extrapolated from a $44 monthly bill, including billing amount of $42.34 for 244 kWh, which includes a $14.50 customer fee and $1.66 sales tax, getting the billing amount for 1000 kWh was a little more complicated because Alabama Power charges one rate for the first 750 kWh and another thereafter.  So the math problem involves extracting the fuel differential between the posted 750-kWh-and-under rate schedule and the actual bill charges (see main article), then applying that to the advertised over-750 rates.

            By those calculations, for a 1000-kWh usage, the customer would pay $86.18 for the first 750 and $25.52 for the next 250, plus the $14.50 customer charge, for a subtotal of $126.20 plus tax of $5.0, or a total of $131.25.

            Georgia Power:  Here we start from the bill of a householder across the border in Dade County, Ga., totaling $57.78, which includes a $10 customer fee, usage of $46.62 for 407 kWh, $3.69 Environmental Compliance Cost (ECC), $3.11 Nuclear Construction Cost (NCC) Recovery, municipal franchise fee 58 cents and sales tax $3.78.  Here again, extrapolating a total for 1000 hours requires some math because in the winter, Georgia Power charges one rate for the first 650 hours and another for the other 350. 

            So once again, it was necessary to extract the fuel differential between the two advertised rates and the actual amounts charged.  The results:  For 1000 kWh, the Georgia household would pay $58.48 for 650 hours, $44.39 for the next 350 and the $10 customer charge for a subtotal of $112.87, plus ECC $8.93, NCC $7.52, municipal franchise fee $1.40 and sales tax $9.15, for a total bill of  $139.87.

 

 

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