DOCKET 18117 and 18416 - to Establish Public Proceedings to Consider Any Necessary Modifications

OFF AGENDA ITEM

AUGUST 2013 COMMISSION MEETING

DOCKETS 18117 and 18416 – To establish public proceedings to consider any necessary modifications to the Rate Stabilization and Equalization (RSE) mechanism applicable to the electric service of Alabama Power Company (“Alabama Power” or the “Company”). Specifically, the purpose of this proceeding was to determine if the RSE mechanism in place for Alabama Power is continuing to serve its intended purpose of ensuring stable, fair, and equitable rates, reliable service and enhanced monitoring activities by the Commission Staff. As part of this overall evaluation of the RSE program, the Commission is also seeking to determine if the currently allowed Retail Return on Common Equity range of 13.00% to 14.50%, as prescribed in the RSE tariff, is fair and reasonable.

RECOMMENDATION:

After evaluating all information submitted by each of the participants during the course of the four (4) public meetings conducted by the Commission in the matter of Docket 18117 and 18416, an evaluation of the discussions had with respect to that information, and consideration of the positions put forth by staff from the Electricity Policy Division, it is recommended by the Legal Division that the Commission find that Alabama Power’sRate RSE mechanism continues to be just and reasonable to customers and the Company. However, it is recommended by the Legal Division that the Commission propose certain modifications to the rate mechanism that would enhance aspects of the rate, while also mitigating the lingering impacts of the recession on customers. The modifications recommended to Alabama Power’s Rate RSE mechanism are as follows:

(1)It is the consensus recommendation of staff from the Legal and Electricity Policy Divisions that the current ROE range and the provision regarding capital structure set forth in Alabama Power’s Rate RSE be eliminated from the rate. In their place, Rate RSE would reflect a range and set point based weighted cost of equity (“WCE”).

(2)It is the recommendation of the Legal Division that the WCE under Alabama Power’s Rate RSE be established at 5.75% to 6.21%, with an adjusting point of 5.98%. This recommended WCE range and adjusting point are lower than the return on equity and associated equity ratio cap currently authorized under Rate RSE.

(3)It is the further recommendation of the Legal Division that Alabama Power be eligible to receive a performance-based adder of 7 basis points (0.07%) to the adjusting point if at the time of its annual Rate RSE filing: (i) the Company possesses an “A” credit rating equivalent with at least one of the recognized rating agencies; or (ii) the Company is in the top third of the customer value benchmark survey that is examined by staff as part of its most recent annual metrics review.

(4)It is the consensus recommendation of the Legal Division and the Electricity Policy Divisionthat in addition to Staff’s ongoing oversight, which already includes a comprehensive annual metrics review, the RSE review process should be augmented by adding an objective, self-executing mechanism – similar to that recommended for Mobile Gas – that would prompt additional review of the Company’s allowed return.

Using a baseline interest rate equal to the 12-month average 30-year Treasury Bond as of the date of this order, additional review would be triggered in the event the 30-year Treasury Bond increased more than 350 basis points or decreased by more than 200 basis points. The established baseline rate would be tested against the most recent twelve month average of the same 30-year Treasury Bond, on a quarterly basis. Upon the occurrence of a circumstance prompting additional review, staff will notify the Commission and report whether and to what extent staff believes the economic developments necessitate further examination of the range. The utilization of such a mechanism seems appropriate because a change of this magnitude could signal material economic shift and hence the possible need to consider whether the existing range remains appropriate. The Legal and Electricity Policy Divisions are also of the opinion that the Office of the Attorney General should participate in the annual metrics review discussed herein.

(5)It is the further recommendation of the Legal Division that, in addition to the existing filing requirements of Rate RSE, Alabama Power make biannual filings of its income statement and balance sheet. The first filing would include information for the most recent year, along with comparable information for the prior year. The second filing would include information for the most recent January through June period, along with comparable information from the prior year for the same period. These biannual filings would be made within a reasonable period after the corresponding release of this information and in accordance with SEC requirements.

(6)In addition to the ongoing quarterly test set forth above, it is the consensus recommendation of Staff from the Legal Division and Electricity Policy Divisions that the reasonableness of Alabama Power’s weighted return on common equity should be examined on a six-year basis. The form of examination should be comparable to the historical analysis presented by the Company in this proceeding and would evaluate all elements of the capital structure as well as the overall return of the Company, as compared to a group of peer utilities derived through the cluster methodology. The time frame covered by this analysis should include at least the most recent five years for which the necessary data is publicly available. The Company will also include performance metrics demonstrating its operational performance as well as any additional information it deems instructive to the analysis.

The Company would be expected to file its first analysis no later than six years from the date of this order, and then meet with Staff and the Office of the Attorney General to review the results. Subsequently, Staff would report to the Commission whether any further review or other action concerning the return is warranted. Notwithstanding the Company’s analysis, the Staff may also perform its own analysis for consideration before notifying the Commission whether or not any further review or action is needed.

This expansion of Staff’s oversight under Rate RSE would be in addition to, and not in lieu of, all the existing authority of the Commission, and would not impair the rights of the Company to make filings or petitions with the Commission as allowed by law.