The Commissioner’s Question: Who paid?

The newly appointed Public Service Commission (PSC) member Commissioner Throckmorton C. Cummings was scratching his head with his left hand while reading from a letter held in his right hand as his advisor Dr. Benjamin “Ben” Payne entered his office. Cummings had served as a State Senator for over a decade and was familiar, as many legislators were, with some recent utility-related legislation but not with the details of utility ratemaking. Ben Payne had been an economist on the PSC staff and Cummings had appointed him to the one advisory position available to each commissioner.

Looking up at his aide Cummings said “Ben, I’ve been reviewing some consumer letters, and this one caught my attention.”

“Go ahead commissioner, what’s the issue?”

“Well, the topic in this one complaint is the “meter charge” on his electric bill. This customer says that he’s been paying a “meter charge” for more than twenty years and therefore he must have already “paid for” that meter. So why the continuing charge? How much is an installed meter anyway?”

“I’ll check with Consumer Affairs on the customer’s billing history.  I think a residential meter full installation is between $1,200 and $2,000.”

“So, at $5 a month, he could be right?” Observed Cummings after doing some quick simple math.

“Not really Commissioner, under our regulatory system the customer pays for electricity service which is a combination of having available capacity and delivering energy on demand. The electric utility assets which provide the service, are financed by the utility from debt and equity, then constructed and added to the rate base before they provide services.” Payne explained.

“But once they are in ‘rate base’ they are paid for by the customer, right?” replied the Commissioner.

“Commissioner, not exactly. Customer tariffs, rates, are based on an annual revenue requirement which includes all the operating and maintenance expenses, depreciation on the assets while they are providing service, all the taxes as well as a return on the debt and equity used to finance the assets. Customers are not asked to provide capital; Assets are financed on the balance sheet with debt and equity like any other business.”

“Well Ben, what happens of the meter needs to be replaced. Is the customer charged for the new meter?”

“No, Commissioner, If the existing meter needs to be replaced the utility makes the replacement with no new charge to the individual customer.”

Commissioner Cummings put down the letter and removed his eyeglasses.

“So, Ben, let me see if I get the right.  The assets were “paid for” by the utility before they went into rate base and started delivering services. The customers pay only for electric service delivered by the assets.”  Commissioner Cummings looked directly at his aide.

Ben hesitated for a moment. He considered bringing up the subject of “construction work in progress in rate base” which, subject to commission approval, had customer pay for “service” from unfinished projects. Then he thought it would be better to leave it for another time.

“Yes, Commissioner.” He finally replied.