The Mississippi Public Service Commission voted 3-0 last week to begin an examination of the formulas used to calculate return on equity for Mississippi Power Company and for Entergy Mississippi.
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It is used to measure a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested in, for example, things like new facilities and new infrastructure.
For Mississippi’s two investor-owned utility companies, ROE is set as a percentage. The latest figures the PSC has approved for Entergy’s ROE is 11.63 percent; for MPC , 10.62 percent. Each company uses multiple formulas to calculate its ROE, and takes the average of those formulas. For instance, MPC uses three formulas to calculate its ROE. The results generally end with a ROE somewhere between 9 percent and 11 percent.
That’s about in the middle range for comparably sized utilities in the Southeast. For example, the most recent ROE rate for Alabama Power, MPC’s sister company, maxes out at 14 percent, though the company targeted a return of 12 percent in its last fiscal year, according to SEC filings.
Commissioners voted during a meeting last Tuesday to hire consultants and to begin a series of hearings. If the PSC decides it wants to change anything, it will have to be done in an entirely separate docket.
The proceedings will review the formulas, and not the amount of capital companies are spending. The formulas are reviewed annually, within established parameters, and ROE rates are set, though they don’t vary much between 9 and 11 percent. The docket commissioners opened last week will examine if the formulas are producing the rates they should.
“We need to verify that we’re operating within an acceptable range, first and foremost,” said Central District Commissioner Lynn Posey. “We need to get our consultants hired and let them start working with the (public utilities) staff, and pass along what they find to the companies and let them respond to it. If it looks like we need to lower rates, then we’ll go in that direction.”
Northern District Commissioner Brandon Presley, who has employed his Twitter feed the past several weeks to advance the idea of lowering ROE rates, hopes the docket proceedings lead to just that.
“They’re making way too much money,” Presley said. “We get elected to ask the tough questions.”
Presley cited interest rates that are lower than they were when most of the current ROE rates were set. The cost of borrowing money has gone down, he said in an interview last week, so the ROE should follow suit.
“If interest rates were going up as fast as they’ve gone down, I guarantee you the companies would be in front of us demanding that we raise the (ROE) rates. We need to do the reverse of that.”
Posey said it was likely hearings would not begin until next year, possibly in the spring.
Southern District Commissioner Leonard Bentz said through a spokesperson that it was simply time that the process used to arrive at ROE rates undergo an evaluation.
“There’s no particular goal in mind, and there wasn’t a particular event that triggered this,” said Bethanne Dufour. “It was just time to do it.”
Entergy Mississippi spokesperson Mara Hartmann said the PSC approved the company’s formula rate plan in 2009, and in doing so, raised the metrics the company had to meet that measure reliability, affordability and customer satisfaction. “We feel the formula’s appropriate, but we are amenable to (commissioners) taking a look at it. If they do decide to change it, they are our regulators. We would just hope they adequately balance the company’s and the customer’s interests.”
Hartmann said the ROE is “an opportunity, not a guarantee. Even if you’re performing well, you could have a bad sales year and not hit that 11 percent.”
Mississippi Power spokesperson Jeff Shepard did not return cell phone and email messages last week.