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AGL Hit with Rate Freeze That Will Cut Annual Revenues by $25M

Officials at AGL Resources and Georgia utility subsidiary Atlanta Gas Light were stunned last week by a 3-2 vote at the Georgia Public Service Commission (GPSC) to freeze the utility company's residential rates. AGL said the decision will cut its annual utility revenues by about $25 million.

In an effort to avoid "being harmed while it seeks reconsideration of the decision," AGL filed a motion for stay at the commission on Friday. The motion requests that the stay be put in place until the GPSC rules on petitions for rehearing, reconsideration and oral argument that the utility intends to file on May 9.

"Our preliminary review suggests the decision is unsupported by the facts presented in this case," said Kevin P. Madden, executive vice president for distribution and pipeline operations. "It also appears to be fundamentally flawed from both a legal and public policy standpoint. It is our hope that these flaws will be rebutted appropriately on reconsideration and be reversed."

By a vote of 3-2, with Commissioners Angela Elizabeth Speir, David Burgess and Robert B. Baker Jr. voting yes, a majority of the GPSC approved the rate freeze, saying it would save gas customers $46 million over the next three years. AGL had requested an increase in annual revenues of $24 million that would have increased monthly residential bills by about $1.39. It has not had a rate increase in 12 years and three years ago agreed to reduce rates by a total of $30 million over three years.

Commissioner Stan Wise, who voted against the plan, called it a "punitive decision that ultimately puts the company at risk. "This decision was based on flawed analysis by consultants hired based on the lowest bid," said Wise. "The commission has made a punitive decision that was decided long before testimony began. If we continue to make these decisions we'll have another failed company."

Wise said that budget cuts over the past three years have hampered the commission's ability to hire "the best and brightest consultants" to evaluate and analyze utility rate cases. He said the AGL rate decision also will affect the company's quality of service. "We've made great strides in quality of service, but the commission by its action today has said we don't care if the company cuts those people who have provided this excellent quality of service."

Madden said AGL will consider all available options to modify the decision. This will include filing for reconsideration, filing a new rate case and appealing to Fulton Superior Court.

The order includes an abandonment of AGL's performance-based sharing mechanism and the amortization of a previously recorded gain on the sale of an asset, which will require AGL to revise its previously reported first quarter earnings if upheld.

AGL was seeking to continue its performance-based sharing mechanism. But the commission's decision appears to abandon that after just three years. The utility's plan was to set an earnings band of 10% to 12% with three-quarters of any earnings above 12% shared with Georgia customers and one-quarter retained by AGL. Instead, the recommendations adopted by the commission would set a return on equity of 10.375%, which AGL said is "well below the average for natural gas distribution companies across the country and an 11.25% rate of return on equity the commission approved for Georgia Power Co. in December 2004."

Madden said the utility has improved efficiencies and lowered its costs over the last three years. "At the same time, Atlanta Gas Light has brought excellence to customer service, provided additional peaking resources for colder weather and added more than $108 million in capital additions," he added.

"The recommendations adopted by the commission would penalize a growing company for efficiencies and benefits to customers from recent acquisitions by AGL Resources that have brought new jobs to Georgia. It also ignores the fact that there are certain costs over which AGL has little control. To assume that costs such as employee health care and other expenses will not go up is unrealistic," he said. "Such reductions would force substantial budget reductions and would not be in the public interest."

Meanwhile, the company reported a 14% increase in net income last Wednesday to $88 million ($1.14 per diluted share), but that likely will have to be reduced by $13 million to $75 million because of the GPSC's decision. According to the order, AGL will be required to recapture a $21 million pre-tax gain previously recognized and associated with the sale of its Caroline Street campus in September 2003 by recording an expense and an associated regulatory liability as of the quarter ended March 31.

The adjustment defers the $21 million pre-tax gain and amortizes the gain into base rates over a 10-year period starting when the order goes into effect on May 1. As a result, first quarter 2005 basic and diluted earnings per share would decrease by $0.17 to $0.98 per basic share ($0.97 per diluted share).

In commenting on the company's strong first quarter performance, CEO Paula Rosput said AGL was "hitting our stride early in the year." Unfortunately, Georgia regulators have suddenly slowed down its pace.

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