Higher Utility Bills Coming; Rate Relief Filed (FE, CHG, AEE, AYE, GAS)

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While many utilities are reporting earnings, there is one thing that many investors will care about more than each company’s results.  It seems that utilities across the board are filing with state or regional boards for rate relief to pass on higher costs to customers.

First Energy Corp. (NYSE:FE) today reported first quarter earnings of $276 million, or $0.91 EPS, compared with earnings of $290 million and $0.92 EPS for the same period in 2007. First quarter revenues totaled $3.3 billion, better than analyst estimates of $3.14 billion and $0.85 EPS. First Energy noted that high fuel costs and higher costs for purchased power reduced EPS by $0.19.

Earlier this week, CH Energy Group Inc. (NYSE:CHG) reported that revenues increased by more than 19%, but net income declined by about 4% and EPS decreased by about 4%. The company’s chairman and CEO had this to say: "Higher energy supply costs are resulting in higher total bills, inducing our customers to conserve, and sales volumes are noticeably affected." In other words, people turn down the heat in an effort to save money, and it costs the utilities money.

So what do utilities do? They go to their state public utility regulators and ask for rate hikes. First Energy has sought a rate increase in  Ohio of $340 million. Central Hudson is seeking an unspecified rate increase during the summer. Ameren Corp (NYSE:AEE), which will report earnings tomorrow, is seeking rate annual increases of 12.1% ($251 million annually) in Missouri and $247 million in Illinois.

The blame for the rate hikes resides largely with rising fuel costs. Coal prices have nearly doubled in the past year, and average natural gas prices at the wellhead have increased by about 25%. The utilities have a point. But they are also seeking increases to their regulated return, usually by about 1%-2%. State regulators so far are not impressed. Last year, Ameren requested a rate hike of $361 million in Missouri, which state regulators trimmed to a recommended $43 million. Both the company and government officials in Missouri are appealing the ruling. The company because the recommended increase is insufficient; the government, because it is too high.

Allegheny Energy, Inc.’s (NYSE: AYE) Potomac Edison Co., has also filed a request with the
Virginia State Corporation Commission for recovery of the cost of purchasing power for its Virginia customers.  It is asking for the recovery of a minimum of $73 million for the 12-month period beginning July 1, 2008, which would boost customer electric bills by about 29% if certain costs can’t be mitigated.

Nicor Inc. (NYSE: GAS) has also filed with the state of Illinois to pass on higher gas costs to its 2.2 million northern Illinois customers.  The rate hike request will add about $4.60 per month to the average residential electric bill, which would take effect in spring 2009.  While the company is saying this isn’t due to the cost of gas because Nicor buys on wholesale and passes on to customers without any mark-up, but this is "for the cost of delivery to the homes and businesses."  Delivery, material…. six of one, half a dozen of the other.

Higher gas prices, higher coal prices, and higher raw materials and transportation costs are going to be influencing residence and business utility bills.  If you think this is bad, wait until potable water shortages become more and more prevalent.  Higher utility bills are on the way, probably across the country and beyond.

Paul Ausick
May 1, 2008