Rate of return a key point in SW Gas rate hike hearing

Kevin Rademacher

Tuesday, July 13, 2004 | 10:53 a.m.

Southwest Gas Corp. executives began defending an $18.9 million general rate increase request before the state Public Utilities Commission on Monday morning.

Predictably, the company met immediate resistance from the state Bureau of Consumer Protection.

The stage was set for duel between the utility and the BCP weeks before the hearing began. The BCP filed testimony with the commission recommending that the $18.9 million request be cut to $41,000. Southwest Gas responded with more than 500 pages of rebuttal testimony.

PUC staff experts recommended that the rate increase be trimmed by about $9 million.

A general rate case allows utilities to recover construction and maintenance costs for distribution systems as well as general administrative costs. Rates of return for shareholders also are set in these cases. If the case is approved as proposed, rates would rise by 6.2 percent beginning Sept. 1.

A key point of contention Monday was Southwest Gas' request for a higher rate of return -- an overall Wall Street measure of profitability incorporating a return for shareholders -- of 8.03 percent. The company is currently earning a rate of return of 5.92 percent. PUC staff recommended a rate of 7.55 percent. The BCP recommended 6.85 percent.

Ernest Figueroa, deputy attorney general representing the BCP, challenged Southwest Gas on its request for higher rates of return.

He pointed to the utility's past ownership of PriMerit, a savings and loan it controlled between 1987 and 1995. While the utility has had two general rate cases come up since then, Figueroa pointed out that both cases were settled without hearings. That, he said, left the issue of the troubled financial institution ripe for argument in the company's financial requests.

PriMerit was a factor in several stock analysis reports issued by Value Line Publishing Inc. His testimony appeared to indicate that the troubled subsidiary dragged down the company's credit rating and chewed up capital. The company has argued that it needs a higher rate of return in order to meet the rapid growth demands of the Southern Nevada market.

The company also argued that while growth has demanded soaring construction expenses, lower per-customer usage due to more energy efficient homes and appliances has made it harder to recover construction costs.

Ted Wood, treasury services manager for Southwest Gas, responded that while the company took a $14.5 million hit because of PriMerit, the company has seen more than $250 million evaporate because of warmer-that-normal weather and lower per-customer usage.

Because of those factors, Wood pointed out that debt rating agencies have Southwest Gas barely above junk status.

"Until that (rate of return) problem is corrected we don't have the chance to improve our capital structure," Wood said.

Earlier in his testimony he said: "All we are asking for ... is to get a rate of return that is risk adjusted and comparable to the industry average."

Also included in the case -- and particularly contentious in the PUC staff and BCP testimony prior to the hearing -- is a request for an increase in the basic residential service charge. It was proposed as an effort to stabilize the company's recovery of costs.

In Southern Nevada, Southwest Gas has asked to raise the current $8 charge to $11.20 a month in the summer (between May and October) and $14.50 in the winter. That would be offset by a lower usage-based commodity charge, evening out customer bills.

The basic service charge is paid by every Southwest Gas customer, regardless of gas usage.

The result would be a more stable return for the company and smaller spikes in customer bills in cold months when usage climbs, the company has said. Again, company executives have claimed that the change also would offer the company some relief in recovering construction expenses despite lower demand. Since 1987, residential usage for natural gas has dropped from 682 therms a year to 496 in 2003, company statistics show.

PUC staff and the BCP recommended the rejection of the change in rate structure. PUC staff instead recommended raising the basic customer service charge to $9.

Jeffrey Shaw, chief executive of Southwest Gas, also made the case that the move could benefit the company's debt rating. He also pointed out that the request comes in conjunction with company efforts to improve customer service while increasing the number of customers per employee.

"We would not have made this request if we hadn't done our part," Shaw said. "We need the commission's support."