Two of the fundamental principles of setting rates for public utilities are that rates should be based on the cost of providing service, and there should be no discrimination between different customers. These rules prevent one or more customers or classes of customers from subsidizing the costs incurred by the utility to provide service to other customers. If the total costs of a utility are seen as a fixed pie, these rules prevent one customer from having to pay for portions of the pie eaten by another customer.
But what happens when the cost of utility service threatens to drive one customer out of business? Should the utility be allowed to charge that customer a rate lower than its cost of service in order to preserve its economic viability or competitiveness, under the theory that if the customer goes out of business, that would cause a greater shift in costs to other customers? That argument was made to the Missouri Public Service Commission by Noranda Aluminum, Inc. for the electricity rates of Ameren Missouri, and the PSC said “no.”
Noranda filed a complaint on February 12, 2014, asking that its rate as a Large Transmission Service customer be reduced from approximately $41.44 to $30.00 per MWh. Noranda is the only customer in that class, based on the lower cost of service to it by Ameren. Noranda acknowledged that its request would provide a rate below cost of service, but argued that it is facing a liquidity crisis and the lower rate is necessary for it to remain competitive in the aluminum industry. Noranda also asserted that closure of its plant in New Madrid, Missouri would result in substantial impacts to the local economy, which justifies shifting costs from the company to other customers.
In its Report and Order, the PSC found that Noranda had not met its burden of proof on those arguments. The agency noted that Noranda had been providing its investors with a different, more favorable analysis of its liquidity position and overall finances. While much of the evidence was provided to the PSC confidentially, it is clear that the agency did not accept Noranda’s claims of a liquidity crisis at face value. In addition, the PSC noted the history of Noranda’s capital structure, as it was acquired and then sold to the public by the private equity investment fund Apollo Management, L.P. Finally, the PSC rejected Noranda’s argument that a lower rate for its operations would provide benefits to other Ameren customers. For those reasons, the PSC denied and dismissed Noranda’s complaint.
You may ask why I am writing about this case on a blog devoted to water resources law? The fundamental rules applied to electric and water public utilities are the same, so the rationale of the PSC would apply equally to water companies. In fact, the seminal case regarding cost of service and non-discrimination in Missouri concerned two laundries that requested the same rate as other manufacturing customers of a water company, State ex rel. Laundry v. Public Service Commission, 34 S.W.2d 37 (Mo. 1931), and the PSC had ruled that “economic development” water rates set by the City of St. Louis violated the cost of service principle in Civic League of St. Louis v. City of St. Louis, 4 Mo. P.S.C. 412 (1916). Thus, the PSC’s ruling would apply directly to water rates.
As water security becomes a more important concern for industrial and manufacturing companies and their investors, we have already started seeing cities tout ample water supplies as a reason for companies to locate there, and it would not be surprising to see a city or water utility offer lower water rates as part of an economic incentives package. In addition, various interest groups often assert that they should not be required to pay the full cost of water service, because of some public policy in their favor. In Missouri at least, the PSC has upheld the principle that each customer must pay rates equal to the cost of providing service to it, and that the burden of utility costs cannot be shifted from one customer to another based on broad arguments about the value of one enterprise or customer to the area.
Very interesting how this legal concept could affect the rate structures fostered by the CA PUC. In particular sharply tiered rates that shift the economic burden to large residential users and discounted rates for low income users.
This specific decision of course was in Missouri, so there is no direct impact. But you are correct that the principle could be used to criticize various rate designs that shift costs from one group of customers to another. The California PUC has so far been supportive of rate designs that incentivize water conservation and provide some basic water supplies to low income customers. The courts have been less supportive when applying the same principle to government-owned utilities under Proposition 218. In that context, it is clear that establishing a low-income rate would violate Prop 218, and conservation rates are also susceptible to challenge. See my post here for more on that.