Dominion Resources (NYSE:D) did the unthinkable this week, requesting a rate decrease from local regulators. But the utility knows what it's doing, and this latest move makes a lot of sense for its long-term strategy. Here are three reasons why.
1. Higher rates don't always equal higher profits
Dominion's Virginia Power subsidiary is a regulated unit. Its profits are strictly monitored, and the utility isn't allowed to make a single cent off charging more for fuel than its actual cost. Dominion's latest request to lower fuel rates by about 3.3% isn't cutting into the utility's profits -- it's just ensuring there's no financial finger-pointing when regulators comb over Dominion's books for any hidden earnings.
The new rate would cut an average customer's monthly bill by $3.70, resulting in $140 million in savings, a sizable chunk of the average $2 billion the company usually spends on fuel every year. Rather than backtrack off high bills later in the year, Dominion pre-emptively filed the request seven months early.
But for customers, rates are rates, and not all utilities are in a position to pass on savings. While Dominion has been able to capitalize on cheaper and cheaper natural gas from the Marcellus region, Floridians are feeling the squeeze.
Starting in 2014, Duke Energy's (NYSE:DUK) Florida subsidiary wants its customers to pay around 7% more for their electricity. For the average user, that equates to more than $8 a month added on to their current bill and includes a charge of $0.89 per month to help the company recover from the retirement of its Crystal River nuclear plant.
Around the same time, TECO Energy's (UNKNOWN:TE.DL) Tampa Electric utility requested an even larger average $11.68 bill boost, but only around $1.28 of that accounts for fuel costs. TECO has been behind the times on its return on equity (the single-most important investment indicator for regulated utilities), and previously expected its ROE to clock in at less than 9% for 2013. But TECO's request was approved in September, and the company can now enjoy 10.25% ROE off its 5.5% increase in regulated revenue.
2. More customers always mean more profit
While Duke has had to add on customer costs it can't profit from, Dominion's rate decrease should translate directly to happier customers at no sacrifice to shareholders. All things equal, happy customers use more product and attract other customers. If Dominion's rate decrease is enough to increase average use or add on more customers, its absolute ROE will expand regardless of fuel expenses.
3. Making nice with regulators is smart
Like it or not, electricity rates are political and economic tools. Regulators can reject rate increases if they think it'll slow the economy, if they believe a utility is asking for more than it deserves, or if it would somehow reflect badly on their regulatory body. For this reason, the smartest utilities pick their battles, requesting reasonable rates when the time is right -- and holding off when it's not. Dominion's request today could give it good grace down the road, when the company needs to add on costs for other reasons.
The world of regulated utilities is increasingly complex and volatile. The energy sector is in a major shakedown phase, and even stalwarts like utilities aren't as stable as they once were. Dominion's latest move puts it in a better place to react to the unknown future of its sector, and other companies would do well to follow suit. If they can.
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