Wal-Mart To CL&P: Your Rate Increase Is 'Excessive'

With energy being one of its largest costs, Walmart has a huge interest in the rate increase. (Reuters)

The residents and state officials clamoring against Connecticut Light & Power's proposed rate increase have gained a sizable corporate ally: the world's largest retailer.

Wal-Mart Stores Inc. in recent weeks has begun a careful critique of CL&P's request for a steep increase in distribution rates.

An executive at Wal-Mart's headquarters in Bentonville, Ark., called some of the changes proposed to the company's profit margin "excessive" based on the general direction of profit margins in the industry and the consideration of regulators on a measure to make CL&P's revenues more stable.

In testimony filed last week, Wal-Mart's head of energy analysis, Steve W. Chriss, urged regulators to "consider the impact on customers thoroughly and carefully to ensure that any increases in CL&P's rates is only the minimum amount necessary for the utility to provide adequate and reliable service."

A spokeswoman for CL&P's parent company, Northeast Utilities, said the company has "worked hard to hold the line on rising operating costs" and trusts that regulators will "conduct a comprehensive review of our targeted system investments."

Wal-Mart's critique follows the concerns from state officials and residents about how the proposed increase would make it more difficult for customers to control their energy costs through energy efficiency or distributed generation such as rooftop solar. The proposal involves a large increase in the fixed monthly customer charge, an element the company says is necessary as energy use has waned in recent years.

Wal-Mart, which recorded $476 billion in sales last year, has a huge interest in the rate increase being only as high as it has to be. Energy is one of its largest costs.

In Connecticut, Wal-Mart's stores use about 60 million kilowatt hours a year; that's nearly as much as 7,700 average homes' annual power use. Twenty-eight of the company's 39 Connecticut stores fall in CL&P's distribution territory. Wal-Mart has not responded to a request for comment.

CL&P, which unsuccessfully opposed Wal-Mart's request to enter testimony into the case on its rate increase, is asking regulators to approve a rate increase that would give it an additional $231 million a year.

The amount covers $117 million in added regular distribution costs, $90 million in damage costs from major storms, and $25 million in system resiliency costs such as putting underground wires in critical areas, enhanced tree trimming and stronger wires.

As part of the overall increase, CL&P also wants a higher profit margin — a major sticking point for Wal-Mart.

Right now, CL&P makes 9.4 percent on every dollar it spends on distribution work. Its "return on equity," this ensured profit margin is set by regulators and often tracks that of similar companies and interest rates in general.

The request pending before the state Public Utilities Regulatory Authority asks to bump the rate up to 10.2 percent, an increase Wal-Mart says makes Connecticut Light & Power $23 million more a year.

Chriss provided regulators a list of recently set profit margins for electric distribution utilities, showing the average return on equity as 9.57 percent. For example, Connecticut regulators recently approved a rate of 9.15 for United Illuminating, the state's other major electric distribution company. On top of that, Chriss noted that the margins are trending downward, not upward.

Another piece of Chriss' argument is how regulators plan to establish a way to make CL&P's revenues more stable, through a practice called decoupling. This would guarantee the company a certain forecasted revenue: If the company earns more, the difference is split with customers, and if the earnings are less, the company gets the difference through the next rate case.

In addition to removing some disincentives to support energy efficiency programs that reduce how much electricity utilities sell, it makes sales more stable and less risky. Chriss concluded, citing regulators' earlier decisions, that this fact should require a reduction in the company's profit margin.

If regulators approve a decoupling plan for CL&P, Chriss said, "it should consider the extend to which implementation of the mechanism reduces CL&P's business risk and should be reflected" in its return on equity.