SIGNIFICANT REGULATORY POLICIES
ELECTRICITY SECTION

This section is responsible for monitoring the revenues, expenses, investment (rate base), equity, debt and RSE program for Alabama Power Co. This includes financial analyses, compliance auditing and the design and implementation of monitoring and forecasting procedures. Also, this section is responsible for analyzing the various filings by the company and submitting recommendations to the Commissioners. These filings pertain to rate adjustments, new tariffs, certificates for new plant, accounting issues, special contracts, financing issues and other regulatory matters.

Rate Stabilization and Equalization (RSE)
Under the RSE program for Alabama Power Co., the Electricity Section examines the company's books and records on a monthly basis to determine the Retail Return on Common Equity (RRCE) for the preceding 12-month period. Every third month (January, April, July, and October) is a point of test. The section prepares a monthly report for each Commission meeting, indicating the current RRCE, any ensuing rate adjustment, the determinations of RSE since the first filing and the projected RRCE for the next point of test.

The approved Retail Return on Common Equity range for Rate RSE is 13.0 percent to 14.5 percent, with an adjusting point of 13.75 percent.

In June 1995, the current RSE plan for Alabama Power Co. was extended through December 2000. The Commission may elect to review Rate RSE in calendar year 2000 to determine if continued operation of the mechanism is appropriate, or if some alternative form of regulation should be implemented in January 2001. In addition to placing a moratorium on rate increases (but not rate decreases) under Rate RSE until January 2001, the order provided for:
(1) a reduction to 14.00 from 15.00 mills per kilowatt-hour (kwh) in the Energy Cost Recovery ECR) adjustment factor for all rate schedules for the 12 months effective July 1995;
(2) a waiver of the July 1995 and July 1996 rate adjustments under Rate CNP (Greene County combustion turbines) applicable to nonresidential rate schedules; and
(3) an increase in the customer charge for residential rates together with a commensurate reduction in certain nonresidential rate schedules.

When the RRCE goes above 14.5 percent (upper limit of the equity return range), rates are decreased to bring the return back to the 13.75 percent adjusting point. Adjustments are based on financial results for the 12-month period ending two months prior to the proposed effective date of the change.

In June 1995, the Commission approved an application by Alabama Power Co. to establish return parity between customer classes. The Class Return Equalization Adjustment (Rate CREA) Rate is a revenue neutral adjustment set up to bring equality to the rates of return on investment between residential and non-residential customers. In order 24860, Rate CREA allows for adjustments to be made, if necessary. The first adjustment to be effective for billings was January 1999. On November 15, 1999, Alabama Power Co. filed a rate adjustment in accordance with Rate CREA to be effective for January 1, 2000, implementation. Upon review of the proposed rate schedules and further consideration of the Commission's June 12, 1995, order, the Commission suspended the operation of Rate CREA for the January 1, 2000, adjustment.

On June 15, 2000, Alabama Power Co. filed a withdrawal of Rate CREA, thus eliminating the 2000 and 2001 adjustments.

The net amount of all rate increases and decreases under Rate RSE since its inception in November 1982 results in a net increase of $124,151,728 or 5.95 percent. There were no rate adjustments pursuant to Rate RSE for FY-00.

Energy Cost Recovery (ECR)
Rate ECR is the method used to recover the retail customer's portion of energy cost. Initially established at 17.88 mills per kwh, the rate has been adjusted for temporary periods of time to reduce the under/over collections accumulated in the energy cost account.

The Electricity Section prepares a report for the monthly Commission meeting reflecting the status of energy costs recovered, the accumulated over/under collection, and an updated ECR projection. This projection assumes 100 percent normal hydrogeneration.

In July 1995, the ECR factor was reduced from 15.00 to 14.00 mills per kwh and remained at that level through June 30, 2000. In July 2000, the factor was changed to 15.50 mills per kwh for the period July 2000 through December 2000, with an ECR factor of 17.88 mills per kwh established for the billing months of January 2001 and thereafter.

Certificated New Plant (CNP)
The Electricity Section conducts the financial analysis of Certificated New Plant (CNP) filings by Alabama Power Co. Under Rate CNP, rates are adjusted beginning with the second month after the month in which a new plant begins commercial operation or when a portion of an operating plant is sold. The net amount of all CNP adjustments since its inception reflects an increase of $57,844,727.

In December 1997 in Docket 26115, the Commission granted Alabama Power Co. a certificate of convenience and necessity for the construction and installation of three combined-cycle generating units. These units will produce a total of 800 megawatts of combined cycle generating capacity at an estimated cost of $290 million, and will be located in Mobile, Alabama at Alabama Power Co.'s Barry Steam Plant site. In April 1999 this docket was amended to increase the total amount of generating capacity from 800 megawatts to 1,075 megawatts at an estimated cost of $384 million. The first unit, Barry Unit Six, began commercial operation on May 30, 2000. The second unit is scheduled to begin operation in June 2001. The company agreed to waive the operation of Rate CNP for the first unit, but Rate CNP will operate on the second unit.

During FY-99, Alabama Power Co. began construction of a co-generation facility adjacent to two of its industrial customers (Degussa Corp. and Phenolchemie, Inc.). The facility will provide process steam to the customers concurrent with the production of electricity for use on the company's electric system. Primarily composed of a combustion turbine, the facility will have approximately 207 megawatts of electric capacity and will serve as a base load resource for the company at a cost of approximately $113 million. Phase One went commercial in December 1999, and Phase Two is scheduled to go commercial in November 2000. As a condition of Commission approval, the company agreed to waive the operation of Rate CNP associated with the commercial operation of the co-generation facility.

On February 11, 2000, Alabama Power Co. filed with the Commission a revised Rate CNP to be effective March 13, 2000. The purpose of the revision is to provide a mechanism for recovering the fixed costs associated with a power purchase arrangement that is certified by the Commission in lieu of a traditional rate-based addition of generating plant. The Commission approved the revised Rate CNP.

Flexible Contract Rate (FCR)
On February 28, 1996, Alabama Power Co. filed with the Commission a new Flexible Contract Rate (Rate FCR). Rate FCR is applicable to commercial and industrial customers who have a need for flexibility in rates and/or service and who have an account that is no less than one-megawatt. In most cases, the need for additional rate or service flexibility for either a new customer or an existing customer's expansion is the reason for executing a Rate FCR contract. This rate was approved in April 1996.

For the period October 1, 1999, through September 30, 2000, the company did not seek Commission approval to utilize Rate FCR for any new electric service contracts.

Natural Disaster Reserve (NDR)
By order dated Oct. 3, 1994, the Commission granted Alabama Power Co. authority to establish a reserve of $32 million against which extraordinary operation and maintenance expense resulting from natural disasters would be charged. That reserve was established and has served to help mitigate the disruptive effects of significant natural disasters in the company's service territory.

However, the Natural Disaster Reserve was substantially depleted in October 1995 because of Hurricane Opal. Under the monthly accruals established in the original order, it would have taken more than eight years to restore the reserve to the authorized level of $32 million.

That's why in December 1995 the Commission authorized the company to make additional accruals, without further order by the Commission, above the normal monthly amount of $250,000 whenever the balance in the Natural Disaster Reserve declines below $22.4 million. Accruals above normal monthly amounts may continue until the reserve is restored to $32 million and must be reported to the Commission in writing.

For the 12-month period ending September 30, 2000, there were no charges against the reserve. However, the company's service territory did experience some damage from various storms during the period October 1, 1999, through September 30, 2000, and these charges are being accumulated. The company anticipates charging the reserve approximately $10 million because of this collective storm damage. The company has made no additional accruals above the normal monthly amount of $250,000 to the Natural Disaster Reserve for this same period. The NDR balance at September 30, 2000, was $21,178,551.02.

Accounting for Balance Sheet Asset Reductions
On Dec. 4, 1995, the Commission authorized Alabama Power Co. (Informal Docket U-3647) to reduce balance sheet items such as production plant in service, cost incurred in the redemption and refinancing of securities and other deferred assets. This reduction could be no more than the company's actual positive revenue variation from the base rate revenue budget.

Also, on April 21, 1997, the Commission granted the company the additional authority to reduce balance sheet asset items in conjunction with future reductions in retail rates (Informal Docket U-3741).

For the period October 1, 1999, to September 30, 2000, the company made no accruals pursuant to Informal Docket U-3647 or Informal Docket U-3741.

New and Revised Tariffs
This year, the Commission was scheduled to review the cost to serve different rate classes and other issues in its investigation of restructuring the electric industry in Docket 26427. Because of the complexities of this issue, the Commission suspended (December 1999) the operation of Rate CREA. The Commission did not believe that the January 1, 2000, adjustments contemplated by Rate CREA should occur until the proceeding in Docket 26427 was final. In June 2000 Alabama Power Co. withdrew Rate CREA, thus eliminating the latter two adjustments originally contemplated for January 2000 and January 2001. Therefore, only a few revisions were made to rates and rate riders.

>From October 1, 1999, through September 30, 2000, Alabama Power Co. petitioned the Commission to revise Rate PAE (Docket 18005) and Rate Rider TVSS (Docket U-3477). Rate PAE (Purchase of Alternate Energy) was revised (20th) and became effective June 2000 as per Commission order dated March 1981. Docket 18005 required Rate PAE to be reviewed annually and reflect any updated costs. Rate Rider TVSS (Transient Voltage Surge Suppressor) was revised for the first time. Effective date was September 1, 2000. The original Rate TVSS was approved August 1, 1999. This rate rider allows a consumer an option to lease a Transient Voltage Surge Suppressor unit that is installed on a consumer's service entrance and is designed to protect motor driven devices from externally generated surges. This revision allows for installation over 200 amps and will be extended to larger commercial and industrial customers.

Alabama Power Co. also filed for other minor revisions to and withdrawal of various rates and rate riders. Several rates were revised to incorporate a five-year term with a one-year notice to terminate. The Commission approved the petition in Informal Docket U-4226, effective with November 2000 billing. The specific rates and rate riders amended were as follows:
Rates ASL, BEVT, CFTV, TST & LPLM were revised to include the same language as used in the above-mentioned Commercial Time-of-Use Rates.

Rates LPTS and LPTM were revised to modify the contract term from five years to one year, and Rate HOSP-M was withdrawn. No customers were served under Rate HOSP-M. Customers eligible for service under Rate HOSP-M can receive service under Rate HCARE-M.

Rate ILTU (Incremental Load - Time of use) was restricted to existing customers on that rate. Due to fluctuations in incremental cost, Alabama Power Co. stated Rate ILTU was no longer appropriate and should not be offered to any new customers. However, existing customers under this rate will be allowed to continue service until their contracts expire or are terminated.

Rate LPTL was amended to modify the minimum bill calculation for customers on Rate LPTL with Rate Rider RGB (supplementary, backup, or maintenance power). Customers taking service under Rate LPTL and Rate Rider RGB have a minimum bill component of $5 times the monthly billing capacity. In addition, the Commission instructed Alabama Power Co. to revise the minimum bill section of Rate LPTL to include applicable adjustments for transformation facilities for consumers using Rate Rider RGB. Also, the Term of Contract language in Rate LPTL was amended to incorporate a five-year term with a one-year notice to terminate consistent with language described in the above mentioned rates. The applicability clause in Rate Rider ML (multiple load) was revised to specify that customers taking service under Rate Rider RGB are not eligible for Rate Rider ML. Some minor modifications were made in the applicability, definitions and rates portion of Rate Rider RGB. This change included clarification that usage is for the premises under contract, and language was incorporated to clarify the demand minimums associated with the applicable rate for billing purposes.

In August of this year, Alabama Power Co. requested approval to revise the company's Special Rules Governing Application of Commercial and Industrial Rates ("Special Rules"). In the filing, Alabama Power Co. proposed to include Rate LPLM as a rate that would qualify for the six-month load development period under Rule 2(d) of the Special Rules.

Docket U-4220 was approved by the Commission as petitioned by the company with November 2000 as the effective date. Alabama Power Co. had proposed the revision "Example of Application" in Rule 7 of the Special Rules. The "Example Application" referred to the summer billing months as June through October, even though the Commission had previously approved summer billing months of June through September. The new proposal more clearly reflected the appropriate summer months.

This past year, technology enabled the public to access current rate schedules and review current issues via the Internet. To view this information, click on "Pricing" on Alabama Power Co.'s Web site at www.southerncompany.com/alpower.

Financing
The Electricity staff reviews all petitions filed with the Commission by Alabama Power Co. and Southern Electric Generating Company (SEGCo), when the company seeks approval to engage in the issuance of securities or to assume obligations pursuant to other types of debt instruments. Upon analysis and evaluation, the staff makes recommendations to the Commission pertaining to those petitions. The Commission subsequently makes a disposition of the petition by an order.

On November 1, 1999, the Commission issued an order regarding Informal Docket U-4082 granting Alabama Power Co. the authority to (1) issue additional securities and (2) assume obligations in connection with the issuance of promissory notes by Southern Electric Generating Company (SEGCo). The amounts of these securities issued during 1999 and 2000 were not to exceed $650,000. Alabama Power Co.'s obligation as a guarantor in connection with the issuance of promissory notes by SEGCo during 1999 and 2000 was not to exceed $50,000.

Auditing
The Electricity Section's auditors conduct monthly analytical reviews/audits to test the accuracy of financial data submitted by Alabama Power Co. This same data is then used to calculate the company's Retail Return on Common Equity (RRCE).

Since the company's fuel costs are approximately 50 percent of total operations and maintenance (O&M) expense, the section's monthly fuel audit is particularly important. For this audit, all coal purchase and burn records are reviewed each month. Additionally, the auditors make a site visit to one steam plant each month to verify that the plant burn and purchase records agree with the corporate fuel department's accounting records.

Also, the section conducts a bimonthly review of the company's customer accounts, customer service, sales and administrative and general expenses. These costs are approximately 10 percent of the company's total O&M expenses. The section reviews these costs for proper FERC account classification. The proper classification is important to ensure the accuracy of the RRCE calculations.

Additionally, the section's auditing staff investigates any areas of concern that are highlighted in the monthly monitoring and analytical reports.

Analysis, Evaluation and Forecasting
The Electricity Section evaluates and documents the findings from monitoring and auditing activities, generally within 30 days of the closing of Alabama Power Co.'s books and records. The documentation is as follows:
  1. Monthly evaluation of Rate RSE
  2. Effect of variances in expenses and revenues on rate of return
  3. Fuel and purchased power expenses
  4. Energy cost recovery
  5. Operation expense
  6. Maintenance expense
  7. Depreciation expense
  8. Decommissioning cost for nuclear facilities
  9. AFUDC and interest expense
  10. Operating revenues
  11. Unit power, economy and emergency sales
  12. Advertising expense
  13. Unit cost of generating facilities
  14. Coal costs
  15. Operational statistical data by division
  16. Steam heat operating revenues and expenses
The section conducts on-site investigations requiring examination of work papers, financial reports and other records. When necessary, the staff conducts meetings with officials of Alabama Power Co. and/or Southern Co. Services, Inc. to discuss related matters (company policy, audit exceptions, filings, company programs, etc.).

In addition, the staff prepares a Retail Return on Common Equity forecast for each point of test in the calendar year. Also, the section conducts annual analyses of the company's budget, return on investment by customer classification, the Jurisdictional Allocation Study factors and the Cost Allocation Methodologies from Southern Co. Services, Inc.

Finally, the section analyzes and makes recommendations on all tariff changes and special contracts filed by Alabama Power Co. The staff participates in all proceedings before the Commission relating to Alabama Power Co. The staff responds to inquiries from law offices, consulting firms, utilities, consumers and other regulatory bodies regarding electricity rates, regulatory practices and industry restructuring.

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