PSC grants Shawano electric rate hike

City only gets half of its requested hike for Aarrowcast

Kevin Murphy Leader Correspondent

The Public Service Commission granted Shawano Municipal Utilities an overall 2.88 percent electric rate increase Thursday but only about half of what it sought for its largest customer, Aarrowcast, Inc.

Thursday’s rate increase comes barely a year after SMU’s last increase, which the utility has since said has not produced enough revenue to prevent its non-industrial customers from subsidizing the cost of serving Aarrowcast with power.

“By our calculation in 2017, we lost $840,000 in the cost of purchased power alone to Aarrowcast,” said Brian Knapp, city administrator.

Although SMU can adjust its rates as the cost of power it buys wholesale fluctuates, it can only do so within the average cost of power for all customers. The cost of wholesale power it supplies its largest industrial customer, Aarrowcast, is billed at rates lower than the average cost of power, Knapp explained.

The power cost adjustment clause customers see on their bills just does not recover the increases in the cost of power to serve customers the size of Aarrowcast, he said.

“We buy a kilowatt hour at $1 and sell it at 83 cents,” to Aarrowcast, Knapp said.

SMU last implemented new rates on Dec. 31, 2016, which the PSC projected would earn the utility an additional $705,496 in annual revenue and a 5 percent rate of return on the value of its infrastructure. However, by August SMU projected that the new rates would only boost annual net income by $297,007 and earn a 2.15 percent rate of return.

By year’s end, Knapp said SMU’s net income was down to about $30,000.

SMU attributed its lackluster financial situation on changes Aarrowcast made in response to the last rate increase, which bumped its rates by 5 percent. Since then Aarrowcast has spent $3 million for more energy-efficient melting furnaces and changed operations to times of day when rates are lower.

SMU filed a rate request in June initially seeking to increase electric rates by $392,247, or 1.8 percent, based on a 5 percent return on the value of its infrastructure.

PSC staff reviewed the application and recommended a 2.88 percent overall rate increase or $621,028 in new net income and a 5 percent rate of return.

Rates utilities charge their customers are supposed to be based on the cost to serve them. Industrial customers like Aarrowcast are assessed higher overall rates than residential customers because a utility typically has to invest more in infrastructure to serve industrial customers.

Based on its estimates of what it costs to serve Aarrowcast, SMU sought to increase the company’s rates by 8 or 9 percent. Anything less would have the SMU’s non-industrial customers subsidizing the cost to serve Aarrowcast, Knapp said.

The Citizens Utility Board intervened in the rate case and recommended a 7 percent increase for Aarrowcast and increases in the range of 2.5 percent for residential and small business class customers.

“Obviously, Aarrowcast is an important, major employer, but CUB became involved to make sure residents and small businesses aren’t paying more than they need to,” said Tom Content, CUB’s executive director.

Aarrowcast received the highest rate increase of any SMU customers in the December 2016 rate order, and objected to the 8 percent requested increase. It claimed it was not being given credit to responding to market signals in the last rate case and taking conservation measures to save energy costs.

The company has been in Shawano for more than 40 years, provides 285 full-time salaried jobs, up 43 from 2016. The company says it wants to add a new product line which would result in 30-45 new jobs. However, electric rates greatly impact production costs and the ability to remain competitive drives the decision to expand or not, according to testimony it filed with the PSC.

“(Brian Knapp) has gone so far as to suggest, in a meeting with Aarrowcast executives and the Shawano mayor, that SMU … would be better off if Aarrowcast was not a customer of the utility,” according Aarrowcast’s filed testimony.

Aarrowcast said a 4 percent increase this year would be more proportional and gradual than the 8 percent SMU requested.

“A 37 percent rate increase over five consecutive rate cases is the definition of rate shock,” according to Aarrowcast’s filed testimony.

Shawano Paper Mills, a division of Little Rapids Corp., is SMU’s second largest customer. It accounts for 20 percent of SMU’s revenue, and also asked the PSC to set rates that are fair.

Since 2010, Little Rapids has invested $6 million in energy-efficient boilers and purchased a $40 million paper machine last year in addition to $3 million in annual capital expenditures.

“(A)ccess to affordable, cost-based, subsidy-free electricity is critical to the viability of Little Rapids,” according to the company filed testimony.

The three PSC commissioners agreed with Aarrowcast and increased their rates by 4 percent, calling it gradual and sensitive to their business needs.

“Nine percent after 12 months is substantial for a company that has tried to contribute to the solution and is well above inflationary costs,” said Commissioner Lon Roberts.

Commissioners Ellen Nowak and Mike Huesbsch both said they wanted to select rates that did not cause Aarrowcast’s to spike while still not imposing too large of subsidy on other customers.

Aarrowcast did not return a phone call seeking comment on the rate decision.

Knapp said the PSC’s action will continue other customers to subsidize Aarrowcast. However, SMU will not seek its next rate increase until its rate of return drops to around 3 percent, where it becomes difficult to fund ongoing maintenance and other needs.

The new rates will take effect about April 1 and be reflected on bills mailed in May, Knapp said.