BEFORE THE PUBLIC
SERVICE COMMISSION
OF THE STATE OF MISSOURI
Noranda Aluminum, Inc., et
al., )
)
Complainants, )
)
v. ) File
No. EC-2014-0224
)
Union Electric Company,
d/b/a )
Ameren Missouri )
)
Respondent. )
APPEARANCES
Diana
M. Vuylsteke, Mark B. Leadlove, Kenneth J. Mallin, Elizabeth Carver, and David
Storey, Attorneys at Law, Bryan
Cave, LLP, 211 N. Broadway, Suite 3600, St. Louis, Missouri 63102,
And
Edward
F. Downey and Carole L. Iles,
Attorneys at Law, Bryan Cave, LLP, 221 Bolivar St., Suite 101, Jefferson City,
Missouri 65109.
For the Complainants
Thomas
M. Byrne, Director-Assistant
General Counsel, and Wendy K. Tatro, Director-Assistant General
Counsel, Ameren Services Company, P.O. Box 66149, St. Louis, Missouri 66149,
James
B. Lowery, Attorney at Law, Smith
Lewis, LLP, 111 S. 9th Street, Suite. 200, Columbia, Missouri 65205,
And
L.
Russell Mitten, BRYDON,
SWEARENGEN & ENGLAND, P.C., 312 East
Capitol Avenue, P.O Box 456, Jefferson City, Missouri 65102-0456.
For
Union Electric Company, d/b/a Ameren Missouri.
Kevin A Thompson, Chief Staff Counsel, Alexander Antal,
Whitney Hampton, Akayla Jones, and Tim Opitz, Legal Counsel, and Jamie
Myers, Rule 13 Certified Law Student, 200 Madison Street, Ste. 800, Jefferson
City, Missouri 65102-0360.
For the Staff of the Missouri Public Service
Commission.
Dustin J. Allison, Acting Public Counsel, and
Marc D. Poston, Senior Public
Counsel, 200 Madison Street, Suite 650, Jefferson City, Missouri 65102-2230.
For the Office of the Public
Counsel and the Public.
Thomas R. Schwarz, and Stephanie S. Bell, Attorneys at Law, BLITZ, BARDGETT &
DEUTSCH, L.C., 308 East High St., Suite 301, Jefferson City, Missouri 65101.
For
the Missouri Retailers Association.
Mark W. Comley,
Attorney at Law, NEWMAN, COMLEY & RUTH, P.C., 601 Monroe St., Suite 301,
P.O. Box 537, Jefferson City, Missouri 65102-0537.
For
Continental Cement Company, L.L.C.
John B. Coffman,
Attorney at Law, John B. Coffman, LLC, 871 Tuxedo Blvd, St. Louis, Missouri
63119-2044.
For
Consumers Council of Missouri.
Lisa Langeneckert,
Attorney at Law, P.O. Box 41173, St. Louis, Missouri 63141.
For
River Cement Company.
Edward
F. Downey, Attorney at Law, Bryan
Cave, LLP, 221 Bolivar St., Suite 101, Jefferson City, Missouri 65109.
For
Missouri Industrial Energy Consumers.
Rick D. Chamberlain,
Attorney at Law, BEHRENS, WHEELER & CHAMBERLAIN, 6 N.E. 63rd
St., Suite 400, Oklahoma City, Oklahoma 73105,
And
Marcos A. Barbosa,
Attorney at Law, BAKER STERCHI COWDEN & RICE, LLC, 2400 Pershing Road,
Suite 500, Kansas City, Missouri 64108.
For
Wal-Mart Stores East, LP, and Sam’s East, Inc.
Leland B. Curtis,
Carl J. Lumley, Robert E. Jones, and Edward J. Sluys, Attorneys at
Law, CURTIS, HEINZ, GARRETT & O’KEEFE, P.C., 130 S. Bemiston, Suite 200,
St. Louis, Missouri 63105.
For
the City of O’Fallon and the City of Ballwin.
CHIEF REGULATORY LAW
JUDGE: Morris L. Woodruff
REPORT AND ORDER
Table of Contents
Appearances....................................................................................................... 1
Procedural
History................................................................................................ 4
Findings of Fact................................................................................................... 5
Conclusions of
Law..............................................................................................
18
Decision ............................................................................................................ 24
Ordered Paragraphs............................................................................................ 28
The Missouri Public Service Commission,
having considered all the competent and substantial evidence upon the whole
record, makes the following findings of fact and conclusions of law. The positions and arguments of all of the
parties have been considered by the Commission in making this decision. Failure to specifically address a piece of
evidence, position, or argument of any party does not indicate that the
Commission has failed to consider relevant evidence, but indicates rather that
the omitted material was not dispositive of this decision.
Summary
In this case,
Complainants seek a change in rate design to reduce the rate assessed to the
Large Transmission Service Class, of which Noranda Aluminum, Inc. is the only
customer and which is the lowest-cost rate class of all customer classes served
by Ameren Missouri. This proposal asks the Commission to provide rate relief that
departs from traditional cost-of-service ratemaking. Complainants’ request is
founded on three contentions: 1) Noranda
Aluminum, Inc.’s aluminum smelter is crucial to Missouri’s economy; 2) the
smelter cannot be sustained without the rate relief requested; and 3) all
Ameren Missouri ratepayers will directly benefit from the relief requested
because granting that relief is more beneficial compared to Noranda leaving the
Ameren Missouri system.
While there is substantial evidence in the record regarding the impact of the
smelter on southeast Missouri and on the state, the evidence does not support the
second and third of Complainants’ contentions. Accordingly, the Commission finds that the
Complainants have failed to carry their burden to show that Ameren Missouri’s
rate design should be modified, contrary to traditional cost of service
principles, in order to give a reduced rate to Noranda Aluminum, Inc. The complaint is, therefore, denied and
dismissed.
Procedural History
On February 12, 2014, Noranda
Aluminum, Inc., joined by 37 individual customers of Union Electric Company,
d/b/a Ameren Missouri, filed a rate design complaint and request for expedited
review. The complaint asked the
Commission to revise the rate Ameren Missouri is allowed to charge Noranda for
operation of its aluminum smelter located near New Madrid, Missouri. The Complainants seek to reduce the rate
charged to Noranda to $30 per MWh and to adjust the electric rates of Ameren
Missouri’s other ratepayers upward to make the rate changes revenue neutral to
Ameren Missouri. The complaint alleges
that unless Noranda receives the reduced rate it seeks, it will lack sufficient
liquidity and may be forced to close.
As required by Commission rule 4 CSR 240-2.070, the
Commission notified Ameren Missouri of the filing of the complaint and directed
the utility to file is answer no later than March 17. Ameren Missouri filed its answer on March 17,
along with a motion to dismiss the complaint.
The Commission denied that motion to dismiss on April 16.
The Commission allowed the following parties to
intervene: Consumers Council of Missouri; Continental Cement Company; the City
of O’Fallon and the City of Ballwin; Wal-Mart Stores East, L.P. and Sam’s East;
the Missouri Industrial Energy Consumers; River Cement Company; and the
Missouri Retailers Association. In compliance
with an expedited procedural schedule, the parties prefiled multiple rounds of testimony. In addition, the Commission held three local
public hearings to collect testimony from interested members of the
public. An evidentiary hearing was held
on June 16 and 17. The parties filed initial
post-hearing briefs on July 8, with reply briefs filed on July 16.
Findings of Fact
1. Union Electric Company is an investor-owned
electric utility, subject to the jurisdiction of this Commission and is the
largest electric utility in Missouri.
2. Noranda Aluminum, Inc., is a publicly-traded
(NYSE) company that operates as an integrated aluminum manufacturer. It owns and operates an aluminum smelter near
New Madrid, Missouri, and also owns and operates a bauxite mine in Jamaica, an
alumina refinery in Louisiana, and rolling mills in Arkansas, North Carolina,
and Tennessee.
3. Noranda’s New Madrid smelter processes
alumina into molten aluminum, which is then processed into aluminum products
such as billet, rod, foundry products, and primary ingots. The process of converting alumina into molten
aluminum requires prodigious amounts of electricity.
4. The New Madrid smelter uses
approximately 480 MW of electricity, 24 hours per day, every day of the
year. It does so with a 98 percent load
factor, meaning the amount of electricity is uses varies very little from hour
to hour. Noranda is Ameren Missouri’s
largest customer, and is the largest consumer of electricity in Missouri.
5. When the New Madrid smelter is at full
production, at current rates, Noranda pays Ameren Missouri approximately $160
million in base rates for electricity each year, plus additional charges under
Ameren Missouri’s fuel adjustment clause.
6. Noranda employs 888 workers at its New
Madrid smelter and is the largest manufacturing employer in the southeast area
of Missouri. The smelter’s estimated payroll in 2013 was
$95 million, and its presence has a large economic impact on that economically
depressed region, and upon the entire state. The closure of the smelter could reduce the
gross domestic product of the state of Missouri by nearly $9 billion over a 25
year period.
7. The price Noranda receives for its basic
aluminum product is set by world-wide market forces through the London Metal
Exchange (LME).
8. Noranda takes electric
service from Ameren Missouri under the Large Transmission Service rate
schedule. Noranda is the only customer
that qualifies for membership in that rate class. Under rates established in Ameren Missouri’s
last rate case, File No. ER-2012-0166, which became effective on January 2,
2013,
Noranda pays a base electric rate of $37.94 per MWh, plus an extra amount for
the fuel adjustment clause rider, which is currently $3.50 per MWh, for a total
of $41.44 per MWh.
In recognition of the fact that it costs Ameren Missouri less to serve Noranda,
as established in the class cost of service studies presented in the last rate case,
Noranda’s current electric rate is lower than the rate for any other Ameren
Missouri customer.
9. Noranda asks the Commission to reduce the
rate it pays to $30 per MWh for a fixed term of ten years, subject only to a
rate increase of up to 2 percent at the time of each general rate increase
granted to Ameren Missouri by the Commission during this period.
That rate would not be subject to Ameren
Missouri’s fuel adjustment clause.
Noranda contends the $30 rate is “the highest rate Noranda could bear
that allows the New Madrid Smelter to be viable.”
10. Noranda concedes that the $30 per MWh rate
it requests for the next ten years is not based on cost of service principles. Instead, it claims that it is facing a
liquidity crisis and that a reduced rate is all it can afford if it is to remain
competitive with the rest of the aluminum industry.
11. In his testimony to this Commission, Kip
Smith, CEO of Noranda, offered a financial model to explain the company’s claim
that it is facing a short-term liquidity crisis and a long-term reinvestment
challenge. The results of that financial
model are reported in Exhibit A to Smith’s direct testimony. However, Noranda has designated that exhibit
as highly confidential so the details of the financial model cannot be
disclosed in this order. Noranda
summarizes the results of that model by stating that without actions to improve
its liquidity, including obtaining a reduced electric rate, Noranda would
consume all its available liquidity by the end of 2015.
12. On February 19, one week after Noranda
filed its direct testimony in this case, Noranda reported to its investors that
as of the end of 2013, it had a total liquidity of $196 million, representing
$117 million available borrowing capacity under a revolving credit facility
plus $79 million in cash. At that time, Smith, speaking to investors
at an earnings conference call, reported that “today we have a healthy balance
sheet and a solid liquidity position.”
13. At the end of the first quarter of 2014,
Noranda reported to its investors that it had a total liquidity of $191
million, representing $140 million of available borrowing capacity plus $51
million cash.
At that time, Dale Boyles, CFO of
Noranda, told investors “We believe our flexible capital structure, combined
with our focus on managing controllable costs and working capital, provides us
with a solid liquidity foundation as we work through the headwinds presented by
this portion of the commodity cycle.”
14. The assumptions used in the financial model
that Noranda presented to the Commission to support its assertion that it is
facing a liquidity crisis differ substantially from the assumptions used in the
financial model that it presented to Moody’s Investors Service on January 31,
2014, less than two weeks before it filed its complaint in this case. Again, the Moody’s presentation is highly
confidential so it cannot be described in detail in this order. Far from showing a liquidity crisis,
Noranda’s presentation to Moody’s showed adequate liquidity throughout the
five-year-cash-flow forecast used in the financial model.
15. The cash-flow forecast Noranda presented to
Moody’s is more favorable for two important reasons. First, the more pessimistic forecast Noranda presented
to this Commission as a justification for a lower electric rate assumes that
aluminum market prices will be lower than the anticipated prices used in the
Moody’s model. Second, the model
presented to the Commission assumes that Noranda will need to make substantially
more in capital investments each year than was assumed for the Moody’s
presentation.
16. For purposes of the cash flow model it
presented to the Commission to support its claim of a liquidity crisis, Noranda
assumed that future aluminum prices would be predicted by the Forward LME
price. However, for the Moody’s
presentation, Noranda relied on a price forecast derived from CRU’s Aluminum
Market Outlook for December 2013. Over the next several years, the CRU forecast
of aluminum prices is significantly higher than the Forward LME price.
17. The Forward LME price is established by the
market to allow for trading of aluminum now for a future transaction price. It is not a forecast of future aluminum
prices, a fact upon which the witnesses for Noranda and Ameren Missouri agree. Ameren Missouri’s witness, Robert Mudge,
explained that the CRU forecast is developed by:
one of the most, if not the
most respected data-gathering organizations in the industry who put together an
econometric model that includes data about supply and demand, inventory,
macroeconomic factors, interest rates.
They have a large model they use to develop this, and they will be
wrong. We don’t know if they’re too high
or too low. But they actually produce
something that is intended to forecast the price, by contrast to the LME
Forwards.”
18. If
the higher CRU forecast numbers were substituted for the lower Forward LME
prices in Noranda’s cash flow model, Noranda’s liquidity outlook improves
substantially.
Noranda’s witness does not dispute the accuracy of that calculation using that
assumption.
19. Noranda’s liquidity projections assume that
Noranda will need to make $100 million per year in sustaining capital
investments for the company as a whole, not necessarily for just the New Madrid
smelter. However, for its Moody’s presentation,
Noranda assumed that it would make only $75 million per year in capital
investments, which is the company’s average level of capital investment over
the last three years. Noranda told its investors that its
sustainable capital expenditures should be in the range of $65 to $75 million
per year. Most of the additional $25 million in capital
expenditures Noranda claims it will need to make in the future are for
unidentified growth projects.
20. Including in the cash flow model the
unidentified growth projects, for which Noranda asserts the need to make an
additional $25 million per year in capital expenditures, does not yield any
production or cash flow improvements within the five-year period of the
forecast, when compared to the cash flow model presented to Moody’s. Instead,
smelter production in the model presented to the Commission is identical to
that in the Moody’s presentation, even though a much greater capital
expenditure is incurred in the model presented to the Commission.
21. The fundamental demand for aluminum is
increasing and will generally support price increases. But the straight LME aluminum price is not
the only factor affecting the price Noranda receives for its aluminum
products. The global LME aluminum price
is adjusted to include a Midwest Premium that is paid for all aluminum produced
in the United States. The inclusion of regional premiums in the LME price is
designed to encourage local supply by recognizing transportation differentials
between regions of the world.
The Midwest Premium is also expected to
remain strong.
22. Noranda contends it must have a reduced
electric rate to effectively compete with other aluminum smelters in the United
States. The electricity rate paid by
Noranda is the fourth highest electricity rate among the nine U.S. smelters in
2013.
However, the rate Noranda paid for
electricity in 2013 was only about three percent above the average rate paid by
U.S. smelters.
23. Moreover, the cost of electricity is not
the only factor that determines whether an aluminum smelter can compete. The cost of production will vary among
smelters based on the cost of goods and services as well as the configuration
of the plant. The cost of alumina,
labor, and electricity account for 75 to 80 percent of a smelter’s total cost,
with alumina and electricity each comprising about one-third of the cost of
production. When the total cost of production at each
smelter is taken into account, at current electricity rates, the New Madrid
smelter operates at a total cost that is less than the average cost for a U.S.
smelter. In fact, at current rates, it
is the third cheapest producer of aluminum in the United States, largely
because it benefits from the cheapest alumina supply in the nation. If Noranda were granted the $30 rate it
requests, it would have the lowest total costs of any smelter operating in the
United States.
24. At the hearing, Smith testified that a few
days before the hearing an event occurred that had a bearing on Noranda’s
liquidity position. Smith’s testimony was offered in camera so
the details of the event cannot be described in this order. Even though the testimony was offered in
camera, counsel for the Complainants said, in open court, during her opening statement,
that “Noranda is currently out of cash and is paying its daily expenses by
borrowing against an asset-backed loan.
So the paychecks that will be issued this week to employees will be
funded by debt.” Again, later in her argument, she said: “But
the evidence shows that Noranda’s clearly in a liquidity crisis. It’s out of cash. It’s paying its daily expenses on its
asset-based loan, and its paying its employees from borrowed money.”
Obviously, statements of counsel are not evidence. The Commission cites those statements merely
to provide context for a matter that must otherwise remain highly confidential.
25. The facts of the event as actually
described in the evidence are much less dire than they would appear from the
statements of counsel. Noranda’s cash
flows can vary depending on the time of the month depending upon when its bills
are due and when payments are received from customers that like to pay at the
end of the month. The fact that the event occurred does not
have any broader implications on Noranda’s long-term liquidity position. Noranda has not informed its shareholders of
any liquidity crisis or the liquidity event through an 8-K filing with the
Securities and Exchange Commission. The Commission finds that the event described
by Smith does not change the analysis of Noranda’s liquidity position as found
by the Commission elsewhere in this order.
26. This is not the first time that Noranda has
argued to the Commission that it must have a lower electric rate if its New
Madrid smelter is to survive. In its
Report and Order resolving Ameren Missouri’s 2010 rate case, ER-2010-0036, the
Commission noted that a nonunanimous stipulation and agreement that was opposed
by one of the parties would have given Noranda a rate reduction, while all
other Ameren Missouri customers paid substantially higher rates. The Commission
stated “MIEC, and in particular, Noranda, attempt to justify these results by
claiming that Noranda needs special rate consideration to remain competitive
with other aluminum smelters in the United States, lest it be forced to close,
resulting in economic devastation to Missouri.”
27. In 2010, the Commission rejected the
stipulation and agreement that would have given Noranda a rate reduction while
increasing rates paid by all other customers. The New Madrid smelter did not close because
of that decision, but in 2011, Noranda’s board of directors voted to give its
shareholders a special dividend totaling $44 million.
28. Noranda was purchased from its previous
owner by Apollo Management, L.P., a private equity investment fund, on May 18,
2007. In a deal valued at $1.165 billion,
Apollo paid $214.2 million in equity and the balance was from debt secured by
Noranda assets and operations. Twenty-five days later, on June 12, 2007,
Noranda borrowed money to pay Apollo a dividend of $214.2 million. Thereafter, while still owning stock in the
company, Apollo has fully recovered its investment and currently has no equity
invested in the company. Noranda was
left with a capital structure of nearly 100 percent debt.
29. But Apollo was not done taking cash out of
Noranda. On June 13, 2008, Noranda paid Apollo another dividend of $100.7
million. Noranda conducted an Initial
Public Offering (IPO) of one third of its equity in Noranda on May 19,
2010. After the IPO, Apollo received
additional dividends of $107.9 million, as well as $151.1 million from the
secondary sale of Noranda stock. In all,
Apollo has realized dividends of $422.8 million and realized stock sale
proceeds of $151.1 million, while still retaining 34 percent of Noranda’s
stock. In addition, Noranda has paid
Apollo $31 million in management fees since the acquisition. As of the end of 2013, Noranda’s ratio of
long term liabilities to book capitalization is 87 percent.
30. Because of its debt, Noranda must pay
roughly $50 million per year in interest payments.
31. The Complainant’s proposal to shift some of
Noranda’s electric costs to Ameren Missouri’s other customers for a ten-year
period gives Noranda a subsidy of at least $331 million. That amount is calculated by taking the
difference between Noranda’s current rate base of $37.94 per MWh and its
proposed rate of $30.00 per MWh and multiplying that difference by Noranda
expected electric load of 4.169 million MWh per year, for ten years.
32. The basic subsidy of $331 million likely
understates the actual subsidy Noranda would receive over the ten years it
proposes to receive a reduced rate, because that calculation assumes no
increases in Ameren Missouri’s base rates over ten years and ignores the
existence of Ameren Missouri’s fuel adjustment clause. The Complainants proposed that Noranda be
exempted from the fuel adjustment clause and that any increases in base rates
be limited to two percent per increase.
As a result, as the rates Ameren Missouri charges the rest of its
customers increase, the amount of the subsidy received by Noranda would also
increase.
33. If it is assumed that Ameren Missouri’s
rates actually increase by six percent in June 2015, and six percent every 36
months thereafter, the total subsidy grows to $468 million. If it is assumed that Ameren Missouri’s rate
increases six percent every 24 months, the subsidy would be $529 million. Of course, no one can know with certainty how
much Ameren Missouri’s costs, and consequently its rates, may rise over the
next ten years, so the exact amount of the subsidy given to Noranda under the Complainants’
proposal cannot be known.
34. Moreover, as a practical matter, it is
unlikely that the subsidized rate given to Noranda could be ended after ten
years. By that time, the rate Noranda
would be paying would likely be even further below Ameren Missouri’s actual cost
to serve the company. If Ameren Missouri’s
general rates increased by six percent every other year, while Noranda’s rates
were allowed to increase by only two percent every other year, at the end of
ten years, the rate Noranda pays would be nearly 34 percent below its cost of
service. Clearly, Noranda would not be willing, or
able, to withstand a 34 percent rate increase in year eleven to return to
cost-based rates. As a result, the
subsidy could, in effect, become permanent.
35. The foundation for the Complainant’s claim
that the subsidy would benefit Ameren Missouri’s other customers as well as
Noranda is an assertion that while the rates paid by other customers would have
to go up to pay the subsidy, those rates would climb even higher if the subsidy
were not paid and Noranda closed the New Madrid smelter and stopped taking
electricity from Ameren Missouri.
36. The Complainant’s witness, Maurice
Brubaker, calculated that Ameren Missouri’s net revenue would be reduced by
approximately $60 million per year if the New Madrid smelter closed. In contrast, if the Complainant’s proposal was
implemented and the smelter remained open while paying a lower rate, Ameren
Missouri’s net revenue would be reduced by only $47.7 million, resulting in a
net benefit to other customers.
37. Brubaker’s calculation was based on the calculation
by another Complainants’ witness, James Dauphinais, of the net costs that
Ameren Missouri would avoid if the smelter closed and Noranda no longer took
power from Ameren Missouri. In his
direct testimony, Dauphinais estimated those net avoided costs to be $27.05 per
MWh. Brubaker then estimated that the difference
between the avoided cost of $27.05 per MWh and the $30.00 per MWh would provide
a benefit to other rate payers of roughly $12 million per year. To achieve the same $12 million per year
benefit to other ratepayers, the same $2.95 difference would have to be added
to whatever avoided cost was calculated.
38. In his surrebuttal testimony, Dauphinais
revised his calculation of Ameren Missouri’s avoided cost to arrive at an
estimate of between $27.91 and $28.49 per MWh. That estimate is still below the $30 per MWh
rate for Noranda proposed by the Complainants, but to achieve the $12 million
per year benefit originally described by Brubaker, the rate would need to
increase to between $30.86 and $31.44 per MWh.
39. Using different inputs and relying on more
recent price assumptions, Ameren Missouri’s witness, Matt Michels estimated
Ameren Missouri’s avoided costs to be $33.89 per MWh as of May 1, 2014. To give other ratepayers the $12 million
annual benefit initially described by Brubaker, Noranda’s rate would need to be
set at $36.84 per MWh, just $1.10 per MWh less than Noranda’s current base
rate.
40. Similarly, Staff’s witness, Sarah
Kliethermes, using different inputs and different price assumptions, calculated
that Ameren Missouri’s cost to serve Noranda at the time she prepared her
testimony is roughly $31.50. She estimated that a rate set at that amount
would allow Ameren Missouri to recover its costs at that time, but would not
contribute to Ameren Missouri’s common costs.
Thus, in order for other customers to be better off with Noranda on
Ameren Missouri’s system than they would be if Noranda left the system, Noranda
would have to pay some amount greater than $31.50 for its electric service. To give other ratepayers the $12 million
annual benefit of contributions to
common costs previously described would require a rate to be set at no less
than $34.45 per MWh.
41. Ms. Kliethermes’ calculation is the most persuasive
of the three calculations. Mr. Dauphinais’ calculation was less persuasive because
his initial calculation, presented in his direct testimony, relies heavily on a
single year of electric price information from a period when such prices were relatively
depressed. Electric prices are the largest component,
approximately 95 percent, of the calculation. In his revised calculation for his
surrebuttal testimony, he relies on a three-year average of those prices, but
purports to normalize away the higher electric costs experienced in the
unusually cold winter of January – March 2014. Such normalization is not appropriate because
while the extreme cold associated with a polar vortex may not reoccur
frequently, other, not necessarily weather-related, anomalies will occur and
have an impact on electric prices. Normalizing the one such anomaly that
happened to occur in the three years examined unfairly understates the expected
electric prices.
42. None of the proposed measurements of cost
to serve seek to determine Ameren Missouri’s fully embedded cost to serve
Noranda. That amount was determined in
the class cost of service study presented in Ameren Missouri’s last rate case
and was in the $36 range at that time. No party challenges that determination in
this case.
43. The value of all three calculations of
Ameren Missouri’s cost to serve Noranda is limited because they are based on
historical values, with no attempt to determine how the cost to serve might
change over the next ten years for which Noranda asks that it be given a
non-cost-based rate. Dauphinais
testified that he was not even attempting to project what costs might be in the
future; he was merely attempting to determine a reasonable cost at this time,
with the understanding that Noranda’s rates would be reviewed and adjusted in
Ameren Missouri’s next rate case.
44. Following questioning by Public Counsel,
Smith offered two commitments that Noranda would make if the Commission granted
it the reduced rate it sought. First, he
committed to continue to employ 888 full-time employees at the smelter while
the special rate remains in effect.
Second, he committed to invest a total of $350 million in capital
expenditures over the ten-year period of the rate design.
Conclusions of Law
A. Union Electric Company, d/b/a Ameren
Missouri is an electrical corporation as that term is defined at Section
386.020(15), RSMo (Supp. 2013). As an
electrical corporation, Ameren Missouri is subject to regulation by this
Commission as described in Chapters 386 and 393, RSMo.
B. Noranda Aluminum, Inc., is not a
regulated utility and is not subject to the jurisdiction of this Commission.
C. Section 386.390.1, RSMo 2000 establishes
the standards for bringing complaints before this Commission. The relevant part of section states:
Complaint may be made by
the commission of its own motion, or by the public counsel or any corporation
or person, chamber of commerce, board of trade, or any civic, commercial,
mercantile, traffic, agricultural or manufacturing association or organization,
or any body politic or municipal corporation, by petition or complaint in
writing, setting forth any act or thing done or omitted to be done by any
corporation, person or public utility, including any rule, regulation or charge
heretofore established or fixed by or for any corporation, person or public
utility, in violation, or claimed to be in violation of any provision of law,
or of any rule or order or decision of the commission;
The section goes on to
state:
Provided that no complaint shall be entertained by the
commission, except upon its own motion, as to the reasonableness of any rates
or charges of any gas, electrical, water, sewer, or telephone corporation,
unless the same be signed by the public counsel or the mayor or president of
chairman of the board of alderman or a majority of the council, commission or
other legislative body of any city, town, village or county, within which the
alleged violation occurred, or not less than twenty-five consumers or
purchasers, or prospective consumers or purchasers, of such gas, electricity,
water, sewer or telephone service.
This
complaint alleges that the rate Ameren Missouri charges to Noranda for
electricity is unreasonable because Noranda cannot afford to pay that rate. As required by the second part of the
statutory section, the complaint is signed by not less than twenty-five
customers, and, therefore, complies with the statutory requirements.
D. This action is a complaint
against Ameren Missouri. So, the
Complainants, as the party asserting the affirmative of an issue, bear the
burden of proving the allegations made in their complaint.
E. The complaint alleges that
the rate Ameren Missouri charges Noranda, a rate established by this Commission
in Ameren Missouri’s most recent rate case, is now unreasonable because without
a reduction in its electric rates, Noranda would have insufficient liquidity to
remain viable and would be subject to closure.
Those are the allegations the Complainants must prove to prevail in their
complaint. But even if the Complainants
are able to prove those allegations, there are other questions about whether
the Commission can grant the relief they request.
F. Section 393.130, RSMo
(Supp. 2013) establishes the requirements for the provision of service by
regulated utilities. In general, it
requires that all charges for utility service must be “just and reasonable” and
not more than allowed by law or order of this Commission. Subsection 2 of that statute further states:
No … electrical corporation
… shall directly or indirectly by any special rate, rebate, drawback or other
device or method, charge, demand collect or receive from any person or
corporation a greater or less compensation for … electricity …, except as
authorized in this chapter, than it charges, demands, collects or receives from
any other person or corporation for doing a like and contemporaneous service
with respect thereto under the same or substantially similar circumstances or
conditions.
Subsection
3 adds:
No … electrical corporation
… shall make or grant any undue or unreasonable preference or advantage to any
person, corporation or locality, or to any particular description of service in
any respect whatsoever, or subject any particular person, corporation or
locality or any particular description of service to any undue or unreasonable
prejudice or disadvantage in any respect whatsoever.
G. In sum, the statute says
that utilities cannot give any “undue or unreasonable” preference to any
particular customer, or class of customers.
The leading case interpreting the meaning of “undue or unreasonable”
preference is State ex rel. Laundry v.
Public Service Commission,
a 1931 decision by the Missouri Supreme Court.
The Laundry decision arose
from a complaint brought before the Commission by two laundry companies contending
that they should be allowed to receive water service at the same reduced rate made
available to ten manufacturing customers.
The court found that the special manufacturing rate had been put in
place by the utility to try to draw more business into its service area. In its decision, the Supreme Court found that
the laundries were similarly situated to the manufacturing customers and should
have been allowed to take water at the reduced manufacturer’s rate.
H. The Laundry decision merely decides that in the facts described in that
case, the laundries should have qualified for the industrial rate. However, Ameren Missouri cites to an even
earlier Commission decision that the Laundry
court quoted extensively for the proposition that all economic development
rates are forbidden by the controlling statute.
That Commission decision, Civic
League of St. Louis v. City of St. Louis,
does indeed sharply criticize a water rate imposed by the City of St. Louis for
the purpose of encouraging manufacturing enterprises to locate within the city,
and orders the city to revise those rates to avoid discrimination. However, the criticism was that the rates
imposed by the City of St. Louis were set below the cost of service and that
they were unreasonably low. In the words of the Commission:
The establishment of the
truth of such averment (that rates to manufacturers were below the cost of
service) would reveal not only unquestionably unjust discrimination, but also
an unreasonable low rate to this class (the manufacturers), and intolerable
oppression upon the general metered water users in that they would be compelled
to pay in part for water and service furnished to the favored class. The exercise of power crystallized into
legislation that unjustly discriminates between users of water in this manner,
in effect deprives those discriminated against of the use of their property
without adequate compensation or due process of law, and turns it over to the
favored class. It is in essence a
species of taxation which takes the private property of the general or public
metered water users for the private use of metered water users engaged in
manufacturing. This is an abuse of
power.
While this
decision speaks more directly to the propriety of below-cost rates, it does not
necessarily contradict the principle set forth in Laundry that the Commission may set preferential rates as long as
the preference is reasonably related to the cost of service and is not unduly
or unreasonably preferential. No party has identified any subsequent court
decision that would go as far as proscribing all economic development type
rates.
I. Instead, the courts that
have examined this issue have made fact-based inquiries about the statutory
proscription against unjust and unreasonable rates and undue or unreasonable
preference or disadvantage. So how does the Commission determine whether
a given rate is unduly or unreasonably preferential or disadvantageous? In a general rate case, the parties will
submit one or more class cost of service studies. Such studies are designed to determine the
amount of cost that each class of customer causes, and then recommend how rates
should be established to maintain the principle that those causing the costs
should be responsible for paying rates sufficient to recover those costs.
J. That does not mean all
customers should pay the same rate. On
the contrary, a single rate for all customers would likely be unjust because
different customers cause different amounts of costs. So, Ameren Missouri’s current rates recognize
several different rate classes, including the Large Transmission Service class,
of which Noranda is the only member.
However, the rates charged to each customer class are firmly based on
cost-causation principles.
K. The Complainants argue
that the Commission should throw out cost causation principles in order to
allow Noranda a lower rate based not on costs, but rather on what it says it
can afford to pay. The Complainants must
shoulder a very heavy burden to show that such a rate would not be unduly or
unreasonably preferential.
L. Ameren Missouri also
challenges the sufficiency of the Complainant’s case on the basis that they are
attempting to alter rates based on consideration of only a single factor, in
other words, they are asking the Commission to engage in single-issue
ratemaking.
M. At its heart, the argument
against single-issue ratemaking is based on the requirement that the Commission
examine all relevant factors. That
requirement is based on section 393.270.4, RSMo 2000, which states:
In determining the price to
be charged for gas, electricity, or water the commission may consider all facts
which in its judgment have any bearing upon a proper determination of the question,
although not set forth in the complaint and not within the allegations
contained therein, …
In
interpreting that statute, Missouri’s courts have found that when adjusting
rates, the Commission is required to consider all relevant factors.
N. The Complainants contend
that because they are not asking the Commission to change Ameren Missouri’s
revenue requirement there is no need to produce evidence to establish the
utility’s current cost of service.
Instead, they believe the only relevant factor is Noranda’s ability to
pay its electric rate. However, if
Ameren Missouri’s revenue requirement is to remain unchanged, then any
reduction in the amount of revenue Ameren Missouri is allowed to collect from
Noranda must necessarily be collected from the other rate-paying customers.
O. Public Counsel argues that
the Commission could simply reduce Noranda’s rate without collecting the
resulting shortfall from other customers; essentially requiring Ameren’s
shareholders to absorb that cost. As
Public Counsel points out, there is nothing in Missouri law that would allow
the rates paid by other ratepayers to be automatically raised when Noranda’s
rates are decreased.
P. Public Counsel suggests
that Ameren Missouri somehow has a burden to respond to Noranda’s complaint by
establishing that rates for other ratepayers should be increased to make up for
Noranda’s rate decrease. However, this
is the Complainants’ complaint, and only the Complainant’s have a burden to
prove their complaint. That burden
cannot shift to the respondent utility. Thus, any failure to establish that the rates
Ameren Missouri charges to its other customers should be increased is a failure
by the Complainants to meet the burden that is placed on them.
Decision
The
Complainants have the burden of proving the rate Noranda currently pays, the
rate established by this Commission in Ameren Missouri’s 2012 rate case, is now
unreasonable because without a reduction in its electric rates, Noranda would
have insufficient liquidity to remain viable and would be subject to closure. Noranda framed this burden when it argued that
the Commission must conclude its smelter is crucial to Missouri’s economy, that the smelter cannot be
sustained without the proposed reduced rate, and other ratepayers will benefit
more from the reduced rate that they would from Noranda leaving Ameren
Missouri’s system. The
Commission is fully persuaded that Noranda is important for the economy of
southeast Missouri and for Missouri as a whole. However, after considering all
the evidence presented, the Commission concludes that the Complainants have not
met their burden in that they have not shown Noranda is suffering from a
liquidity crisis, and they have not shown Ameren Missouri’s other customers
will be better off if the Commission granted the requested relief.
Liquidity Crisis
The
Complainants have not established that Noranda is facing a liquidity crisis. By
filing its complaint and demanding an expedited procedural schedule, and by
proclaiming at the hearing that Noranda had run out of cash, the Complainants
sought to show imply that Noranda was facing an emergency that must be
addressed quickly if the New Madrid smelter is to be saved. However, the evidence presented at the
hearing did not establish a short-term need for immediate rate relief.
Indeed, the
rate relief demanded by Noranda is not designed to address a short-term
crisis. Rather, in the complaint,
Noranda seeks a subsidized rate that it insists must remain in place for a
period of ten years if the smelter is to remain viable. The complaint does not suggest that after ten
years Noranda would be able to return to a cost-based rate, and the evidence
suggests that by that time Ameren Missouri’s rates would have increased to a
level that would make an immediate return to such rates highly unlikely. Therefore, the rate Noranda would likely be a
permanently subsidized rate financed by Ameren Missouri’s other ratepayers.
Even when
considering the longer-term viability of the smelter, the Complainants have failed
to prove that a subsidized rate is needed. The financial model that Noranda
presented as the basis for its claim for subsidization is severely flawed. By relying on Forward LME prices rather than
more realistic forecasts from CRU that take into account a strong fundamental
demand for aluminum, Noranda’s model understates the likely future price of
aluminum. Further, the financial model
that Noranda submitted to this Commission assumes that the company will need to
make $25 million per year in additional unidentified capital investments that
it has not made in the past and that Noranda did not claim a need to make when
it described its financial projections to Moody’s a few weeks before it filed
this complaint.
In sum,
the Commission believes the financial projections Noranda has presented to its
investors, and to Wall Street in general, cast considerable doubt on the
financial projections it presented to this Commission.
Benefit of Reduced Rate
The
Complainants argue that Ameren Missouri’s other ratepayers would be better off
if Noranda pays a $30 per MWh rate, with limited upward adjustments, for ten
years than they would be if the smelter closes and Noranda no longer makes a
contribution to Ameren Missouri’s common costs.
But the evidence shows that Ameren Missouri’s marginal cost to serve
Noranda today is above $30 per MWh, likely in the range of $31.50. Even Noranda’s witnesses concede that the
marginal cost would likely increase in future years and would need to be
adjusted in future rate cases. That
means the Complainants are asking the Commission to establish a rate for
Noranda that would be subsidized by Ameren Missouri’s other ratepayers and that
would not benefit those other ratepayers. Thus, even if Complainants had
succeeded in proving a liquidity crisis, they failed to establish that Ameren’s
other customers would benefit from the rate reduction Noranda proposed.
Although
Noranda’s witnesses testified that it absolutely needs a $30 per MWh rate,
sustained over ten years with only limited increases, to remain viable, the
Complainants have also suggested that the Commission could craft some sort of
unspecified compromise terms under which Noranda’s electric rate is modified. Because
this is a complaint, however, the Complainants bear the burden of proof
regarding the relief they seek in that complaint, not some other relief that
the Commission might craft on their behalf.
Missouri
law forbids a utility to charge a rate that gives an undue or unreasonable
preference to any particular customer or class of customers, and the Commission
cannot lawfully approve such a rate.
Since the Complainants are asking the Commission to order Ameren
Missouri to charge Noranda a rate that is not based on the utility’s cost to
serve that customer, they bear the burden of proving that such a subsidized
rate is just and reasonable and is not an undue or unreasonable preference to a
particular customer. The Complainants
have not carried that burden.
The
Commission usually determines whether a rate design - the means by which the
responsibility to pay the utility’s revenue requirement is distributed among
the utility’s customer classes – is just and reasonable by examining a class
cost of service study to determine the amount of costs that should be assigned
to each class on the principle that the class that causes the cost should pay
that cost. The Complainants did not
present a class cost of service study in this case, nor did any other
party. The Commission will not state
that a class cost of service study is absolutely indispensable to sustain a
complaint case, but here it would be instructive. In the absence of a class cost of service
study, it is impossible to determine whether Ameren Missouri’s current rates
are now unjust and unreasonable.
Giving a
subsidized rate to Noranda would necessarily mean that Ameren Missouri’s other
customers would ultimately have to foot the bill. No doubt the New Madrid smelter is very
important to the economic health of the entire state of Missouri. The Commission sympathizes with Noranda’s
employees and the residents of the New Madrid area who testified at the local
public hearings in this case. The
Commission certainly does not want the smelter to close. But the Commission determines that the
evidence presented in this case does not warrant a departure from cost-of-service
ratemaking. The Complainants have not
demonstrated a liquidity crisis nor adequately demonstrated that Ameren
Missouri’s remaining ratepayers would be better off if Noranda took service at its requested rate than
they would be if Noranda exited Ameren Missouri’s system. Finally, and
importantly, a request for an economic development subsidy of this magnitude is
more properly directed to the Missouri General Assembly.
After
carefully considering all the evidence and the arguments of the parties, the
Commission finds and concludes that the rate design complaint must be denied
and dismissed.
THE COMMISSION ORDERS
THAT:
1. The complaint brought by Noranda Aluminum, Inc. and
the other complainants is denied and dismissed.
2. This
report and order shall become effective on September 19, 2014.
BY THE COMMISSION
Morris L. Woodruff
R.
Kenney, Chm., Stoll, W. Kenney,
Hall
and Rupp, CC., concur;
and
certify compliance with the
provision
of Section 536.080, RSMo
Dated
at Jefferson City, Missouri,
on
this 20th day of August, 2014.
