Coal contracts, corporate affiliations generate questions in MidAmerican Energy's rate case

Berkshire Hathaway's ownership of both MidAmerican Energy and BNSF Railway have complicated the examination of the utility's electric rate adjustment request before the Iowa Utilities Board.

One of the primary reasons for the two-year $115-million rate adjustment requested by MidAmerican is to offset anticipated increases in coal fuel and coal transportation expenses for its Iowa electric generating plants.

The only two railroads serving the Wyoming Powder River Basin mines, which supply 100 percent of MidAmerican's coal-fired power plants, are the Union Pacific (UP) and BNSF Railway (BNSF). The Union Pacific currently is MidAmerican's coal transportation provider using its trackage and tracks shared by the UP and BNSF.

With the current coal transportation contract set to expire later this year, MidAmerican is negotiating with its Berkshire affiliate, BSNF, and UP, and the IUB has asked for assurances the solicitation and negotiations with BNSF will be transacted on an "arms length basis."

In his response to questions from the IUB staff, MidAmerican President William Fehrman denied that Berkshire's ownership of the utility and BSNF would "limit MidAmerican's incentive to pursue the best rail transporation rates."

"My responsbilities are to do what is best for MidAmerican and our customers," Fehrmann stated in his testimony. "Further, MidAmerican's application for rate recovery under its adjustment clauses will be subject to regulatory review and scrutiny. MidAmerican can recover only prudently incurred costs.

"Additional, I have a strong incentive to maintain MidAmerican's competitive advantage in electric rates," Fehrman stated. "To alter that competitiveness would hinder economic development in Iowa, which would be a detriment to the company as well as our customers."

Fehrman also testified his total compensation (listed as $745,981 in the required annual report filed with the Federal Energy Regulatory Commission for 2011) was not dependent on the financial results of Berkshire Hathaway or any Berkshire subsidiary other than MidAmerican Energy.

At the IUB's request, MidAmerican submitted new and expiring coal and freight contracts to the IUB staff for review. The utility sought and was given approval to keep those documents confidential from the general public because disclosure could hurt the utility in its negotiations.

Large industrial users and the state agency representing consumers, the Office of Consumer Advocate (OCA), have signed off on MidAmerican's rate increase request. The IUB has set an October 1 hearing to enable board members to ask questions on the proposed settlement.

The two-year rate adjustment agreement would allow the privately owned utility to recover an additional $39 million in 2012 and $76 million in 2013 to cover additional coal transportation/coal costs and the expense of environmental upgrades at its electric generating stations.

Under the proposed settlement agreement, MidAmerican Energy would be allowed to earn a return on common equity (profit) of 10 percent. Should the utility be able to earn more than 10 percent, it would share the higher profits with ratepayers based on a sliding scale.

The proposed fuel/environmental adjustment charge would be for only two years, a factor cited by the OCA in agreeing to the deal.

"Terminating the automatic adjustment clauses in 2013 and forcing MidAmerican to justify future cost increases before rates can be increased provides MEC with a powerful incentive to manage environmental and fuel/freight costs efficiently," Brian Turner, chief of the OCA's technical bureau, said in his testimony in support of the settlement.

"The sharing mechanism proposed in this case reduces the risk that MEC will over-earn and keep all the excess earnings, and eases my concern with ensuring a match of the reduced risk with a lower rate of return," Turner testified.

Customers have been paying the higher electric rates on an interim basis since March 2 of this year.