JARED SOARES The Roanoke Times

Representatives from Steel Dynamics say rate increases have already increased the mill's power bills by 42 percent, and they fear that will rise.

JARED SOARES The Roanoke Times

While businesses lament rising energy bills, Appalachian Power representatives say it too has obligations to stockholders.

A year ago the steel mill faced a problem businesses love -- its Roanoke plant scrambled to match production with red-hot demand.

"We were going great guns right through September of last year," said Joe Crawford, vice president and general manager of Steel Dynamics Roanoke Bar Division, formerly known as Roanoke Electric Steel. "And then October hit."

The minimill melts scrap metal in electric-arc furnaces and thus depends heavily on electricity. For months now, it has operated at about 50 percent capacity and tried to cut costs by ramping up production during nonpeak hours. But its electric bills have still averaged about $1 million a month, the same amount paid last year during full-bore production.

Crawford ties that steady billing to rate increases in Virginia last year by utility Appalachian Power Co. He said those increases have raised the mill's power costs by about 42 percent.

Thus, he worries about even higher electric bills because of Appalachian's ongoing quests for rate increases on top of rate increases -- especially during a knee-buckling recession when increased costs cannot be prudently passed on to buyers.

Among Roanoke-area businesspeople, ranging from manufacturing executives to small-business owners, Crawford has a lot of company. Many residential customers aren't happy either.

Economic developers fear that the region's long-standing reputation for comparatively low electricity costs, a lure for recruiting and retaining companies, is slipping away.

Competition

Dennis Dowdy owns the Hawthorn Suites hotel franchise in Blacksburg. He said the hotel paid about 41 percent more per kilowatt-hour consumed during the first six months of 2009, after rate increases, than it did during the same period last year.

Since then, the hotel's bills have stayed about 40 percent to 50 percent higher than they were in 2008, he said.

"It's quite an impact," Dowdy said. "But you can't pass along your costs to customers because we are in such a competitive market right now."

Appalachian has no competition in its territory, which is why the Virginia State Corporation Commission regulates the company's Virginia operations and carefully reviews and often reduces increases sought through rate requests. The SCC is bound to comply with state law.

Virginia law requires that regulated electric utilities have an opportunity to recover through customer charges the utility's "reasonable and prudent" operating expenses plus a fair profit. A utility can recover costs for fuel, transmission expenses, environmental and reliability costs, conservation programs, renewable energy programs and generation facilities.

Appalachian and parent company American Electric Power emphasize that Appalachian is a business too and one also beset by increasing costs -- especially to comply with environmental regulations related in large part to the utility's reliance on coal-fired generating plants.

Appalachian and other subsidiaries of Ohio-based AEP also have obligations to shareholders, said Barry Thomas, Appalachian's director of regulatory services in Virginia and Tennessee.

"Appalachian, over the past 30 years, has earned its authorized return on common equity only about five or six times," Thomas said. "It is my guess that Roanoke Electric Steel does not have that same record. If they'd had that record, they would be out of business."

He said a reasonable return on common equity offers AEP shareholders the rewards necessary "to entice them to stay invested in AEP common stock."

In spite of not always earning authorized returns, AEP's profit in 2008 totaled about $1.4 billion, or $3.43 a share. AEP's profits dropped during its first quarter of 2009 by about 37 percent to $360 million, or about 89 cents per share, when compared with the first quarter of 2008.

Thomas said he imagines that Steel Dynamics and the hotel are profitable over time.

"It is my belief that those businesses you mentioned have been able to, in fact, extract a reasonable profit level," even though earnings might suffer during one quarter or another, he said.

The rising cost of producing and delivering electricity is not unique to Appalachian. Costs are rising across the country, Thomas said.

"In a way, if those businesses had had such dismal results that they didn't believe it was worth staying in business, then they should, in essence, perhaps close down," he said. "And I'm not wishing that on anybody."

Later, Todd Burns, an Appalachian spokesman, said, "If a business anticipates having difficulty paying its electric bill, it should contact Appalachian early."

The steel plant in Roanoke has about 440 employees.

Indiana-based parent Steel Dynamics posted a record profit in 2008 of $463 million, or $2.38 per share. But 2009 results to date for the company have been grim. During its first quarter, Steel Dynamics lost $88 million. During its second, it lost $16 million.

A barbless hook?

When Steel Dynamics acquired Roanoke Electric Steel in 2006, the plant benefitted from "one of the lowest power rates within the Steel Dynamics system," Crawford said.

"We caught up quickly, even to the point that our rates are going to be some of the highest within the Steel Dynamics family," he said.

And how might rising rates affect efforts to attract and retain businesses and jobs?

"One of the strongest selling points we have always relied on in the Roanoke Valley is our competitive energy costs compared to other parts of the U.S., and other parts of the state, for that matter," said Doug Chittum, Roanoke County's director of economic development.

Regional economic developers met this week to discuss the potential fallout of rate increases, he said. A related meeting is planned with Appalachian officials in mid-August, Chittum said.

He said he and others worry that the region's battered manufacturing sector could shed additional jobs if more employers shift production to China "where they have low labor costs, cheap energy, and are free to pollute the air."

Made in the U.S. -- or not

One of the region's most vocal critics of Appalachian's latest rate increase requests is Doug Bassett, an executive for Vaughan-Bassett Furniture Co. in Galax.

During a July 1 public hearing in Wytheville, Bassett shared with SCC commissioners his opposition to Appalachian's proposed fuel factor rate increase of about 13 percent. He lamented job losses among domestic furniture manufacturers tied to foreign competition and "the worst recession in all our lifetimes."

He testified that Vaughan-Bassett's annual power bill in Galax "has already jumped from about $758,000 in 2007 to $875,000 in 2008. In 2009, we are on a pace to pay Appalachian $1.21 million, or 60 percent more than we did just two years ago."

Bassett warned that rate increases as submitted will kill jobs across the industry. Vaughan-Bassett has about 625 workers in Galax and nearly 700 companywide, he said.

But Thomas said AEP cannot forgo recovering costs or earning profits because of the recession.

It is unreasonable, he said, to expect utilities and their stockholders to "become a bank or a lending institution or a social institution for fixing things that are wrong at the time."

Good news, bad news

Good news for Joe Crawford might be bad news for Joe or Josephine Homeowner.

Appalachian divides customers into three classes -- residential, commercial and industrial -- with subset billing structures for commercial and industrial customers.

Through complex formulas Appalachian determines which sized slice of costs each customer class should eat.

Historically, payments by large commercial and industrial customers have helped subsidize the bills of residential customers. But Appalachian wants to reduce that subsidy because it says residential customers, with a trend toward mega-homes and proliferating appliances and gadgets, have not been paying their fair share.

By some calculations, the monthly bill for a residential customer consuming 1,000 kilowatt-hours has the potential -- if current rate requests are granted on top of last year's increases -- to jump approximately 76 percent over a period of 17 months, according to the SCC.

So, if the SCC approves Appalachian's rate increases and subsidy revisions as submitted, Steel Dynamics' base rate increase will be about 12 percent while the residential rate will increase about 19 percent.

"We'll take a little good with the bad," Crawford said.