If you live in most areas south of Cullman or Cherokee Counties (with exceptions like Bessemer and Tarrant that are in TVA territory), chances are your electric bill comes from Alabama Power.
Alabama Power operates as a monopoly, which means they’re the only company allowed to provide electricity to a large part of the state. This monopoly was granted by the Alabama State Legislature, giving Alabama Power a guaranteed customer base and a predictable stream of revenue. But Alabama Power’s profits aren’t based on selling electricity.
Alabama Power, like most investor-owned utilities, makes its money from spending on capital investments like building power plants. The Alabama Public Service Commission allows Alabama Power to charge its customers for the cost of these capital investments plus a profit, known as return on equity (ROE). ROE is essentially the percentage of profit that Alabama Power’s shareholders expect to make on the money they’ve invested into the company.
While ROE is standard in the utility industry, Alabama Power enjoys some of the highest profit margins in the nation thanks to a one-of-a-kind method used by the Alabama Public Service Commission (PSC) to calculate its allowable profit. Unlike most other states, where public service commissions use a more uniform method to set these rates, the Alabama PSC grants Alabama Power some of the most generous returns in the country.
Alabama Power’s Profit Margins Compared to Other States
In 2018, the average allowed ROE for shareholder-owned electric utilities in the U.S. was 9.51%, according to the Edison Electric Institute. However, Alabama Power consistently enjoys ROEs that are ranged between 13% and 14.5%. Compare that to standard investment advice regular Alabamians hear where they would be thrilled to earn 8% or more on their retirement savings.
Between 2014 and 2022, Alabama Power generated over $2 billion in extra profits compared to the industry average ROE, according to an analysis by the Energy and Policy Institute. This means that if the Alabama PSC had regulated Alabama Power’s profits in line with the rest of the country, Alabamians could have kept an extra $2 billion in their own pockets during those years.
The Alabama PSC’s favorable approach to Alabama Power’s profit margins raises important questions about whose interests are being prioritized. While it’s great news for the utility’s shareholders and executives—who benefit from higher stock dividends and bonuses tied to corporate profits—regular Alabamians are left paying the price in the form of higher electricity bills.
How ROE Affects Your Electric Bill
So, what does all this mean for your electric bill? Essentially, the higher the allowed ROE, the more profit Alabama Power is allowed to make from providing you with electricity. This is significant because it means that factors outside of the national economy, like a recession or inflation, aren’t always the main reason your electric bills increase. Instead, rising rates are often a result of the utility’s need to recover costs for new infrastructure projects—like building a new gas plant —and to maintain high profits for shareholders.
Alabama Power’s unique position as a monopoly allows it to pass these costs onto its customers with little resistance. For instance, if the company wants to build a new gas plant, it can raise rates to cover the construction costs and still guarantee a high profit margin. These rate hikes are rubber-stamped by the Alabama PSC, which is supposed to consider the interests of consumers, but frequently sides with the utility.
What Does This Mean for Alabamians?
The result is clear: while Alabama Power’s executives and shareholders enjoy high returns and lavish perks, everyday Alabamians are left to foot the bill. In fact, Alabama has the fourth-highest residential energy consumption and the third-highest energy bills in the nation. Yet, Alabama Power ranks near the bottom when it comes to energy efficiency programs that could help residents lower their consumption and reduce costs.
The situation has only worsened in recent years, with utilities like Alabama Power increasingly raising rates not only to cover operational costs but also to maintain high ROE levels. This leaves consumers with little recourse and no choice but to pay more, even when wages stagnate and the cost of living increases.
Alabama Power’s profit model benefits the company and its shareholders at the expense of everyday Alabamians. With rising temperatures and soaring energy bills, the need for a utility that prioritizes people over profits is more urgent than ever. Unless there are meaningful changes in how the PSC regulates utilities like Alabama Power, residents will continue to shoulder an unfair financial burden.
