US tries to cash in on zeitgeist of Presidential utility support

In the US if a utility finds its costs increase it can ask its local regulator for permission to raise prices. While the average price increase agreed with regulators was not exceptional, during 2018 the US Energy Information Administration shows in a July report that 89 utilities, around 50% of the total, requested a price increase.

The likely conclusion is that changes after 20 or 30 years or not upgrading transmission and distribution system, a few $billion needs to be spent to accommodate renewables.

But it does seem strange that as energy utilities face a dramatic transformation from fossil fuels to renewable energy, there might be the odd shortfall in cash. If you used to buy from a coal fired plant, and you replace that at retirement with renewable energy, your prices should come down, not go up. The cost of retiring the old plant and cleaning up is supposed to be built into the charging rate for its energy throughout its lifetime, so this should not cause financial hardship for any utility and they should be lowering prices not raising them.

This is the most rate cases raised with state regulatory commissions since 1983. Of the 89 utilities filing rate cases in 2018, 10 proposed to decrease rates, 1 negotiated a rate freeze until 2020, and the other 78 utilities proposed rate increases.

Regulated electric utilities can request rate changes to help recover expenses for building, operating, and maintaining their electric generators, transmission and distribution equipment, and other buildings and equipment. In addition, utilities have the right to earn a return on their investments.

The number of electric utility rate cases should typically reflect only changes in the costs of generating and delivering electricity. In 2018, increases in spending for electricity transmission and delivery, rather than for electric generation, drove most of the rate increases.

In a way, you might expect that. Renewable energy suppliers contract with energy companies at a lower rate, but the consequence is that some energy has to be bought at a higher rate, to cater for intermittency, and also the grid would need to be upgraded to allow for more renewable energy.

Delivery expenses included investments to modernize and strengthen the power grid, connect to wind and solar installations, restore storm damage, manage vegetation, and install new customer information and billing systems.

But just why would there be any increases relating to electric generation costs? But in some cases there were.

One reason can be the cost of adhering to environmental compliance around existing nuclear plants, another might be wind generation expenditures as production tax credits phase out. Both come back to the current president, who has promised to keep energy prices down, not up. He should not be phasing out tax credits for renewables, nor trying to keep nuclear alive longer than is healthy.

The upside of moving to renewables could end up so great as to pay for most of the transmission costs, and what we may be seeing here are utilities showing resistance to moving to renewables, spurred on by an irresponsible President who does not understand the situation. Or it could be increases in transmission costs because of renewables. The data is not clear enough to tell us which.

But in the 1980s there was an oil crisis to spur on costs, and subsidized renewables entered the scene and there was always Three Mile Island in 1979 and improvements for safety-related costs at nuclear plants. We would need something just as extreme now to warrant the amount of cost change ghosting through US utilities.

Even if we are not talking purely about renewable energy here, the low price of gas alone, brought about by the insane levels of competition in fracking across the US, means that there is a cost premium operating across the gas zone of electricity as well. And the rise of competitive wholesale electricity market places has meant a lowering of prices overall, which is why today most utilities no longer hold their own generational assets, or hold less of them. All of this should have lowered rate cases, not promoted them.

Regulators anyway have luckily mostly approved lower rate increases than utilities have requested. In 2018, the aggregated value of utility-rate increase requests was $6.8 billion, and regulators approved a total increase of $2.8 billion, so this has not massively influenced consumer pricing, due to the prudence of the local regulators weeding out some unnecessary costs. Perhaps the President’s rhetoric has simply raised the ambition of the average utility, and they have simply chanced their arm.

Last year the US Energy Information Administration showed spending on US distribution systems up 54% over 20 years, from $31 billion to $51 billion annually. Transmission was also up, but more a function of grid modernization and weather outages combined.