How to Save Americans $70 Billion
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Delivering immediate savings to American households struggling to pay their electricity bills is surprisingly feasible, not to mention politically palatable, according to Brian Shearer, director of competition and regulatory policy at Vanderbilt Policy Accelerator (VPA).
Shearer, a former senior adviser and assistant director for policy planning and strategy at the Consumer Financial Protection Bureau (CFPB) under President Biden, unveiled a five-point plan to bring down electricity costs for residential ratepayers in a recent paper for VPA. The plan would cut those costs by 30 percent, saving American households $500 per year while lowering average monthly electricity bills to under $100. It also presents an opportunity for policymakers to break the “affordability curse,” Shearer said.
“Affordability policy is so hard to do, or it doesn’t go into effect quickly, [so legislators] inevitably fail to follow through on the promise,” he told the Prospect. “I think here we have a real opportunity to break the cycle because these are some proposals that, put together, would lower prices by enough that people would notice, and they can go into effect quickly enough that it would fall in one political cycle.”
Both state and federal lawmakers have been striving to bring down the cost of electricity for consumers. For instance, Indiana passed sweeping and largely bipartisan legislation to implement performance-based ratemaking (PBR), levelized billing, and a ban on summer electric service shutoffs for low-income households, among other reforms Gov. Mike Braun (R) signed into law on February 26. The New York State Assembly has been maneuvering to tackle energy affordability in similar ways.
Meanwhile, the Alabama state Senate’s Hail Mary legislative push to overhaul the state’s Public Service Commission, freeze electric rate increases until 2029, and prohibit utilities from passing lobbying or advertising expenses on to customers passed the chamber unanimously last week, though it remains unclear whether the state House of Representatives will follow suit.
Congress is a bit of a different story. Unlike in Indiana and Alabama, energy affordability has yet to draw bipartisan support on Capitol Hill. As the Prospect reported, ongoing efforts from Rep. Josh Riley (D-NY) to hold utilities accountable were the genesis of the Congressional Lowering Utility Bills Caucus, which as the name suggests, is a Democratic-led initiative to bring down electricity costs through legislation, intervention, and public scrutiny of investor-owned utilities.
As policymakers foreground energy affordability, they may want to consider the simple reforms that, according to Shearer, “would save Americans $70 billion right now.” Moreover, he contends the Federal Energy Regulatory Commission (FERC) and state-level utility commissions could enact most of these reforms “under existing law now, without legislative changes.”
INVESTOR-OWNED UTILITIES serve approximately 70 percent of American households. As I have written, the rates many of these utilities charge are rising much faster than those of their municipally owned counterparts.
State utility commissions have the responsibility of determining whether those rates are “just and reasonable,” a standard established by the Supreme Court’s landmark ruling in Federal Power Commission v. Hope Natural Gas. How utility regulators arrived at that standard didn’t matter, as long as rates of return for power companies were sufficient to continue providing an essential service, and fair for both ratepayers and utility shareholders.
Investor-owned utilities habitually seek regulatory approval to recover prudently incurred costs plus an authorized return on equity (ROE), which goes directly to investors. As Shearer points out, a 7 percent ROE “is roughly equivalent to the average long-term cost of capital for utilities.” Utilities are long-term, low-risk investments. He argues that their return on investment should reflect that. What’s more, ROE is not the same as “the amount of profit coming out of the overall revenue,” Shearer said.
“In fact, the profit margins are much higher than these return on equity figures, and the reason is that the amount of assets that these companies hold are actually higher than the annual revenue … because of this high ROE-induced overspending on projects,” he told the Prospect. “While the ROEs are like 10 percent, the profit margins are close to 20, which is huge.”
According to a recent Energy and Policy Institute analysis, investor-owned utilities retained an average of 12.8 percent of their revenue as profit between 2021 and 2024. For their part, MidAmerican Energy, an Iowa-based utility owned by Berkshire Hathaway, and Florida Power & Light averaged profit margins of 27.2 percent and 23.5 percent, respectively.
Return on equity is difficult to figure out; the cost of equity is not directly observable, so it must be estimated. “When regulators approve rates charged to customers, the ‘cost plus’ calculation is based on projections,” Shearer explains in his paper. “Regulators approve a certain return for investors, but sometimes the return ends up being higher than the percentage that the regulator approved.”
A glaring example of this comes from Exelon subsidiary Pepco, which provides electricity to approximately 894,000 customers across Washington, D.C., and Maryland. In 2022, Pepco customers paid for $41 million in capital investments that never happened. According to the public power campaign We Power DC, that figure was even higher in 2021, coming in at $53 million. In return for the $94 million ratepayers shelled out to Pepco over those two years, the D.C. Public Service Commission approved offsets, or rebates, totaling $62 million.
When all was said and done, Pepco walked away with $32 million.
Regulators already require investor-owned utilities to provide rebates in individual rate cases, so making the Pepcos of the world pay customers the difference between the authorized ROE and the return utilities actually get back isn’t such a far-fetched idea. Shearer contends this “will ensure that ratepayers are not overcharged due to flaws in utility or regulator projections.”
Another way to ease the economic burden of electricity bills for American households is by charging all ratepayer classes the same average per kilowatt-hour price. Residential customers on average pay a higher rate than their industrial counterparts, in large part because “it costs more to plug 400 houses in than it does to plug one factory in,” Shearer said, acknowledging that his proposal would increase industrial rates by 59 percent and could result in price increases on manufactured goods.
Despite this, he asserted that “in an affordability crisis, when we need to make trade-offs in order to lower prices for families, we could shift back to the historical model, where it was something closer to postage stamp pricing.” Exceptions would still be made for low-income programs and small businesses. Policymakers “can write the legislation to specifically allow that,” Shearer said, “and my proposal does.”
This spring, the Indiana Utility Regulatory Commission (IURC) is expected to vote on investor-owned utility AES Indiana’s sweetheart deal with the city of Indianapolis and some of the state’s large electric users. The Indiana-based consumer advocacy organization Citizens Action Coalition (CAC) urged the IURC to reject the deal, as it would result in higher rates for residential customers.
“We will vigorously oppose this unfair and unaffordable deal and do everything we can to protect the residents of Indianapolis from yet another large utility bill increase,” Kerwin Olson, CAC’s executive director, said in a statement. “Hoosiers have had enough with AES Indiana’s poor service, soaring bills, and backroom deals. It’s time for the IURC to send a message and restore affordability and accountability at our out-of-control monopoly utilities.”
Meanwhile, AES President Indiana Brandi Davis-Handy said in a statement, “For over a decade, AES Indiana has consistently ranked among the lowest residential rates in the state, and that’s not by chance. Despite rising costs, we have been disciplined in our planning through measures like our operations and maintenance costs holding flat for the past five years.”
Shearer’s five-point plan also proposes to prevent investor-owned utilities from using electricity rates to recover excessive and unnecessary expenses. Transmission and distribution companies in particular routinely recover expenses related to lobbying, litigating rate cases, advertising, and even corporate jets. Several states, including California, Colorado, Connecticut, and Maine, have passed legislation prohibiting this practice.
“The whole point of utility rate cases is that you’re supposed to allow companies to recoup the costs that are necessary to provide electricity,” Shearer told the Prospect. “It’s a matter of fairness, and it’s also a matter of making sure that utilities can’t make customers pay for the things that the utility does to try to increase the prices on customers.”
At the federal level, FERC is required to provide an incentive for investor-owned utilities that join a regional transmission organization (RTO). It does this in the form of a half a percentage point “adder” to the utility’s ROE. That adder “applies in perpetuity,” Shearer writes, “even to transmission utilities that no longer need an incentive to participate in an RTO.”
Shearer’s plan paves a practical path forward for policymakers and regulators alike to save American households hundreds of dollars every year on their electricity bills. Perhaps unsurprisingly, all the usual suspects were quick to push back on the proposed reforms.
One such critic is Drew Maloney, who transitioned from his role as CEO at the American Investment Council to serve as CEO of the Edison Electric Institute last year. He told The Washington Post that legally restricting utility profits and capital expenditures would inadvertently increase costs for customers.
“Continued investment is essential to keep energy affordable and reliable for customers and to make the grid stronger, smarter, and more secure,” Maloney said in an email to the Post. “Reducing investment in the electric grid doesn’t lower costs for customers—it ultimately raises them.”
Shearer disagreed, pointing to how capital bias incentivizes utilities to spend more on expansion projects than grid efficiency, often across fewer projects.
“The higher return on equity is causing a utility, which has a pot of money, to spread that across fewer projects so that it has a higher equity-to-debt ratio for the projects it does spend money on,” he said. “I think it’s an oversimplified perspective to say that a higher ROE means better infrastructure and more spending on the things that we need in the grid.”
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