The Biggest Rate Cases from the Past Year
Electric utilities across the U.S. are requesting ever-larger rate increases, according to an analysis of recent rate case filings being tracked by EQ Research in its Policy Vista™ service. These rate increase proposals could have a big impact both on how, and how much, families and businesses pay for their electricity.
Between July 6, 2018, and July 6, 2019, 54 electric utilities serving roughly 37 million customers (roughly 90 million Americans, or 28% of the population) filed rate cases with state regulators seeking approximately $6.1 billion in annual retail revenue increases. Of those utilities, only four requested decreases in their revenue requirement, and two others requested no change.
The proposed rate increases would likely have been higher had utilities not been refunding hundreds of millions of dollars to customers due to the impacts of the Tax Cuts and Jobs Act. Among other provisions, the tax cut bill signed into law by President Trump in December 2017 reduced the corporate tax rate from 35% to 21%, thereby reducing the amount of money utilities need to collect from customers through their rates to pay their taxes. Since existing rates were based on the higher corporate tax rate, utilities over-collected revenues until their rates were adjusted accordingly.
Of the 54 recent rate cases, 37 (69%) were filed by vertically integrated electric utilities, where residential customers are generally not allowed to choose their electricity provider, and 17 were filed by utilities in jurisdictions with residential customer retail choice. Separating vertically integrated utilities from those operating under a retail choice model is important when analyzing utility rate cases because the former include more costs in their rate case proposals that are not covered by the latter. For example, rate cases filed by vertically integrated utilities can include rate increases corresponding to costs for building or updating power plants, adding pollution control technology to existing power plants, and coal ash remediation. In contrast, utility rate cases in jurisdictions with retail choice are typically constrained to examining electric distribution spending and cost recovery.
Let’s take a brief look at some of the biggest rate cases filed over the past year by electric utilities, as defined on three different criteria: (1) the requested increase in utility revenues; (2) the proposed residential bill impact; and (3) the proposed monthly residential fixed charge increase.
Larger utilities tend to propose larger absolute increases with respect to their revenue requirements (i.e., the amount of revenue a utility needs to collect each year to recover its costs, plus a fair profit). Indeed, the three largest revenue increases proposed in the past year were filed by the largest utilities, which all have more than 2.5 million customers: PG&E in California ($1.1 billion, excluding the impact of its subsequent request to dramatically increase its authorized return on equity due to wildfire risk), Georgia Power in Georgia ($942 million), and Con Edison in New York ($485 million).
Smaller vertically integrated utilities tend to top the list for proposing the largest percentage rate increase requests (see Table 1). With fewer customers and retail sales to spread costs over, these utilities are more susceptible to large swings based on one or two key cost drivers.
Residential Bill Increases
Another critical metric for evaluating the effects of a utility’s proposed rate increase is the bill impact the proposal will have on residential customers. The average bill increase proposed in recent rate cases filed by vertically integrated utilities is about $12, which not surprisingly is significantly more than the $7 increase proposed in rate cases filed by utilities in jurisdictions using retail choice providers.
Notably, in the past year, six electric utilities have sought residential bill increases of nearly double the national average, requesting increases of $21 – $23 (Table 2), and one utility, AEP subsidiary Indiana Michigan Power (I&M), has requested an eye-popping $36 per month increase.
Residential Fixed Charge Increases
There are big implications for how rates are ultimately designed to recover a utility’s revenue requirement. One of the most basic considerations in residential rate design is which costs should be recovered through fixed charges versus variable (per kilowatt-hour) charges. All things equal, increasing the proportion of revenue collected through fixed charges results in smaller variable charges, which diminishes the financial benefit of energy efficiency and home solar investments.
In rate cases filed over the past year, the median existing monthly residential fixed charge was $10.46 and the median proposed fixed charge was $14.88, making the average increase proposed by utilities $4.42, a whopping 42%. Seven utilities requested monthly residential fixed charge increases of more than $7 (Table 3).
Summary and Conclusion
U.S. investor-owned electric utilities filed rate cases seeking more than $6 billion in rate increases affecting around a quarter of the entire U.S. population. While big utilities have bigger rate case proposals, from a total revenue standpoint, smaller utilities topped the list for the largest proposed percentage increases. From a household’s perspective, the monthly bill total is one of the most important metrics to consider. While the typical rate case involves a request for a residential bill increase of about $12 for vertically integrated utilities, seven utilities sought increases of nearly double that or more. The fixed charge is a key consideration in residential rate design, with seven utilities seeking an increase to the fixed charge of more than $7, which if approved, would render a substantial portion of residential customer bills outside of the customer’s ability to control.
Rate cases will continue to be the critical forum for examining traditional issues related to utility cost recovery — determining revenue requirements, the proper cost allocation among different customer classes, and setting rates. However, new challenges for utilities on a diverse set of fronts will increasingly take centerstage in rate cases, ranging from issues as disparate as large coal ash remediation and coal plant depreciation costs, to rate designs under proliferating distributed energy resources, to the role of the utility in fostering electric vehicle adoption, to the level of authorized return on equity needed to maintain healthy utility credit ratings in an era of accelerating risk of catastrophic wildfires. For utilities, advocates, and consumers alike, tracking the proposals in utility rate cases will be critical for understanding today’s changing energy landscape, including the clean energy transition that is already underway.
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