While the cost of electricity has fallen dramatically over the last two years as a result of the drop in natural gas prices, the delivery part of your electric bill (transmission and distribution company charges) has been going up significantly.
The distribution charges have been going up for a variety of reasons: New state mandates on energy efficiency and renewable energy as well as long-delayed rate cases with the expiration of rate plans. I’ll write more at another time about the distribution increases. Today, I want to focus on the transmission piece and applaud a recent filing made by Massachusetts Attorney General Martha Coakley and the Connecticut Public Utilities Regulatory Authority to reduce those rates, which PowerOptions joined.
Transmission costs have been stable to flat over the last decade or more quite simply because, as a region, not much has been built here. Indeed, with depreciation of the existing investment taken into account, transmission costs have historically declined and have been a small portion of a customer’s bill.
But if you’ve looked at your bill lately, you have seen that transmission costs can be as much as 10 percent of your bill. This is because there has been a significant ramp up in investment and the cost of transmission is shared regionally through an allocation agreement regulated by the Federal Energy Regulatory Commission (FERC).
Massachusetts pays the biggest chunk of those costs – about 48 percent – because the costs are shared based on the usage of each state. Between 2002 and 2010, about $4.5 billion has been invested in transmission infrastructure and another $4.5 billion or so (a total of $9.3 billion) is slated – already committed – to be spent over the next five years. This level of spending will result in a 600% increase in the regional transmission rate between 2003 and 2015.
Putting aside the debate about whether there is a need for this investment and whether there are “non-transmission alternatives” to address the reliability concerns warranting this investment, the filing by Attorney General Coakley focuses on the rate of return on equity (ROE) – i.e., the profit – which the transmission companies earn on this investment – and rightly so.
Under the FERC tariff, transmission companies recover their costs and a return on the capital invested in the facilities. The current ROE, set in 2006, is 11.14 percent. There’s no need to state the obvious here that this return is out of whack with the market. Even billionaire investor Warren Buffet is only getting six percent for his $5 billion investment in Bank of America.
Utility ROEs have traditionally been set by taking into account alternative investments available to the typical utility investor. While the long-held view that “widows and orphans” invest in utilities or U.S. Treasury’s may no longer hold true, 11.14 percent, by anyone’s standards, is excessive – especially for a relatively risk-free regulated return.
The Attorney General has asked FERC to reduce the ROE immediately to 9.2 percent, which is consistent with the formula in the tariff and other returns granted to comparable utilities in rate proceedings. This would reduce the revenue collected in rates by about $113 million annually.
While it might not make a big difference in transmission rates or on individual bills, it is a good first step in trying to hold down the escalation.
Maybe FERC should dig even deeper and look at the wisdom of a rule established several years ago that also gives the transmission companies an additional 0.5 percent ROE on top of the allowed ROE to provide them an incentive to build. This incentive ROE was established to get transmission companies to agree to participate in the coordinated regime in the region whereby the Independent System Operator (ISO) can tell the utilities what and where to build. When set, this incentive was really aimed at utilities in the rest of the country that did not have the level of regional coordination and ISO control we have here in New England. Our utilities benefited from the national policy. Clearly, that incentive is no longer needed and should be reexamined.
But the Attorney General has been wise in her strategy to not challenge the incentive ROE in her pleading. Keep it simple and direct. The current return is excessive. This should be an easy request for FERC to grant quickly.
Kudos to the Attorney General and her team for looking beyond our borders to find fixes to help lower overall electricity costs and help businesses, institutions and consumers.