Why Are Electricity Rates (High And) Rising?

Nobody likes it when prices rise, especially if they are already high. Which is precisely why many customers want to know what is behind recent rises in electricity prices. One explanation is that in many countries in Europe as well as states in the US, utilities are adding surcharges to rates that are called general service charges or levies in Europe and public purpose or public benefit charges in America. Since politicians don’t like to increase taxes, such levies are an easy way to collect extra revenues without calling them extra taxes.

A recent article on the components of electricity bills in the state of Connecticut, for example, shows that public benefit charges in the state amount to 18% of the average utility bill for residential customers. It amounts to $42 for a customer paying $200 per month (visual next page) – which happens to be the average monthly residential bill.

Most utilities include – or bury – a variety of expenses including discounts to low-income customers in public benefit charges. In the case of Eversource, one of the largest utilities in Connecticut, the utility rates were recently raised – with the approval of the Public Utility Rate Authority (PUPA) to cover some $800 million in under-collections during the Covid pandemic where millions of customers could not or did not pay their bills and the utility was told not to shut off service to them during the pandemic.

Regulated utilities in the US typically use a Rate Adjustment Mechanism (RAM) to recover under-collections beyond their control – in this case allowing Eversource to collect the unpaid bills, which amounted to 23% of the public benefit charge with the remainder providing a subsidy to keep the Millstone Nuclear Power Plant running.

The nuclear plant generates power at a rate that is 2.5 time more expensive than power generated from an efficient natural gas fired plant but is being subsidized to continue operating because of its lower carbon emissions. It is a worthy cause, but does it belong to public benefit charge? Aren’t there cheaper ways to reduce carbon emissions?

Questions like these are being asked across the US and in Europe – where levies are in the 20-30% range in many countries. In California, which has some of the highest rates in the country, public purpose charges include significant subsidies for low-income customers – who pay 35% less than everybody else – plus substantial investments to upgrade the aging distribution network. Over the past few years, additional investments to mitigate wildfires – such as undergrounding lines to avoid starting fires – have been added to public purpose charges. Finally, as an increasing number of customers go solar and cut down on their monthly bills, the utilities have been allowed to recover their lost revenues by raising prices on everyone else.

The net result is that as of July 2024, California had the second highest electricity rates in the nation (~34 cents/KWh), trailing only Hawaii (~45 cents/KWh), according to a recent article in The Wall Street Journal. One customer in Borrego Springs, a desert town near San Diego, received a $1,837 electricity bill in June which was more than the $1,200 monthly rent on the apartment. The local utility, San Diego Gas & Electric Company (SDG&E) has raised electric rates 82% in the past 10 years with more expected.

The accompanying chart shows the current average monthly bill for a residential customer using 750 kWh per month for the big 3 investor-owned utilities (IOUs) and a couple of municipal ones. Currently the #1 spot belongs to Pacific Gas & Electric Company (PG&E), whose average rates are 42 cents/kWh. PG&E’s rates are currently more than twice those of neighboring Sacramento Municipal Utility District (SMUD) – 18.5 cents/kWh – for the same or lower quality service.

California’s electricity rates have been on a steep upward curve with the big 3 IOUs continually raising rates for both residential and commercial customers. California does not have much heavy industry, but for those that remain, it is pretty much the same story. Recently the California Public Utilities Commission (CPUC) approved an 11% rate increase on top of already high prices.

According to a study by the California Solar and Storage Association (CALSSA), On average, SDGE’s rates rose by 9% every year, followed by PGE at 7% and SCE at 6% as shown on the visual on left.

As electricity gets more expensive, more customers try their best to reduce their bills, which means installing more solar and pairing it with batteries, which does not help the utilities’ finances. Moreover, electrification becomes more of a challenge as customers balk at switching to EVs or defer installing efficient electric heat pumps.

This article originally appeared in the October 2024 issue of EEnergy Informer, a monthly newsletter edited by Fereidoon Sioshansi who may be reached at fpsioshansi@aol.com”