Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Big City Bias: he Problem with Simple Rate Comparisons

Looking beyond ranking utilities on price.
Fortnightly Magazine - December 2002

territories impose on utilities.

The Big City Bias

Providing utility service to low-density rural areas can be costly. The rural electrification programs and perceived continuing need for universal service funds in telecommunications demonstrate this fact quite clearly. 1 Yet the opposite is also true. Big cities can also prove costly to serve.

In fact, little systematic research exists on how the size of metropolitan areas affects the cost of supplying electricity to consumers. While there is generally no doubt in people's minds that most goods and services are more expensive in large cities, there often is little guidance as to how the cost of supplying electricity varies with city size. 2 Certainly, very few rate comparisons compiled by regulatory agencies or presented in regulatory proceedings explicitly take into account the size of the metropolitan area that utilities serve.

The U.S. Bureau of Labor Statistics (BLS), the government agency that compiles consumer price information, reports the regional average of end-use electricity prices for large, mid-sized, and small metro areas based on numerous monthly surveys that include 26 large metropolitan areas. (A metro area is defined as "large" if its population exceeds 1.5 million; "small" metro areas are those with a population of less than 50,000.) This consumer price data, averaged over 1998 to 2001, is shown in Figure 1. The figure shows quite clearly that: (1) average electricity prices in mid-sized metropolitan areas significantly exceed electricity prices in small metropolitan areas; and (2) electricity prices in large metropolitan areas on average exceed those of mid-sized metropolitan areas. This amounts to a significant difference of average utility rates in large and small metro areas. In the Midwest, for example, average rates in large metropolitan areas are approximately 20 percent higher than the average rates of small metro areas.

Importantly, the consistent pattern of electricity rates across the individual regions clearly suggests that serving major metropolitan areas imposes on utilities direct and indirect costs not faced by the average utility in a state, region, or the country as a whole. Any credible electricity rate comparison and performance benchmarking analyses thus needs to be either limited to an "apples-to-apples" comparison of utilities operating in similar service territories, or corrected for differences in operating characteristics and costs that utilities face in their service territory.

The additional costs of serving a large metropolitan area can be quite substantial. For example, add-on taxes (such as gross receipt taxes) can exceed 10 percent in large metro areas, which may be double and triple the level of such taxes in more outlying, less urban areas. Statistics on consumer expenditures also show that property taxes in urban areas on average are approximately 50 percent higher than property taxes in rural areas. As Figure 2 shows, utilities serving large metro areas also face labor costs that exceed statewide averages by at least 10 percent. This labor cost disadvantage is, again, consistent across the various regions of the country.

Other important operating characteristics also tend to increase the average costs of utilities serving large metro areas. Such factors include the high cost of underground