Traditional utility regulation has been unable to prevent the electric rates of some utilities from rising far above those of neighboring companies. Two factors are responsible for this failure. First, regulators lack the means to keep seemingly reasonable but unnecessary costs from creeping into rates. Second, ratemaking considers a utility's costs in isolation and does not use peer benchmarks to true up rates.
Political pressure helped limit rate increases for nuclear plants during the 1980s. Yet, in the case of the Long Island Lighting Co. (LILCO), with the highest electric rates in the country, political pressure has proved ineffectual.
The 3.5 million people on Long Island who are served by LILCO paid an average electric rate of 15.3 cents per kilowatt-hour (›/Kwh) in 1994 (em 16.8 cents for residential customers and 14.3 cents for commercial and industrial customers. These rates were roughly 50 percent above those in the New Jersey and Connecticut suburbs of New York, and twice the national average. If these rates were cut to the national average, residents would stand to save $1.2 billion annually (em about $700 per residence and $6,000 for each of Long Island's 102,000 businesses.
The most significant factor driving rates is the 1989 settlement that allowed LILCO to recover and earn a return on its $4-billion investment in the Shoreham nuclear plant. Over the 40-year life of the settlement, LILCO will collect $14 billion for Shoreham (em $4 billion in recovery, and $10 billion as a return. LILCO's electric rates have risen 31 percent since 1989.