Electricity rates may be heading skyward sooner than we think.
Electricity rates may be heading skyward sooner than we think.
Fortnightly Magazine - April 2004


Electricity rates may be heading skyward sooner than we think.

EES North America

Are state regulators in danger of bringing about the thing they most fear-higher electricity rates? Critics charge that some regulators seem to be opening up the cookie jar, letting utilities have as they please with no supervision.

How else, they ask, to characterize rate-basing merchant generation with no competitive solicitation? And that's not to mention the recent trend of allowing utilities to recover in rates the full cost of upgrading power plants to meet environmental requirements.

Just those two categories could pump billions into rate base. Add in transmission upgrades and new coal plants, and the costs start to add up. Many of these expenses may well be necessary. But will they lead to regulatory rate creep? That's the question.

As we reported in our March issue, in 2003, just over 1.4 GW of unregulated generating capacity was converted into rate-based assets, while pending deals promise another 5.6 GW of unregulated capacity brought into rate base. The sum of pending and completed deals cost ratepayers in excess of $1 billion just last year.

Most of these plants are fired by natural gas. And, as many are aware, most of them were planned without a competitive solicitation. Ratepayers may never know to what extent they subsidized merchant losses, or even if they got a good deal.

But ratepayers may soon find out. On page 48, two authors suggest that reserve margins may not be as large as we think, as many gas plants cannot economically be called into service, or have been mothballed and won't be contributing to reserves. The so-called supply glut, the article warns, may be over sooner rather than later.

Furthermore, some utilities are "voluntarily" spending billions on emission reduction equipment to meet, in some cases, environmental targets that are not required for several years into the future. That's great for the environment. But with some utilities, ratepayers are taking on what amounts to $5 billion in capital investment over 10 years for emissions reduction equipment. Is that a prudent allowance? I imagine that question will be answered in the context of future rate increase requests. And there will be more requests.

Moreover, in some cases, the true rate impact may not be felt for many years to come from utility expenditures.

Legislatures have been getting into the act and extending rate caps to utilities in advance of the development of competitive markets. Some critics say such arrangements carry the risk that bad news will be postponed for years to come.

For example, the Virginia House of Delegates passed a bill March 10 that extends a freeze on electricity rates through 2010, delaying a move to a fully open competitive retail electric market amid concerns over slow market development.

A recent report from Morgan Stanley's equity research division found that the bill allows Dominion to sell power back to the utility at roughly $48/MWh for three years longer, and "[lock] in this attractive semi-regulated cash flow." Furthermore, the bill will allow AEP to get annual rate relief on environmental