In Only the Second Period of Low Real Rates and Bills

Deck: 

How Should We Manage and Regulate Now?

Fortnightly Magazine - January 2017

How should we manage utilities? In this unique period, how should we regulate utilities, when real electric rates and bills are this low?

Real rates and bills have been this low only once in our lifetimes. It last happened in June 2003 through April 2005.

In those twenty-three months, electric bills averaged just 1.40 percent of total consumer expenditures. That's less than a seventieth of expenditures on all consumer goods and services.

In ten of those months, electric bills were less than 1.40 percent. Such a low percentage has occurred in just twenty-five months in history, since the Commerce Department started tracking this back in 1959, as part of the calculation of the Gross Domestic Product.

In August 2004, electric bills as a percent of total consumer expenditures fell to 1.31 percent. This is the all-time low, out of nearly seven hundred months of data.

Then, hurricanes hit the Gulf Coast, including Katrina. Their effect on offshore production drove up natural gas prices, and with them, consumers' costs for electric service.

In that first period of low real rates and bills, before the hurricanes, it wasn't just because of low gas prices along with the flood of new and efficient gas-fired combined-cycle plants. It was also because utility capital expenditures were particularly moderate.

Deregulation was all the rage. Utilities weren't yet back to basics, as they soon would be. There was relatively less appetite all around to invest in the regulated rate base.

The August 2003 blackout had happened. But the Energy Policy Act of 2005 hadn't. The federal government wasn't driving unprecedented spend for transmission, as it soon would.

Phase two of the acid rain control program, under the 1990 Clean Air Act Amendments, had commenced. But the so-called train wreck of environmental regulations hadn't. The federal government wasn't driving unprecedented spend for environmental retrofits, as it soon would.

After April 2005, real electric rates and bills gradually rose. Then, after the great recession struck in the fall of 2008, when the growth of total consumer expenditures slowed (and sometimes contracted), this adverse trend accelerated.

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Electric bills as a percent of total consumer expenditures increased to as high as 1.70 percent in December 2010. At that level, electricity became around a sixtieth of the costs of consumer goods and services.

The present period is not quite as great for consumers as was June 2003 through April 2005. Though it is nearly so. And the present period of low real electric rates and bills may not have run its course.

For the thirteen months of October 2015 through October 2016 (the latest month of the data), electric bills averaged just 1.39 percent of total consumer expenditures. Again, that's less than a seventieth of expenditures on all consumer goods and services.

In eight of those months, electric bills were less than 1.40 percent. As we have said, such a low percentage has occurred in just twenty-five months in history.

Indeed, eighteen of the twenty-five sub-1.40 percent months have taken place during the two periods of low real rates and bills. Only seven of these months have taken place outside of the June 2003 - April 2005 and October 2015 - October 2016 periods.

As we said, electric bills as a percent of total consumer expenditures fell to an all-time low of 1.31 percent in August 2004. The runner-up to the all-time low was during the present period, specifically in March 2016.

Electric bills this March were just 1.32 percent of total consumer expenditures. This is just a tick off the pace of the all-time low.

These ultra-low percentages are a boon for consumers. Whether it's 1.31 percent as in August 2004, or 1.32 percent as in March 2016, that's only a seventy-sixth of total consumer expenditures. This means seventy-five seventy-sixths is freed up to pay for all other consumer goods and services. 

We might ignore that real rates and bills are this low, and proceed as we were proceeding. But that seems foolish. Our mandate is to provide safe and reliable electric service affordably, while being a good steward of the environment. In this present period, we - utilities, regulators and the rest of us in this industry - seem to have the affordable goal nailed.

Some say this is because we're lucky. We're lucky that natural gas prices are low.

I suppose we're as fortunate as Apple was to leverage cheaper and smaller computer chips. Or as fortunate as Facebook was to leverage smart phones in everyone's hands.

With low gas prices, and efficient combined-cycle plants, our industry dramatically transitioned the generation system to gas in a few fleeting years. Seems more opportunistic than lucky to me.

Some say that since gas prices are unlikely to fall further, and with other increasing costs (for distribution infrastructure for example), real electric rates and bills will soon be on the way back up. But fuel price trends have been behind each inflection point in real electric rates and bills.

Even the largest fluctuations of capital expenditures, costs of capital, and operating expenses have had a relatively minor impact. Over the decades, we've vigorously argued about the prudence of rate base investments and the propriety of rates of return, among many examples. But the resolutions of these heated debates generally haven't moved the affordable needle.

Let's assume utilities and regulators continue to control the growth of non-fuel costs (nominal), relative to the pace of inflation and the growth of total consumer expenditures. Then this second period of low rates and bills might continue for a while.

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Should we correct course? Should we allow greater growth of non-fuel costs to - let's say - buy some more reliability? Should we, knowing electric bills' share of total consumer expenditures would gradually rise back up to the 1.5 - 1.6 percent range?

Many or most consumers might be fine with that. They might see it as a good tradeoff: a thin slice of their expenditures in exchange for some more reliability. When real rates and bills are this low, I know I would.

 

Then we must spot the very most compelling deals for customers. And demonstrate to customers how well they benefit.