Report: Lower utility returns could raise long-term costs

Audio By Carbonatix

(The Center Square) –  Lowering utilities’ allowed returns on investment could mean small bill cuts while raising long-term costs, Concentric Energy Advisors says.

The consulting firm published its report⁠ last week.

Concentric studied 13 electric utilities in the PJM region, which covers parts of the eastern United States. They found that cutting allowed returns by one percentage point would lower a typical residential bill by 0.7%. A three-point cut would lower it by 2.2%.

If borrowing costs stay flat, those cuts would save $1.05 to $3.30 on a $150 bill.

Return on equity is the profit rate regulators let utilities make on money that investors put into the company. Utilities don’t automatically make that amount, and it’s not money they save for grid repairs.

Concentric says the profit utilities can make for their shareholders from local power lines make up about 5% of a normal electric bill.

“Affordability is a significant concern, but reducing utility returns as a matter of policy would provide limited relief in the short term,” Concentric Vice President Joshua Nowak said⁠ in a statement. 

Lawmakers in New York and Pennsylvania have proposed using Treasury yields to set how much profit electric utilities can make.

Pennsylvania’s House Bill 2224⁠ and New York’s Senate Bill 10424⁠ would set a standard return at the current 10-year Treasury rate plus two percentage points. Both proposals would let utilities use competitive bidding to set different profit rates for investors.

New York’s sponsor memo says this approach would mean less regulatory discretion and make it so that “ratepayers pay no more than what is necessary to attract capital.”

In June, Pennsylvania’s House passed its bill unanimously; it still hasn’t come up for a vote in the Senate. New York’s bill is stuck in committee.

Concentric says the proposed formula would have put allowed returns below 3% in 2020. The firm says investors would have had less reason to put money into electric utilities as a result.

Arizona regulators cut Arizona Public Service's allowed return from 10% to 8.7% in 2021.

S&P, Moody’s and Fitch downgraded the utility in response. Concentric saw its borrowing costs rise by 1.14 percentage points more than an A-rated utility benchmark from August 2021 to November 2022.

Concentric says higher borrowing costs could cancel out some of the savings for customers. They could also make it harder for utilities to pay for improvements to the electric grid.

Concentric says lawmakers could do more to lower electric bills by addressing wholesale electricity prices and the costs of government regulations.