Energy Musings - February 17, 2025
The outrage over high electricity bills is growing and politicians are seeking solutions. Unfortunately, their policy solutions involve more government involvement despite a record of failure.
New England, Among Others, Deals With High Power Prices
High electricity bills have upset the public throughout New England and elsewhere, forcing politicians to address the problem. Unsurprisingly, politicians dip into their old playbook with attacks against Big Oil and local utilities or proposing to cap commodity prices for answers. The range of proposals blows one’s mind with their stupidity. They remind us of the failed governmental involvement in our domestic energy industry following the 1973 Arab Oil Embargo. Will politicians ever learn?
Rhode Island, Connecticut, New York, and the European Union are the latest energy battlegrounds. Each location’s battle has a different proposed solution but has a common theme: increased government involvement in our energy industry.
Two quick stories about the 1970s’ governmental attempts to “solve” our energy problems illustrate the history of government failure. The Arab countries in the Middle East bound together to shut off shipping oil to Western governments that supported the Israelis during the 1973 Yom Kippur War that pitted them against Syria and Egypt. The response to the reduced oil supply was a crisis, which led to a quadrupling of domestic oil prices during 1973-74. The price went from $2.90 before the embargo to $11.65 a barrel in March 1974. Consequently, gasoline pump prices soared, and shortages emerged, forcing the government to institute a rationing scheme that had not been used since World War II.
Consumers could buy gasoline on a particular day – sometimes limited to several gallons – depending on whether one’s car’s license plate ended in an even or odd number. The problem with the rationing was that bureaucrats who used old population data determined the volumes allocated to the states. Thus, regions with growing populations were penalized with inadequate supplies, while areas experiencing shrinking populations had plenty of fuel.
In 1975, Congress voted to boost American vehicle fuel efficiency from 13.5 miles per gallon to 27 mpg. Consumers were instructed to lower their thermostats to conserve home heating oil and natural gas supplies. Non-essential energy use was frowned upon. In the long run, these steps were essential and beneficial for our economy and society.
We attended a government meeting in Hartford in late 1973 during the early days of the energy crisis. A Washington bureaucrat wanted to know why they couldn’t order cities and homes to shut off natural gas-powered streetlights and exterior house lights. A nervous gas company employee was hauled before the hearing to explain to the bureaucrats that only one large valve controlled the flow of natural gas to entire neighborhoods. Closing that valve would mean no gas available to heat homes, cook meals, or dry clothes during the winter.
Nobody understood the energy infrastructure except the professionals who constructed it. Little has changed over the past 50 years, which helps explain the problems with many proposed solutions for high electricity bills.
The New England power market suffers from two problems. First, the region relies on natural gas for a substantial amount (40%+) of its electricity and home heating needs. However, the pipelines delivering the gas supply are full. New York and New Jersey governors blocked attempts to expand and/or build new pipeline capacity by refusing to issue the necessary permits for their construction.
As a result, during the winter, significant natural gas supplies are diverted from generating electricity to heating homes in the region. This forces local utilities to buy expensive liquefied natural gas (LNG) that has to be shipped into Boston from abroad because the Jones Act prevents the shipment of domestic supplies since there are no U.S.-flagged LNG carriers.
With LNG volumes limited, New England utilities are forced to import more power from New York and Canada, which often have supply challenges. Therefore, the utilities restart idled coal- and oil-fired power plants, which have fuel supplies on-site. These are expensive options, and they are dirty plants. These options are not good for consumers or residents.
While gas market dynamics during the winter contribute to New England’s power problems, consumers are also mandated to pay for clean energy and low-income support plans. These “public benefit” costs were the nexus for the power cost battle in Connecticut last summer.
The Connecticut battle has now expanded to include questions about the functioning of the state’s Public Utilities Commission. Questions have been raised about whether the chair of the PUC has usurped her authority to enact policies without the approval of the full commission. The two leading electric and gas utilities in Connecticut charge that. Even state legislators are worried that the commissioner has gone too far with her actions. She may become a sacrificial lamb for a failed utility regulatory system.
One outcome of this public spat is that Connecticut Governor Ned Lamont backed out of a recent multi-state agreement to purchase offshore wind power. He explained that the power was too expensive. He did not want to be seen piling on Connecticut consumers with more high-cost power suppliers. His decision created a problem for Revolution Wind to move forward with its project, which could now be disrupted by Donald Trump’s election and his Executive Order shutting down offshore wind activity.
Rhode Island’s high electric bills motivated a legislator to introduce legislation to reign in the state’s dominant electric provider and only natural gas supplier. Rather than address the public benefits component of customer bills, which originate from state mandates, this bill targets the profits of Rhode Island Energy, the owner of the utilities.
The bill would cap the company’s allowed return on equity (ROE) to 4%, down from its allowed 9.275%. The rate is allowed under the state’s Public Utilities Commission rules. Rhode Island Energy notes that its allowed rate is slightly below the national average of 9.3% and in line with the returns allowed in neighboring New England states.
The commission established the current rate when National Grid owned the utility businesses. At its last rate hearing, National Grid proposed a 10.1% return for both businesses. The Division of Public Utilities and Carriers represents ratepayer interests in commission matters. It argued for an 8.5% ROE for the electric business and 9% for gas. The commission selected the 9.275% as a compromise.
Utility companies do not always earn their ROE. Sometimes, they do worse, but when they exceed the allowed rate, they are forced to share some of the excess with ratepayers. Narragansett Electric Company is the operating entity owned by National Grid and sold to Rhode Island Energy in the fall of 2022. According to media reports, based on publicly available data for the last five years, the company earned ROEs between 7.96% and 10.74% during the first three years. Depending on the amount of return over the 9.275% allowed rate, the utility refunded 50% or 75% of the overage, depending on its size. Gas company ROEs ranged between 7.94% and 8.57%.
Since Rhode Island Energy took control, the ROEs for both businesses have been between 3.68% and 5.67%, well below the allowed ROE. The company explains the ROE decline as inflationary pressures across its cost structure and increased investments in distribution systems. Greg Cornett, Rhode Island Energy president, says, “There’s a misunderstanding that we’re guaranteed some level of profit. We’re not. It’s an opportunity to earn that.”
The history of ROE allowances shows a steady decline. In 1984, Narragansett Electric Company was forced to refund profits to ratepayers after the PUC learned it had earned a 19.46% ROE, well above the allowed 15.2%. The Rhode Island Supreme Court backed the PUC after the utility challenged the ruling in court. Since then, the allowed ROE has fallen from 12% in the 2000s to 10.9% in the 2010s. It is now down to 9.275%. The rate decline can be partly attributed to low inflation and historically low interest rates.
In several cases, the U.S. Supreme Court has ruled utilities are allowed a reasonable ROE, which is approximate to that of other businesses with similar risks. Setting the ROE at 4% would harm future system investment because the return on new investments would not justify the borrowing cost for the capital to make those system improvements. It was such a low ROE that prompted SouthCoast Wind to appeal to the Rhode Island PUC for higher electricity prices for its offshore wind project, as it could not finance the billions of dollars needed.
An examination of the electric bills for our Rhode Island summer home is consistent with a media report that the cost of energy supply as a share of the typical customer bill has increased from 40.7% in the winter of 2021 to 44.3% last winter. More pernicious is the share of the bill for renewable energy programs, which rose from 18.2% to 21.3% over those three years. This component of a customer’s bill represents the public benefits that created the Connecticut outrage last summer.
ISO-NE, the nonprofit operator of the region’s power grid, reported several years ago that the electricity cost for the region’s utilities represented about 30% of the various state retail electricity rates. The rest was to support transmission, distribution, and meeting state green energy mandates. The green energy mandates are progressively higher percentages of total power that must be provided from renewable energy sources or by purchasing Renewable Energy Certificates representing clean power generated somewhere in New England or neighboring states.
In neighboring New York, the governor has determined a unique way to finance the state’s Clean Energy Standard (CES). The CES was adopted in 2016 and expanded in 2020. It set a goal of 70% of the state’s power coming from renewable energy by 2030 and a zero-emission grid by 2040. Offshore wind was envisioned to be a major contributor to meeting those targets. Without offshore wind and reduced amounts of onshore wind and solar generation, significant investment must be found to finance new power supplies. Governor Kathy Hochul (D) decided to create a “Cap & Invest” anti-pollution program. Under the plan, Big Oil and other energy companies would have a cap on their greenhouse gas emission that is projected to decline each year. New York would set up an auction to let the energy companies bid on pollution-weight-based “allowances.” The state would invest the funds from those purchases in “green” energy initiatives. Estimates are that this program would cost oil companies $75 billion.
Twenty-two states have just filed suit against the New York Climate Change Superfund Act. The required payments are for damages allegedly done from 2000 to 2018. The energy companies will be required to participate in the Cap & Invest program for the next 25 years. The states claim that New York is attempting to charge a handful of energy companies for global greenhouse gases that entered the atmosphere from many sources.
Across the Atlantic, the European Union is considering initiating a new cap on natural gas prices after the temporary one instituted in 2022, following the outbreak of the Russia-Ukraine war that sent gas prices soaring, just expired. TTF, the continent’s natural gas price index, hit a record price of €58 ($61) per megawatt-hour (MWh) last week. That is nearly 3.5 times the price of natural gas in New York City. The TTF has been more than four times as expensive as U.S. natural gas.
Expensive natural gas has contributed to high-cost electricity. High power prices have made much of Europe’s manufacturing sector uncompetitive, jeopardizing employment and economies. The 2022 price cap of €180($187)/MWh was never exceeded. However, gas industry participants and traders urge the EU not to impose a new cap. They see such a cap as destabilizing the gas market, causing a loss in trust in the TTF, forcing buyers to seek new price measures outside of the EU’s control, and thus making it difficult to purchase American and other LNG supplies.
The common theme in all these efforts to control electricity and energy costs is increased government involvement. The history of government involvement in energy markets is one of failure. Energy is a global business, and price controls in their various forms are destabilizing. While government actions are often hailed as positives for consumers, eventually, the problems emerge.
Politicians would be better served by acknowledging their limited understanding of our energy systems. Instead, they should focus on protecting the most vulnerable to high utility prices. The public also deserves to be made aware of how much they are paying for legislated clean energy mandates, about which they were never consulted but are sent the bill. No one knows if these clean energy programs are beneficial. As long as electric bills remain high and risk going higher, expect even more public demands for actions to ease the financial pain.