Who Exactly Will Pay For Utility Upgrades?

Posted September 19, 2003 at 10:19am

The Bush administration has estimated that upgrading the national electricity grid will cost tens of billions of dollars, perhaps even $100 billion. In crafting a comprehensive energy bill that addresses this necessary upgrade, we must ask a very simple, but important question: Who is going to pay for these multibillion-dollar expenditures? Will it be investors, taxpayers or ratepayers? Given

that the purported goal of the energy bill is to provide cheaper electricity to American consumers, I believe the impact on ratepayers — specifically on consumer ratepayers — should be minimal.

During a two-day hearing on the August blackout, the Energy and Commerce Committee heard a chorus of testimony proclaiming that the national electricity grid is in dire need of a comprehensive upgrade. Many on the panel eagerly pledged to do their part and make the necessary capital investments in transmission and distribution systems. However, in so doing, they also stated that they needed an adequate “rate of return” on their investments in order to induce the necessary upgrades. Some talked about “incentive rates,” whereby transmission utilities are allowed to charge sufficiently high usage rates to give investors an “incentive” to spend capital on improving reliability. Energy Secretary Spence Abraham, on “Meet the Press,” was blunt: “The people who benefit from the system have to be part of the solution here. That means the ratepayers are going to have to contribute.

“We think the rates need to be sufficient to incentivize the building of new transmission.” My concern is this: Such terms can be code language for simply raising rates on retail consumers.

Because I agree with the secretary’s belief that those “who benefit from the system have to be part of the solution,” I believe energy companies, not retail ratepayers, should bear the brunt of the cost to upgrade the grid. After all, private companies will reap considerable financial reward from these capital investments. The average consumer should not have to substantially subsidize capital ventures on behalf of private companies that stand to handsomely profit from those very ventures.

Current law requires the Federal Energy Regulatory Commission to approve transmission rates that are “just and reasonable.” The House-passed energy bill directs FERC to promulgate a rule that creates “incentive-based … transmission rate[s].” The de facto effect of the House bill’s language would be to raise transmission rates under the guise of attracting investment capital. Though wholesale ratepayers (usually distribution utilities) would be the actual participants paying the higher incentive rates, they would likely pass these costs off to their retail customers were state regulators to allow it. Congress certainly should not be crafting legislation that would needlessly encourage a rise in retail rates. Instead, we should be finding solutions that would spread upgrade costs to those participants most benefiting from the upgrade and to those participants best able to bear the costs. To change the calculus for transmission rates from “just and reasonable” to “incentive-based” arguably transforms FERC’s rate-setting mission from promoting fairness to promoting unreasonable profit maximization.

Changing existing law to explicitly reflect cost allocation fairness may be valuable, but FERC’s existing discretion already provides transmission utilities with enough financial incentive to invest capital and improve grid reliability.

Currently, the average rate of return built into transmission rates is around 12 percent. This rate should be plenty good for Wall Street. If, arguendo, there is an economic barrier to capital investment in the grid, it could be the risk associated with regulatory uncertainty. One could argue that the chaotic patchwork of federal and state rules and regulations does not give investors adequate guidance on how they can recover their investment costs. While I don’t want to get into the complicated arguments over electricity “deregulation” (or “re-regulation”), I do want to stress that Congress must ultimately provide investors with regulatory stability and certainty. Notwithstanding that opinion, I believe the electricity industry must still definitively show that an authorized reasonable rate of return, in and of itself, is insufficient in attracting necessary capital.

Of course, we should at least consider the option of simply forcing energy companies to make the necessary upgrades and eat the associated costs (to a certain and reasonable degree). Case in point: In 1999, Chicago suffered from recurring blackouts that, at one point, left more than 100,000 people without power during a July heat wave. After an angry public reaction from Mayor Richard Daley (D), Commonwealth Edison invested $2 billion toward upgrading the transmission and distribution system in the Chicago area (and has pledged to invest another $2 billion over the next five years). As a result of these investments, the cascading blackouts we witnessed in August are not likely in the Chicago area. And because Illinois state law caps retail electricity rates, Chicago residents did not see their power bills rise. While Commonwealth Edison may not have fully recouped its costs, the company is doing just fine financially. This illustrates that consumer ratepayers do not necessarily have to bear the brunt of upgrade costs.

Lastly, I would be remiss without acknowledging the fact that I am the sole African-American conferee from the energy committees. As such, I am particularly sensitive to how people of color and low-income communities are impacted by Congressional action. When some argue that transmission is only (roughly) 10 percent of a consumer’s electricity bill and that, consequently, the financial impact of increased rates would be minimal, I would only caution that for low-income people, every penny counts. What may seem like minuscule costs to some are substantive hardships to others. We must do everything we can to protect those who are most vulnerable from incurring unnecessary costs in improving the grid’s reliability.

In sum, to begin our national conversation on electricity policy by asking how ratepayers can pay more is starting off on the wrong foot.

Instead, we should be asking what Congress can do to minimize the impact reliability upgrades will have on consumers. Those who stand to profit from these capital investments and those that are best able to incur the costs associated with this public good should do so. Our mission with this energy bill is to provide cheaper, not more expensive energy to our citizens.

Rep. Bobby Rush (D-Ill.) is a conferee to the energy bill from the Energy and Commerce Committee.