The steep increase in utility bills is a big part of the affordability issue currently animating our national politics.
Small wonder then that states are seeking meaningful ways to address the problem.
Would that Illinois were one of them.
Most audacious of the actions we’ve seen so far was Pennsylvania Gov. Josh Shapiro’s move last month to pressure his state’s largest utility, PECO Energy, into withdrawing proposals to hike rates for both electric and natural gas users and then effectively upending how rate-setting has been done for eons.
In an April 29 letter addressed to the Keystone State’s “utility leaders,” Shapiro declares, “I believe the 20th century utility model is broken — we can no longer simply prioritize corporate profitability to drive infrastructure development.”
Shapiro goes on to lay out three standards utilities will have to meet in the future in order to win approval of higher rates. Stated simply, the companies will have to adjust their mix of debt and equity to reduce the cost of financing their capital investments. They will have to justify those planned investments with thorough cost-benefit analyses. And they will have have to significantly reduce their requested equity returns that inflate their rates.
For those not familiar with the esoteric practices of this highly regulated industry, what Shapiro wrote might not sound all that radical; it might, in fact, sound like common sense. But we can assure you those running these businesses understand this letter as a shot across their bow and a serious threat to their business model because it is likely to reduce their revenues and profits.
In the letter, Shapiro exposes the fundamental problem with how electric and gas utilities function.
Embedded in the regulatory system upon which they are dependent for their financial success are incentives that motivate the companies to spend as much as they can on capital projects because, at least in Illinois, the state guarantees a specified return on those investments. The more utilities spend, the more they make.
A major issue with this model is that some of that new infrastructure truly is stuff of value to customers and results in improved service reliability. And some of it is in the category of, nice to have but far from critical. Our utility regulators, in this state and elsewhere, understandably struggle to determine which is which. Ergo, they too often bless most if not all of the spending utilities propose.
Pennsylvania isn’t alone. In Maryland, Gov. Wes Moore is expected soon to sign legislation to cut electric bills by a collective $150 million in large part by temporarily reducing the surcharge customers pay in their electric bills to support energy efficiency programs.
What are Illinois policymakers doing to attack higher utility bills? Well, very little as far as we can tell, outside of considering measures requiring power-hungry data centers to pay for their own electricity.
Illinois’ energy policy, set via the 2021 Climate & Equitable Jobs Act, prioritizes climate goals rather than affordability. Right now, as we’ve written, that law is having the unanticipated effect of repurposing northern Illinois’ natural gas-fired power plants, which are important to satisfying peak summer and winter demand, to meet demand in other states like Texas and Wisconsin. Losing those assets is likely to drive up the cost of power and ultimately electric bills.
If you look at your electric bill, you’ll see a lengthy list of surcharges that, among other things, support renewable energy development, subsidize low-income households, stabilize revenues at nuclear power plants and, yes, pay for energy efficiency programs. Those energy efficiency programs, by the way, are run by utilities like Commonwealth Edison, which profit from them.
Chicago-based Exelon, the parent of ComEd and one of the nation’s largest utility holding companies, also owns PECO Energy in Philadelphia, which just had the brakes slammed on its rate hike by Gov. Shapiro.
In its first-quarter earnings presentation to investors Wednesday, Exelon said it plans to hike shareholder dividends by 5% annually through 2029. How will it do that? By spending. A lot. Exelon says it will invest $41.7 billion from 2026 through 2029 at all of its utilities, which will boost the net assets on which it calculates its return — and thereby its regulated revenues — by nearly 8% a year. The only way to achieve those goals is to hike delivery rates.
If other governors follow Shapiro’s lead, we could see a wholesale recalibration of how this indispensable industry operates. To the benefit of consumers everywhere.
Shapiro, we should add, is commonly mentioned as a contender for the Democratic Party presidential nomination in 2028. As is Maryland Gov. Moore. As is our governor, JB Pritzker.
Here’s an area where a state has a lot of direct control over affordability, the issue of the day.
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