Skyrocketing electricity bills have become a central part of the affordability crisis straining Americans’ wallets, and policymakers from across the ideological spectrum are searching for solutions to bring down costs–and fast. Brian Shearer, the Vanderbilt Policy Accelerator’s (VPA) director of regulatory policy and competition, released a report detailing how regulators and legislators can tweak existing utility law to immediately lower electricity bills by 30%, saving $500 per household every year, and bringing average monthly bills to under $100. While longer-term solutions are needed to confront issues such as the pervasive growth of energy-hogging data centers and the rise of extreme natural events that tax the electric grid, today’s report provides policymakers with quick solutions to lower residential bills and deliver immediate relief to American households.
“If policymakers are looking to meet the moment on affordability and utility bills, there are some quick fixes that would save Americans $70 billion right now,” said Shearer. “While there’s no question that more significant reforms are important, in the meantime, some basic maintenance to the way regulators approve utility prices would lower average electric bills to under $100 within the year.”
In the United States, electricity prices are approved by state public utility commissions and the Federal Energy Regulatory Commission (FERC) because all or part of the electric grid is operated as a monopoly. When regulators do this, they approve the overall “required revenue” that utilities can collect to ensure utilities recoup their necessary costs and also a return to their investors, and then also approve the way revenue is “allocated” among different customers. The goal of the regulators is to ensure the prices are “just and reasonable” and also non-discriminatory.
Over time, regulators have veered from these goals, allowing utilities to recoup unnecessary costs, bill excess profits, and discriminate against residential customers by charging them more than large corporations like data centers and manufacturers. The following five simple and straightforward policies would ensure that rates are once again just, reasonable, and non-discriminatory.
- Stop approving inflated profits for utility companies. Regulators approve a “return on equity” for utilities that is supposed to align with expected returns for comparable investments. But they regularly approve a 10% return, more than the average stock market return, even though investors put the risk level of utility stocks somewhere between bonds and equities. Policymakers could fix this by capping returns at 7%.
- Fair flat pricing between people and corporations. Residential customers currently pay double the price that industrial customers pay. Residential customers would save 21% on their bills if, instead, regulators approved “postage stamp” prices with equal average per-kWh prices across residential, commercial, and industrial customers. This would also save families money without raising rates for public transit agencies or small businesses paying “commercial” rates.
- Stop paying “FERC candy” to incentivize utilities to join Regional Transmission Organizations (RTOs) they’re already in. Regional Transmission Organizations run wholesale energy auctions in many regions of the country. FERC allows utilities to add 0.5% to utilities’ profits to incentivize them to join these RTOs, a sweetener that one former FERC commissioner described as “FERC candy.” Customers pay for that 0.5% in their bills. Because utilities are de facto required to join RTOs in the regions where they are established, policymakers can repeal this incentive and save customers money without any unintended consequence.
- Require rebates when utilities over-charge. Regulators approve profit margins that are built into bill prices based on projections. Sometimes a utility’s profits end up higher than the return the regulator approved. That money should be returned to customers in the form of a rebate check.
- Stop utilities from billing customers to pay for lobbying and corporate jets. Utilities are supposed to only recover the costs of providing energy in customer bills. But often utilities will put the cost of private jets for executives, lobbying expenses, advertising, and excessive executive compensation on customer bills. Policymakers should ban utilities from putting these costs on bills because they are not necessary to provide energy to customers.
While these policy reforms would reduce electricity bills immediately and substantially, they do not represent major deviations from the status quo. For example, they would not require re-regulating wholesale energy, changing the way energy auctions are run, or the creation of new publicly-owned utilities. Because none of these policies implicate energy generators, they would not create or undermine incentives to build new clean energy generation. These policies also do not address data center energy needs or their impact on residential energy bills. Instead, the proposed reforms are intended to give policymakers a quick fix to lower prices immediately, starting to solve one important part of the affordability crisis, as they continue to consider more fundamental reforms.
Read the full report here or learn more on VPA’s Substack.
About the VPA
The Vanderbilt Policy Accelerator for Political Economy and Regulation (VPA) focuses on cutting-edge topics in political economy and regulation to swiftly bring research, education, and policy proposals from infancy to maturity. To learn more about our work, visit vu.edu/vpa.