A Severe Winter Means High Energy Bills
How state electricity and gas regulators can help relieve the energy burden.
This past summer, one in six US households were behind on energy bills, and unfortunately they won’t be getting much in the way of relief come winter. High fossil fuel prices are slamming against a forecast for a colder winter, leading to average estimated increases in household energy bills of 10 percent for electricity and 28 percent for natural gas. The possibility of further extreme events, like December’s brutal Arctic blast, poses a risk of continued volatility.
These costs get passed on to customers in fuel cost pass-throughs, meaning low-income customers are taking a disproportionate hit. The financial pressure brought on by this energy affordability crisis will force a significant portion of these households to make harrowing economic decisions that put their wellbeing at risk, such as choosing between paying for vital necessities such as food and healthcare and making their monthly energy payments. According to a Census Bureau survey in November 2022, 43.4 million US households were unable to pay their energy bill for at least one month in the past year leading to staggering rates of decision-making informed by energy insecurity. Over 20 million households reported reducing or forgoing expenses for household necessities, such as medicine or food, almost every month to pay an energy bill in that same period, representing a 25 percent increase from 2021 numbers.
Fortunately, state utility regulators can take some immediate steps to alleviate energy burdens by expanding outreach for existing discount rates, payment plans, and programs; collecting data on shutoffs and instituting shutoff moratoriums; and considering fuel cost-sharing structures.
How Big Is the Problem this Winter?
The key drivers of the current energy affordability crisis are high fossil fuel prices and rising electricity rates. Gas prices were 40 percent higher in 2022 than in 2021.
Electricity rates are also on the rise across the country. This past November, National Grid increased the residential electricity rate that raised electricity bills for their Massachusetts customers by 64 percent. Florida Power and Light, which serves over four and half million customers in Florida, is set to increase electricity rates at least three times in 2023, with utility officials citing the impact of the conflict in Ukraine on gas prices as one reason for the increases. Aside from these pressures, other efforts such as resilience build out, grid modernization, and decarbonization also influence calls for rate increases.
Short-Term Regulatory Solutions
Regulators at state public utility commissions (PUCs) are responsible for ensuring that utilities provide safe, reliable, and affordable energy. While they can’t have direct influence over global energy markets or the weather, they do have tools available to take immediate action to soften the blow of rising energy prices, especially for the most vulnerable customers and communities, and reduce the devastating impacts brought on by the energy-poverty cycle.
A shutoff moratorium can protect households — especially vulnerable customers — from having their power disconnected during extreme weather and helps maintain the safety and well-being of all customers. Shutoffs have catastrophic effects on the physical and financial health of families and disproportionately impact Black and Latinx households. At a minimum, utilities should be required to disclose data on shutoffs; currently, only 20 states require regulated utilities to disclose shutoff information, leaving regulators, communities, and advocates in the dark.
Encouraging utilities to deploy arrearage management programs (AMPs) that are flexibly designed to reduce or forgive customer debt will also assist customers. For example, the successful Massachusetts AMP included key design choices such as automatic enrollment, incorporating fuel assistance in payment projections, swift payment forgiveness, trainings for customer service representatives, and allowing for the reinstating of customers into the program. The program resulted in reduced customer disconnections and the AMP customers paid more toward their bills than unenrolled low-income customers.
Getting Out Ahead of Unpaid Bills
In addition to options to support customers once they’re facing unpaid bills, regulators can take action to offer changes to rates, customer programs, and fuel cost riders to improve a customer’s ability to pay their utility bills before they accrue an arrearage.
Regulators can influence the increased uptake of existing energy assistance, namely the federally funded Low-Income Home Energy Assistance Program (LIHEAP). RMI analysis of multiple years of LIHEAP data found that millions of eligible households are not receiving any assistance and most states have less than 20 percent participation in LIHEAP. Utilities and commissioners should partner with community-based organizations for robust outreach to ensure qualified customers have reliable access to these resources and use available data to target households in most need of assistance.
Regulators can direct utilities to expand the availability and uptake of existing energy efficiency and weatherization offerings, especially for vulnerable customers. During the COVID-19 lockdown, states like Connecticut and New York moved quickly to adjust incentives and financing terms to enable participation at risk from rising prices. In addition to reducing customer bills and reducing the risk of shutoffs and further debt, energy efficiency measures such as weatherization and replacement of electric resistance heating for heat pumps can also support electric grid reliability by reducing the severity of demand and price spikes.
Discount rates can also alleviate energy burdens for low-income customers — and 20 states currently allow them. Commissions can either establish these rates, where they have the authority do so, or require updates to existing outreach and education about the rates, since uptake can be a challenge. This year, we’ve seen a wave of action to adopt new or improve existing discount rates to make them more accessible, including adoption of tiers of electric discount rates based on income in Connecticut and a requirement for large utilities to include discount rates in Illinois.
As noted above, gas prices have increased significantly resulting in higher costs to generate electricity and, for those that rely on gas for home heating, higher natural gas bills at households across the country. But it isn’t just gas. According to data from the US Energy Information Administration, coal prices have on average increased nearly fourfold. These price increases get passed on directly to customer bills. While utility companies don’t earn a profit margin on fuel costs, they also don’t bear any risks associated with fluctuating fuel prices. This means if a utility invests in fossil fuel infrastructure, like a gas pipeline or power plant, it effectively locks in its customers to volatile fossil fuel prices.
This has led to many experts calling for fuel cost-sharing structures that would change how fossil fuel costs are recovered from ratepayers. “Cost sharing” between customers and their utilities could have saved ratepayers at least $2 billion during the height of the pandemic. Versions of fuel cost sharing have been implemented in a range of states, with different approaches. In Hawaii, a state still reliant on very expensive fuel oil to generate electricity, the utility is responsible for 2 percent of the difference between projected and actual fuel cost expenditures, up to a cap of $2.5 million. The cap mutes the signal for cost control where prices are highly volatile, an issue that the Hawaii PUC has directed Parties to the proceeding to investigate. In Montana, a state heavily reliant on coal, the commission approves fuel price bands where the utility is responsible for a portion of the costs above the dead band and gets to profit if fuel prices fall below expectations.
The solutions outlined above will mitigate some of the affordability challenges we face in the near term, but won’t go far enough to solve the underlying incentives and challenges that got us here. For that, states must deploy tools that target long-term structural change. Ratemaking tools such as totex ratemaking can address energy burden by supporting proactive planning. Performance-based regulation can align utility incentives with affordability goals — six of the seven most recent pieces of state legislation focused on affordability and cost control as key objectives.
Utility commissions should also take steps to encourage utilities to stop selling customer debt and instead start forgiving it. This can be accomplished in a couple of different ways and ultimately, if utilities continue to sell their customer debt to third-party collectors, regulators should stop allowing utilities from recovering the costs associated with unpaid bills by charging those customers that do pay their bill.
Lastly, as we ring in the new year there is an incredible opportunity to leverage federal funds with enormous potential to accelerate the transition toward a clean, reliable, and equitable electricity system. Last year’s Inflation Reduction Act (IRA) has an incredible suite of tax credits and financing options that make investments to develop clean energy and transition away from fossil fuel infrastructure more economical and feasible at scale. It also includes the Energy Infrastructure Reinvestment Program, which provides low-cost loans to energy communities to “retool, repower, repurpose, or replace” energy infrastructure sites. This program has the potential to power projects beyond the electricity sector, with opportunities such as retrofitting natural gas delivery infrastructure for electric-ready buildings.
We Have the Solutions
The affordability crisis can feel overwhelming and acute, especially this winter. But state utility regulators have solutions they can deploy immediately as well as more structural changes available to consider. By looking to peer states and the examples we outline here, these leaders can move forward a set of policies that buttress their ability to ensure that everyone has access to affordable energy.