Frontlines

Electricity rates may be heading skyward sooner than we think.

Are state regulators in danger of bringing about the thing they most fear-higher electricity rates? Critics charge that some regulators seem to be opening up the cookie jar, letting utilities have as they please with no supervision.

How else, they ask, to characterize rate-basing merchant generation with no competitive solicitation? And that's not to mention the recent trend of allowing utilities to recover in rates the full cost of upgrading power plants to meet environmental requirements.

Just those two categories could pump billions into rate base. Add in transmission upgrades and new coal plants, and the costs start to add up. Many of these expenses may well be necessary. But will they lead to regulatory rate creep? That's the question.

As we reported in our March issue, in 2003, just over 1.4 GW of unregulated generating capacity was converted into rate-based assets, while pending deals promise another 5.6 GW of unregulated capacity brought into rate base. The sum of pending and completed deals cost ratepayers in excess of $1 billion just last year.

Most of these plants are fired by natural gas. And, as many are aware, most of them were planned without a competitive solicitation. Ratepayers may never know to what extent they subsidized merchant losses, or even if they got a good deal.

But ratepayers may soon find out. On page 48, two authors suggest that reserve margins may not be as large as we think, as many gas plants cannot economically be called into service, or have been mothballed and won't be contributing to reserves. The so-called supply glut, the article warns, may be over sooner rather than later.