Affordability’s Ups and Downs
Steve Mitnick has authored five books on the economics, history, and people of the utilities industries. While in the consulting practice leadership of McKinsey & Co. and Marsh & McLennan, he advised utility leaders. He led a transmission development company and was a New York Governor’s chief energy advisor. Mitnick was an expert witness appearing before utility regulatory commissions of six states, D.C., FERC, and in Canada, and taught microeconomics, macroeconomics, and statistics at Georgetown University.
In the first years of the electricity industry, in the late nineteenth century, electric service was expensive. Especially if your home or business was located beyond the big cities, which was the case for most Americans of that day.
State regulation of electric utilities went a long way in fixing the disparity. Regulation mandated universal service. And it set customers’ rates with a revenue requirements model, with a rate base at its core, diluting the impact on bills of utilities’ investments.
In the early twentieth century there was more work to do, to make electricity affordable for all. Universal service didn’t do much of anything for rural America if utilities didn’t want to do business there. Enter stage right, as federally backed cooperatives addressed that problem. By mid-century, service became universal, essentially, from sea to shining sea.
Electric service was increasingly affordable through the early nineteen seventies. Then two oil price shocks that decade drove up electric rates and bills and compelled utilities to decrease oil’s share and increase coal’s and nuclear’s share of the electric generation mix.
That stabilized things for a few years. But then nuclear plant construction costs skyrocketed in the nineteen eighties, driving up electric rates and bills again and compelling utilities to decrease nuclear’s share and increase coal’s share of the electric generation mix even more.
It was in the nineteen nineties, with advances in combined-cycle technology, that natural gas’ share took off. Which was fine until the mid-two thousand noughts when Gulf of Mexico hurricanes sent natural gas prices through the roof, and electric rates and bills with them.
Natural gas prices would not stay high. The revolution in drilling technology, known best as fracking, brought gas prices down and mostly has kept them down for the last decade plus.
Until Russia invaded Ukraine, upsetting the prices of natural gas again, Americans had enjoyed a golden age of energy affordability. Residential electric and gas service were at historic lows, in terms of how much utility bills were as a percentage of household expenditures. But the last couple of years have seen electric price increases outpacing the rate of overall inflation. The trend came to an end in December. But ground had been lost, in energy affordability, in these early twenty-twenties.
Where do we go from here? In energy affordability that is. Well, there is reason for optimism, that energy will become more affordable in the future. And there is reason for pessimism that energy will become less affordable in the future.
If you’re an optimist, you’ll point to increasing use by utilities of artificial intelligence to push down operating costs, and to increasing demand growth spurred by new data centers and other industry. Both trends will exert downward pressure on customer rates and bills.
If you’re a pessimist, you’ll point to increasing investment in the electric grid, that is sorely needed, and to increasing cost of infrastructure equipment. Both trends will exert upward pressure on customer rates and bills.
Personally, I’m a glass half-empty and a glass half-full kind of guy. All those trends in both directions are right there, smack in front of us.
But I am a clear optimist on one thing. I’m confident our industry and our regulators are up to the challenge, as has been proven time and time again in our history. With innovation and dedication, I do believe we will figure it out. My bet, energy will become even more affordable going forward.
Affordability by the Numbers articles at fortnightly.com:
