Mitigating Electric Distribution Rate Increases Will Require Ongoing Effort
by Bob Shively, Enerdynamics President and Lead Facilitator
Do you feel like your electricity costs keep going up? If so, you are in line with the average American consumer. Over the past four years, U.S. electricity prices have risen significantly faster than general inflation. Average electricity prices across all customer sectors increased from 11.10¢ per kWh in 2021 to 13.63¢ per kWh in 2025, representing a compound annual growth rate (CAGR) of 5.27%. Residential customers fared worse, with prices climbing from 13.66¢ to 17.30¢ per kWh over the same period, representing a 6.08% CAGR. Both figures substantially outpace general Consumer Price Index inflation, which averaged approximately 4.5% per year over the same period. In other words, residential electricity prices have risen at a rate roughly 1.6 percentage points per year above overall inflation. And with many utilities planning additional spending growth, it doesn't look like most consumers will see any relief soon.
Some of the price increases, especially the 2022 price spike, are due to supply costs driven by natural gas prices. But the persistent, above-inflation price increases before and after that spike are predominantly driven by delivery costs due to utility expenditures for aging infrastructure replacement, grid modernization, hardening for wildfire and storm mitigation, transitioning to dependence on distributed energy resources, and smart meter deployment. To further determine factors driving distribution costs, the Lawrence Berkeley National Laboratory (LBL) recently completed a study titled Electric Utility Distribution Costs. The study synthesized information to help stakeholders understand the scope, scale, and drivers of recent increases in distribution expenditures for Investor-Owned Utilities (IOUs) and to identify tools to help mitigate rate increases. Following are some key conclusions from LBL.
Recent Distribution Spending
- Since 2014, IOU distribution spending has grown 4 times faster than it did in the prior 20 years, growing nationally by 6% per year, consisting mostly of capital expenditures
- Distribution-driven rate increases have varied significantly by region:
- Key drivers of distribution rate increases include capital expenditures, operations and maintenance (O&M) spending, contraction in sales requiring costs to be spread over fewer kWh, and shorter asset depreciation lives
Planned Spending Growth
- Many utilities are planning for significantly increased distribution spending through 2030
- Much of this spending will be due to capital expenditures, not O&M
- Most of the capital expenditures will be for managing the existing system, not for capacity expansion (despite recent attention given to spending for data centers and other load growth)
- Asset replacement, safety, reliability, and resilience are important drivers of the spending
Impacts on Rates
- Rate increase requests and public utility commission approval levels have increased significantly
- The percentage of rate requests receiving approval is highest in New England, the Southeast, the Mid-Atlantic, and the Midwest (MISO).
Source: LBL study, Executive Summary, page 7
Can Anything Be Done to Help Consumers?
To some extent, utility distribution spending is necessary given aging infrastructure and industry evolution. So, is there anything regulators can do to mitigate the increasing distribution costs? The LBL study identified short, medium, and long-term tools that regulators can consider. Each comes with trade-offs that will need to be carefully evaluated.
Short-term Tools
- Reducing utility return on equity (ROE)
- Approving non-traditional debt/equity ratios
- Considering longer depreciation periods
- Limiting cost trackers to costs outside the utility's control and applying performance metrics to cost approvals
- Using budget caps and lower ROEs or prohibiting inclusion of construction costs in rate base before assets are in service
- Issuing ratepayer-backed bonds at lower interest rates than the utility's average cost of capital for large projects (securitization)
Medium-term Tools
- Augmenting cost-of-service regulation with utility performance incentives
- Requiring detailed information on planned capital investments, including robust justifications
- Staging cost approvals for projects and reviewing prudency over time
- Guiding utilities on how they should evaluate cost effectiveness and prioritize expenditures for planned projects
- Requiring utilities to consider all options for projects to identify the least-cost solutions
Long-term
- Requiring utilities to implement robust asset management plans that closely examine justifications for projects, efficiency of spending, and prioritization of spending.
None of this will be easy or provide immediate relief for consumers, but proactive action now will help mitigate some of the long-term effects of necessary grid enhancements.
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