Transmission costs up, energy costs down

Monday, July 2, 2012

The cost of electric transmission and distribution service in Maine is going up, at the same time that the cost of electric energy is going down.  What this means has implications not only for Maine but for all societies seeking to reduce the cost of electricity.

The cost of electricity to consumers can generally be broken down into two categories: energy and transmission and distribution service.  Electric energy charges represent the cost of the useable electricity that flows through an end-user's meter.  Transmission and distribution service charges, sometimes called "wires charges" or "delivery charges", represent the cost of delivering that amount of energy to the consumer.

In many states, vertically-integrated utilities both generate and deliver the energy.  Other states have restructured or deregulated their electric generation business; in these states, electric utilities deliver energy produced by non-utility generators.  Consumers in restructured states are usually free to select their own competitive electricity provider, whose energy will be delivered over the wires operated by the monopolistic local utility.  Because utilities continue to have a duty to serve all customers, if a consumer doesn't choose a competitive generation source, the utility will provide energy through a default service or "standard offer".

Maine is an example of a restructured state.  The state Public Utilities Commission regulates transmission and distribution utilities and their rates.  Effective July 1, the wires charges for Maine's two largest utilities -- Central Maine Power Co. (CMP) and Bangor Hydro Electric Company (BHE) -- went up.  On average, CMP customers' rates show an increase of 7.1% for the delivery portion of the bill; BHE customers' delivery rates increased 4.5%.  According to the Maine PUC's press release, the major driving force behind these increases are significant increases in the utilities' federally regulated transmission rates: a 19.6% increase for CMP and a 12% increase for BHE.  These transmission rate increases are in turn driven by multi-billion dollar expansions of and upgrades to the New England transmission grid.

At the same time, average energy prices in New England decreased by 7% between 2010 and 2011, largely as a result of cheaper natural gas supplies and reduced demand for electricity.  These energy price declines translated into decreases in the standard offer service delivered by these two utilities, about 25% to 35% lower than prices one year ago.

These twin forces -- increased investment in the transmission grid and reduced electric energy costs -- are not unique to Maine, but exert themselves in a number of regions of the United States.  One net result of these changes is a shifting of consumer costs away from energy and onto wires charges.  The cost of transmission and distribution service thus plays an increasing role in driving customers' electricity costs.  Given this shift, efforts to reduce the cost of electricity to consumers may find the most fertile ground in ensuring that transmission development is efficient, and that utility developers earn a rate of return on their investment that is fair, or in federal regulators' terms, "just and reasonable".

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