A Simple Way to Immediately Lower Electric Bills by Hundreds of Dollars

Americans find our economy increasingly unaffordable and energy bills are a big part of that. Affordability has become a frequent talking point for politicians and pundits across America. But it’s just as common to hear that it’s impossible to deliver on affordability because there isn’t a way to lower prices quickly. There are, supposedly, no quick fixes.

However, there are some quick fixes if we have the political will to act. A report I published today—which The Washington Post covers here—proposes five policies that would lower electricity bills by 30% to under $100 on average, saving $500 per year per household, and about $70 billion per year. The proposals are aimed at fixing the way that regulators approve electric bills, and include:

• Prohibiting utilities from making consumers pay for the cost of corporate jets, political contributions, lobbying, advertisements, and the like in their electric bills.

• Setting the regulator approved investor-return, which is added to your electric bill, at 7% instead of the current 10% to reflect the fact that the risk level of a utility stock falls between bonds and stocks, and are less risky than typical stocks.

• Stop adding 0.5% to investor returns–which, again, is added to your bill–for unnecessary incentives to join Regional Transmission Organizations that utilities are already in.

• Rebate back to consumers the excess when investor returns end up higher than what regulators approve, which happens often.

But the fifth proposal is the biggest and would, by itself, cut electric bills by over 21 percent. It wouldn’t cost the government a dime. It wouldn’t even cost the utilities anything. And the savings would be almost immediate. Here is the proposal:

A utility’s rates shall be considered unduly discriminatory and shall not be approved by the Commission if average annual per kilowatt-hour costs incurred by different ratepayer classes differ, including between residential, industrial, and commercial classes.¹

This one sentence could save the typical American family $360 a year, or about $49 billion in total.

The savings come from reversing a surprising form of price discrimination that you might not know about. Right now, we do not all pay the same price for energy. Regulators, not the utilities, set the revenue that utilities are allowed to collect from us in our bills. And they allow utilities to unevenly divvy up that revenue in the bills they charge to customers. Residential customers consistently pay more than commercial customers, like data centers, and double the price that industrial customers pay. If one factory uses 80,000 kilowatt-hours (kWh) in a month, one data center uses 80,000 kWh in a month, and 350 houses collectively use 80,000 kWh in a month, based on nationwide averages the families living in the houses would pay $13,184, the data center would pay $10,200, and the factory would only pay about $6,504 for the same amount of electricity.

If all we did was require equal pricing, where everyone pays the same average price for energy, residential electric bills would go down 21%. Bills to commercial businesses—including the vast majority of small businesses—would stay even.

And the utilities themselves would be largely untouched. They would continue to collect the same overall revenue, and so there wouldn’t be any impact on their business model or investments.

However, large, corporate, industrial users would see a bill increase, perhaps as much as 59%. That may seem big, but in the grand scheme of things, that amounts to an increase in manufacturing costs of only 1%. Might that cost impact consumer’s wallets? Probably, but only slightly, and not as much as people would save in their electric bills. Any inflationary effect from this increase in costs—which I estimate would be about 0.08%—would be dwarfed by the 0.52% deflation households would experience from the cut in electric bills. In the midst of an affordability crisis, this is a worthwhile tradeoff.

There is precedent for flattening these prices. It would track the long tradition of treating utilities as common infrastructure, like roads, bridges, libraries, schools, and the post office. We, generally, all pay the same price for a postage stamp, even though it costs much more to send mail to a farm than to a city. In fact, this philosophy was used to electrify rural areas in the 1940s and 1950s by charging “postage stamp” prices for energy to everyone and allowing urban areas to “cross-subsidize” farms.

Flat pricing has since fallen out of favor, and utilities and regulators now try to allocate utility prices to reflect the relative costs. Because it costs more to wire houses than factories, they are more expensive. This kind of risk- or cost-based pricing is used in other contexts like lending or insurance where the prices are trying to incentivize safer behavior, or where it’s necessary to ensure access. And different prices for the time of day, or time of year, or for heavy users, can drive more efficient energy use. To be clear, we should keep that kind of price differentiation. But differentiating between houses and factories doesn’t incentivize efficiency, or anything else for that matter. And utilities are legally required to plug residents into the grid.

In other words, once you dig below the surface reasoning for giving factories cheaper rates than houses, there is no compelling justification. Regulators just decided it was “fairer” to make factories pay less and households pay more, and we can decide that it’s fairer to make everyone pay the same.

The broader lesson is this—it is possible to enact short-term policy to get out of the “affordability curse.” We don’t need to be stuck in an endless cycle of politicians promising to lower costs, and then failing to follow through, only to be replaced by other politicians who make the same promises and fail again, and so on. But to do it, we have to have the political will to make a tradeoff. In this case, it is a tradeoff that benefits American households quite clearly.

1. This proposal would allow different pricing methodologies, including between ratepayer classes, and would not require flat pricing. However, utilities and regulators would need to do the math to ensure that the revenue collected from each ratepayer class—from all sources including delivery costs, energy charges, demand charges, and fees—is the same on a per kilowatt-hour basis.