Utility Customers Pay for Pandemic Costs

With many U.S. businesses stuck at a standstill for the first several months of 2020, and now finally operating at reduced capacities if operating at all, the coronavirus pandemic has not only left many businesses in an unprecedented financial crisis but it’s also put our public funds in turmoil.

Due to reduced tax payments, many city councils and state legislators are needing to decide which public services to trim or cut – health and medical, education, public safety, and so on. None are easy choices but until the economy recovers, there’s a lot of things we’ll need to start doing without. Exempt from a lot of the financial dilemma, however, are the public utility companies.

You would think that just like our businesses, and our governments are needing to figure out ways to remain afloat by reducing expenses, the electrical utility companies are not. That’s because when it comes to public utilities, it’s quite a different picture. To understand this, let’s back up a little bit and look at how they are structured.

No doubt that with businesses shut down across America, the electrical utility companies have seen a drop in electrical demand. In fact, the Energy Information Administration (EIA) predicts that by the end of 2020, U.S. energy consumption will have reduced by 7% in the commercial sector alone, making it the biggest annual percentage drop in electricity sales in over 20 years. Despite this major drop in electrical usage and demand, electrical utility companies remain in pretty good financial shape because, by regulation, their businesses are “insulated” from the pandemic.

Let us explain,

Decades of energy regulation allow public utilities to make up for unexpected financial losses today by adjusting the rates they charge for electricity in the future. This regulation is aimed at ensuring utilities continue to deliver electricity, safely, to homes and businesses no matter what’s happening. However, these same rules allow the utilities to face the pandemic pretty much unscathed knowing they will be recuperating any losses by charging more in the future.

One of the most common methods utilities use to stay profitable is called decoupling. In public utility regulation, decoupling means to separate a utility’s profits from the sales of electricity as a commodity. This allows public utilities to adjust and align their rate of return with meeting revenue targets, adjusting rates up or down to ensure the targets at the end of the adjustment period are met. Many states have adopted this method.

This regulation isn’t just pandemic proof. If energy demand slows down, let’s say because homes and businesses start to use energy more efficiently, many states will decouple their rates, increasing them accordingly to ensure they meet whatever financial target had been set for that period.

Other regulations also exist, allowing utilities to increase rates when costs rise in response to an emergency. Other regulations again, allows rates to increase when electrical demand increases or usage spikes, such as hot summers or cold winters that increase electrical demand to cool or heat homes and businesses.