Electric Rate Increases: Cause and Effect
Branko Terzic
The major newspapers and media have turned their attention to electric utility rate increases as a major political issue in 2025. An October 16 Washington Post article “Voters are turning ire over utilities towards politicians” by Even Halper is a recent example. The articles subtitle “Electricity shortages, price hikes, data centers could shape major races” hints at the causes of rate hike issues. The full-page article focuses on two states, Virginia and New Jersey and the impact of electric rate issues on the races for governor.
The article, however, ignores how electric rates are set in the two states. It does introduce the Mid-Atlantic state’s PJM Interconnection as “The obscure organization sets prices and controls when power plants come online.” Perhaps leading readers to believe that’s all there is to the story of electric rate regulation.
In reality the wholesale electric rate making in the PJM system includes the PJM under the jurisdiction of the Federal Energy Regulatory Commission (FERC). In Virginia retail electric rates are set by the State Corporation Commission (SCC). In New Jersey the New Jersey Board of Public Utilities (BPU) set the retail rates. The Governors of these states do not set rates. In New Jersey the governor nominates the five BPU commissioners subject to state senate confirmation. In Virginia the three SCC commissioners are elected by a vote of the two houses of the General Assembly. Rates set by these state regulators are subject to appeal to the jurisdictional courts, not to the respective governors.
In an earlier article I explained that electric rates are approved by regulators after a rate case, a public proceeding. The level of rates is determined by the regulators upon approval of an annual revenue requirement. If the new annual revenue requirement is higher than the revenue expected from the current rates, an increase in rates is required.
The Annual Revenue Requirement
Operating and maintenance expense $
Labor $
Fuel expenses $
+ Depreciation $ ( depreciation rate %/ year times Rate Base)
+ Taxes $ ( Income, sales and maybe property)
+ Return $ (Rate of Return %/year times Rate Base)
= Annual Revenue Requirement $
Looking at this standard regulatory formulation one can ask how the press reports of “causes” of electric rate increases fit into the model. The construction cost of new investment in rate base is funded by debt and equity. The new assets are only added in the rate base in the next rate case when the assets are actually providing service to customers.
Some common causes frequently cited and how they affect the revenue requirement:
“Inflation” affects all utility O&M expenses from labor costs to materials and supplies and professional services such as accounting, legal and cybersecurity. Inflation in construction costs increases the rate base when assets go into service adding to depreciation and return expenses.
“New infrastructure investments” are capital investments approved by the regulator. New capital investment to meet growing demand increases the “rate base” which increases “return” and “depreciation” expenses.
“Upgrade aging plant” are investments usually in transmission and distribution assets approved by the regulator made to improve service to existing customers by reducing outages from aged plant, storms or fires. Return and depreciation expenses increase as assets are added to rate base.
“Gas price increases” is a fuel expense increasing “O&M”
“Gas price increases” is a fuel expense increasing “O&M”. Some regulators allow a monthly “fuel adjustment” line to the consumer bill. This adjusts the rates for the difference between the fuel price used in the last rate case and the current cost of fuel paid by the utility and reviewed by the regulator. If the price is higher now, the adjustment is an increase, if lower a decrease in the per kWh charge.
“Increased demand” for electricity causes the construction of new power plants, transmission and distribution assets with the consideration that the production costs of the new power may be greater than that embedded in current rates. If the new power plants are in the utility rate base the deprecation and return will increase along with possible fuel cost increases. In restructured states with wholesale power markets if new plants have higher production costs then wholesale prices will increase.
“Intermittent renewables” may require new on-demand backup like natural gas plants adding to cost and reliability. New accompanying battery investment may mitigate this factor. New investment adds to rate base increasing depreciation and return.
If you have another cost causation issue then it too must fit within the annual revenue requirement formulation.
The Honorable Branko Terzic is a former Commissioner on the U.S. Federal Energy Regulatory Commission and State of Wisconsin Public Service Commission, in addition to energy industry experience was a US Army Reserve Foreign Area Officer ( FAO) for Eastern Europe (1979-1990). He hold a BS Engineering and honorary Doctor of Sciences in Engineering (h.c.) both from the University of Wisconsin- Milwaukee.
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