Utility Rates FAQs

Utility Rates FAQs

How are utility rates determined?

Like most businesses, utility rates are set taking into consideration normal operating expenses such as labor, fuel and a return on capital investments used to buy equipment—costs for providing natural gas and electric services to homes and businesses. Unlike most businesses, Wisconsin's largest utilities are a state-regulated monopoly. In return for monopoly status, utilities have an obligation to serve all customers. The PSC regulates these utilities and their rates. When a utility requests a rate change, the PSC reviews the request. Based on a PSC audit and customer testimony in public hearings, the PSC sets utility rates.

Utility rates include an amount that is based on a rate of return for shareholders up to an amount capped by the PSC. If the year does not go as well as expected, utilities earn less than the amount authorized. If the year is better than expected, they earn more. The rate of return for shareholders is not guaranteed but does depend on how well a utility operates. Weather also affects how much energy customers use, which in turn affects the rate of return.

(Municipal electric utilities and rural electric cooperatives differ, in that they are non-profit and most only distribute power rather than generate electricity. Further, Electric Cooperatives rates are determined by their Boards of Directors rather than the PSC.)

There is a difference between natural gas and electric bills. For electric bills, the cost of fuels (such as coal and natural gas) is figured into rates. Electric rates include the costs to produce, purchase and deliver electricity. For natural gas bills, the rates cover a utility’s costs to deliver gas to customers—but not for natural gas as a commodity. That is a separate charge that utilities pass on to customers without a markup.

How often do Wisconsin utilities adjust their rates?

The frequency that utilities adjust their rates depends upon economic factors and the need to recover the costs of providing utility service. Volatile fuel costs often necessitate rate changes as does the need to build power plants and transmission lines that may be necessary to provide safe, reliable utility service.

What is a utility’s authorized “rate of return?”

A utility’s authorized “rate of return” is the percent return on shareholder equity that a utility is authorized to recover in utility rates. It is set by the PSC and is designed to fairly incent sufficient equity investment in Wisconsin utilities while keeping utilities’ cost of debt relatively low. Notably, the return is not guaranteed. If the utility does not adequately control costs it will earn a lower return for its shareholders. In recent years, authorized returns in Wisconsin have fallen from over 12% to just above 10%. The level of return allocated to shareholders for Wisconsin utilities is similar to returns approved for utilities in other states.

When demand for electricity falls and sales decline, shouldn’t my rates also go down?

Not necessarily. Utility rates are tied to the cost of providing utility service – the cost of building and maintaining power plants and transmission lines, for example. The cost to build and maintain these assets, unlike the fuel used to power them, are there regardless of how much electricity is used during a given year. These are called fixed costs. Customers can, however, reduce their utility bills by using less. Using less means customers don’t pay the costs, like fuel, that vary with usage and they pay a smaller proportion of the fixed costs than do customers that don’t conserve. A customer’s utility bill can and will decrease by using less, even though the utility rates increase.

Why aren’t utility rates more closely tied to the rate of inflation?

The vast majority of costs incurred by a utility are for the cost of power plants, transmission lines, and fuel used for generating power, with fuel costs being extremely volatile. Utilities often go through building cycles when construction of facilities occurs at an accelerated pace to keep up with demand. From the mid-1980s to mid-1990s, there was relatively little construction of utility plants taking place and fuel costs were low and stable, leaving rates at that time largely unchanged. Since that time both those conditions have changed and rates have risen. However, over the last 20-25 years, electricity bills for some of the state’s utilities have increased less than the rate of inflation.

If I am using less energy, how come utility rates are not coming down?

Utilities are among the most capital-intensive sectors, with many of their costs stemming directly from investments in and maintenance of the pow­er plants, transmission and distribution lines, equipment, and structures that are used to deliver electricity and natural gas. In addition, with increased environmental standards and requirements to generate a larger percentage of their power from renewable sources, utilities are also making additional investments in environmental controls and renewable energy projects like wind farms. These fixed infrastructure and operating and maintenance costs are reflected in and must be covered in utility rates.

Most of the revenue utilities receive is used to pay operat­ing and maintenance costs. Purchased power and fuel are the largest operating expenses for a utility; taxes are the next largest expense. The cost of salaries, materi­als, supplies, services, and a variety of other expenses also must be met. In addition, a utility must be compensated for the cost of depreciation, amortization, and the cost of capital, which includes the return paid to debt and equity investors for the use of their money.

While electric and natural gas sales are down, largely due to the current economic situation, and many customers are using less energy, the resulting utility savings on fuel costs are not enough to cover utility fixed, infrastructure, operating and maintenance costs, and ongoing investments. Utilities continue to face steadily increasing costs to generate and deliver electric and natural gas service to homes, businesses, and industries.