There is a reassuring way to read the latest federal data on household electricity prices. Between 2013 and 2023, average US residential prices rose by less than 1% in inflation-adjusted terms. In 2023 itself, residential bills rose about 2% a month compared with 2022, while general inflation ran at 4.1%. Over ten years of shale gas, cheaper renewables and flat demand, electricity has been one of the more stable items in the household budget.
There is a less reassuring way to read the same data. The stability has come from falling fuel and generation costs offsetting rising costs elsewhere in the bill, and those rising costs are now accelerating. State regulators approved $9.7 billion in net rate increases in 2023, more than double the $4.4 billion authorized in 2022. The money is going into poles, wires, substations and wildfire protection, and it will be recovered from customers for decades.
The national average hides two very different stories
The Energy Information Administration's ten-year comparison shows most states within a few percentage points of inflation. The outliers are instructive.
California's real residential price rose from a little over 21 cents per kilowatthour in 2013 to almost 30 cents in 2023, an average annual increase of 2.8% above inflation. The EIA cites investment in grid modernization and renewables, higher operating and maintenance costs from wildfires, and declining sales as causes. New England's real price rose from a little over 21 cents to almost 29 cents, the highest regional average, with an annual increase of 2.6% above inflation. There, the higher cost of gas and fuel oil from 2022 was a major factor, since those fuels set much of the region's generation cost.
So the two most expensive regions became expensive for different reasons. California's problem is mainly the cost of the network and of the risks it carries. New England's problem is mainly fuel, compounded by limited pipeline capacity into the region.
Where the money in a bill goes
The EIA notes that distribution and transmission charges make up nearly 40% of electric bills on average. That share matters because it is recovered through regulated rates even in states where customers can choose a competitive power supplier. A household in a deregulated market can shop for cheaper energy. It cannot shop for a cheaper distribution network.
The cost of generation has fallen over the past decade, thanks to cheap gas and declining costs of wind and solar. That fall has offset increases in network costs. As long as generation kept getting cheaper, the total bill could track inflation even while wires and poles became more expensive. If generation costs stop falling, as they may with higher gas prices or rising demand, network costs will show through more clearly.
Rate increases are accelerating
The rate case data point in that direction. The 2023 net increase of $9.7 billion reflects $10.3 billion in authorized increases and only $0.6 billion in decreases. More than a third of the authorized increases went to two California utilities: Pacific Gas and Electric, with $2.5 billion, and Southern California Edison, with almost $1 billion, mostly for wildfire mitigation including undergrounding lines and vegetation management.
The pace continues in 2024. From the start of 2023 through mid-August 2024, regulators nationwide authorized 58% of the net increases utilities requested, according to S&P Global data cited by the EIA. If the same ratio holds for the rest of the year, increases are on track to reach $8.9 billion in 2024, in 2023 dollars.
The reasons utilities give are consistent across the country. They need to harden networks against more severe weather and fires, replace aging equipment, and prepare for higher electricity demand from new customers, data centers and electrification.
The California numbers also show how concentrated the pressure can be. Two utilities accounting for more than a third of the national increase in a single year is not a sign of a nationwide network crisis. It is a sign that one category of risk, wildfire, has become expensive enough to move the national total on its own. Other risks, from hurricanes on the Gulf Coast to ice storms in the South, could do the same in their regions.
The case for the spending
It would be wrong to treat all of this as waste. Distribution networks across much of the United States were built decades ago and are reaching the end of their design lives. Storms and wildfires are causing more damage and longer outages, and the cost of an outage to households and businesses is large. New demand, if it materializes, will need new substations and lines. Deferring that investment does not make it cheaper. It usually makes it more expensive and less reliable.
The real question is not whether utilities should invest, but how regulators decide which investments are worthwhile and how the cost is shared.
Where regulators have leverage
Regulators approve or reject rate requests, but they have other tools too. They can require utilities to compare network spending with alternatives, such as local batteries or demand response, that may defer the need for new wires. They can tie a share of utility earnings to performance on reliability and cost. They can scrutinize the allowed return on equity, which compounds over the life of every asset placed in the rate base.
They can also think harder about who pays. A large new data center that requires a new substation imposes costs that are specific to that customer. If those costs are spread across all ratepayers, households end up subsidizing the expansion. Several states are now considering special tariffs for very large new loads for exactly this reason.
What the next decade looks like
A decade of electricity prices tracking inflation was the product of an unusual combination: falling generation costs, flat demand and moderate network spending. That combination is ending. Demand is growing again in many regions. Generation costs are no longer falling as fast. Network spending is rising sharply.
The outcome is unlikely to be a sudden price shock at the national level. It is more likely to be a slow divergence, with some states seeing prices rise well above inflation because of network spending, fire risk or fuel costs, while others stay close to it. The rate cases being decided now are where that divergence is set.