A little-known regulatory policy temporarily put in place following the oil crisis of the 1970s is still prevalent and causing high electric bills, hiking Dominion customers’ bills yet again this past month. Legislation introduced in the state house seeks to fix it.

This opinion piece was first published in Energy News Network on June 16, 2023.

A little-known regulatory policy temporarily put in place following the oil crisis of the 1970s is still prevalent and causing high electric bills, hiking Dominion customers’ bills yet again this past month. Legislation introduced in the state house seeks to fix it.

The obscure policy is a “fuel cost adjustment,” which allows electric utilities, like Dominion and Duke Energy, to charge customers 100% of the cost of fuel power plants need to generate electricity, like coal and fossil gas. This arrangement leaves customers with all of the risk of fuel price increases in the decades during which a power plant operates.

Electric customers across South Carolina are now feeling the pain of this risk as gas and coal prices skyrocketed in recent months. After Dominion Energy’s latest fuel cost adjustment went into effect this past month, a typical customer is being charged $242 more per year compared to April of last year — a 16% bill increase. Likewise, residential customers of Duke Energy Progress are on track to have rates increased three times in 13 months, amounting to a 21% increase, or $320 per year for an average household.

For years, public interest advocates have warned utilities of the dangers of increasing our reliance on fossil fuels for electricity generation, particularly because fuel cost risk is fully borne by customers. Nonetheless, utilities in South Carolina have increased their reliance on gas over the past decade, and when the Ukraine war sent gas prices skyrocketing, South Carolinians are stuck with the bill.

While utilities could not have specifically predicted the Ukraine war in their gas price forecasts, it has long been known that geopolitical events can have drastic impacts on gas prices — a liability that should have been taken into account in earnest. Utilities could have blunted the impact of the gas price spike on South Carolinians if they had invested more in resources that don’t burn fuel, like energy efficiency, solar, and battery storage.

Fuel costs are hitting our wallets especially hard because utilities are incentivized to spend lots of money on expensive, fuel-hungry power plants. Utilities earn more profits for their shareholders by investing in capital projects like new gas-fired power plants than in signing contracts for low-cost renewable energy, and those same utilities know they can pass 100% of the fuel costs on to customers, so the utilities have a clear bias toward new gas power plants instead of renewables.

One way to think of it is to use an analogy of buying a car, with some modifications. The car salesperson works on commission, and therefore wants you to buy the most expensive car, regardless of the fuel efficiency and maintenance cost. Now suppose you have little to no say in what car you buy and can’t shop around between dealerships because the dealership (i.e. utility) has a monopoly. Do you think the salesperson is going to sell you an inexpensive fuel-efficient sedan or a pricier gas-guzzler?

This situation, where the risks of a decision are borne by someone that has little to no say in that decision, is called a “moral hazard,” as our existing fuel cost adjustment regulations were described in testimony to South Carolina’s utility regulator, the Public Service Commission, last year.

Legislation introduced recently by Senator Scott Talley, the Energy Independence and Risk Reduction Act (S. 779), proposes a small change to the existing fuel cost regulation that could provide more stability to electric customers, from those living in small apartments to those running large manufacturing plants alike. Instead of utilities passing 100% of fuel costs — regardless of how they differ from the utility’s forecast — directly on to customers, utilities themselves would be responsible for paying 10% of unanticipated fuel price spikes. The exact amount the utility would pay depends on how the utility’s actual fuel costs differ from its prior forecast of its fuel costs. If actual fuel costs were lower than forecasts, the utility gets to share some of the savings. By keeping the utilities’ potential cost of risk sharing to a small percentage, it minimizes impacts to their shareholder value and thus cost of capital. This financial stake will incentivize utilities to accurately forecast and manage fuel costs looking out for customers and their own bottom line.

We at the Southern Alliance for Clean Energy just released a whitepaper that describes some of the history of fuel cost adjustments, and shows how this outdated regulation has driven up electric bills across the Southeast. With utilities across South Carolina proposing major new gas power plants, the risk of high customer bills only increases unless there is a change in utility plans and regulations.

It is clear that the changes to fuel cost adjustment regulations proposed in S. 779 are good policy. They would work incrementally to align market incentives between electric utilities and us customers, and fix the “moral hazard” in the current regulations without too much disruption.