Electric Utility Distribution Costs: Scoping Study on Trends, Drivers, and Possible Response Strategies

This scoping study synthesizes information that will help stakeholders understand the scope, scale, and drivers of recent increases in investor-owned utility (IOU) expenditures on local distribution power grids, while providing regulators and other decision-makers with potential strategies to keep electricity bills down.

The study includes five distinct components. Drawing first on data from FERC Form 1, it summarizes key trends in past and recent IOU distribution costs. Next, through a review of a sample of distribution-system plans, it characterizes material drivers of planned distribution expenditures. Ultimately, regulators must approve cost recovery for IOU expenditures, including those for the distribution system. The study therefore also: examines trends in utility requests and regulatory approvals related to changes in retail rates and return on equity; identifies areas where utility shareholder and customer incentives may be misaligned; and develops a menu of options that state regulators might consider to optimize distribution system expenditures.

Some of the key findings include:

• IOU distribution spending at a national level has grown by 6%/yr since 2014 in real dollar terms, 4x faster than in the prior 20 years and consisting mostly of capital (not operating) expenditure. 
• On a per-kWh basis, increases in IOU distribution costs since 2014 represent over 30% of the overall national-average increase in retail electricity rates. 
• Regional spending growth has ranged from 2-8%/yr, with larger estimated rate impacts in CAISO, then NYISO & ISO-NE, and then the Southeast, MISO & PJM. 
• Some utilities are planning for significantly increased distribution system spending. Planned spending on managing the existing system (asset replacement, safety & reliability, and resilience are all important drivers) exceeds that for capacity expansion.
• IOU rate increase requests ($18 billion in 2025) and public utility commission (PUC) approval levels (average of 64% of requested amounts from 2021-2025) have recently hit multi-decadal highs. 
• PUCs in New England and the Southeast have recently approved a greater fraction of rate requests (>75%, on average) than in ther regions, while PUCs in California and the Southeast have generally authorized higher equity returns than in other regions. 
• Regulators have many tools to tackle potential misalignments between utility and customer interests and, more specifically, to optimize and reduce distribution costs. Shorter-term options include those related to return on equity, capital structure, depreciation, trackers, construction work in progress, and securitization. Medium-term options include performance-based regulation and a wide variety of planning-related requirements. All options embed important tradeoffs.