After pain at the pump comes electric shock

Americans are reminded about high gasoline prices daily, every time they drive. Another energy cost comes to their attention monthly: utility bills. These are now also rising, creating an added problem for households, for the president — and, as it happens, for utilities.
Governor Ron DeSantis of Florida recently threw a curveball when he vetoed utility-friendly solar power legislation. Whatever his political calculations, his stated rationale of protecting inflation-addled voters from rising utility bills will resonate. Energy’s share of disposable personal income hit its lowest point ever in April 2020 at just 2.1%, 1 as Covid-19 swept through.
By March of this year, that share had doubled to its highest level since 2014. Rebounding gasoline prices were mostly to blame. But over the past year, the bite taken by electricity and gas bills has begun to expand, too.
This arrests a downward drift in the share of spending taken by power and gas over the past decade or so, a useful offset during bursts of high oil prices. Although the overall burden remains well below that of previous energy crises in 2008 and the 1970s, the current increase is notable for its speed and its impact across both fuel and utility bills.
The latter break down into two broad components. One involves utility companies’ simply passing along to consumers the cost of sourcing energy, whether it be the fuel to run power plants and fill gas pipes or the cost of buying power from independent generators.
The utility doesn’t make its money on this; it’s just a middle man. The other component consists of costs that utilities agree on periodically with regulators, primarily non-fuel operating costs and investments made in the grid and associated infrastructure, including a regulated return on equity.
On all fronts, the 2010s were halcyon years. The shale boom suppressed the price of natural gas and, by extension, of producing electricity, since gas-fired plants set the wholesale power price in much of the US. With those pass-through costs flat or declining, regulators could allow utilities to invest heavily in the grid while still keeping bills in check. Even as the asset base of publicly traded utilities expanded by more than 7% a year from 2015 to 2020, average residential bills remained pretty flat, according to Hugh Wynne, an analyst with Sector & Sovereign Research.
Based on correlations observed during the 2010s, every $1 move in benchmark natural gas prices implies roughly a $5 per megawatt-hour move in utilities’ fuel and power-purchasing costs, Wynne calculates.
Having averaged $2 and change in 2020 and about $3.70 in 2021, gas futures today imply $6.50 for this year and $5.25 in 2023. So utility costs look set to hit levels far above what we’ve become accustomed to over the past decade.
All else equal, these figures would imply that utility bills will be 23% higher in 2022 than they were in 2020, the last year for which complete data are available, and 10% higher than the implied figure for 2021. In practice, utilities’ own hedging strategies may ameliorate some of the impact, and regulators may spread the rate increase over several years.

—Bloomberg