Power Surge

As electricity costs spike and demand taxes the grid, some states are eyeing ways to insulate consumers

by Christopher Palmeri and Adam Aston

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Mike Fuentes/Bloomberg News

The reeling U.S. consumer is getting another shock this summer—from electricity bills. Many utilities are putting through some of the largest rate increases in decades, raising prices by double digits over last year. Much of the blame lies with coal and natural gas, which have doubled in cost over the past year and fire about 70% of the nation's power plants. But climbing energy demand and the need to invest in aging transmission systems are also contributing to the problem.

The result is greater stress on customers, as well as mounting political pressure to curb further hikes. Having already struggled with rising prices for everything from gasoline to grain, businesses now have to cope with another source of pain. DuPont (DD), for one, expects its electricity costs to rise between 20% and 25% this year. Although the chemical company hopes to pass the cost along to customers, energy buyer Thomas L. Harrigan says: "We're redoubling our efforts to squeeze everything we can out of every kilowatt."

It doesn't help that rising electricity rates are accompanied by escalating profits at utilities that rely heavily on lower-cost nuclear or hydroelectric power, creating an Exxon-style windfall that doesn't sit well with the public. "The market is not functioning for the benefit of consumers right now," says Paula Carmody, people's counsel for the state of Maryland, who acts as a consumer ombudsman.

The typical residential customer paid about $100 per month for electricity last year. Rates have climbed about 24% since the start of the decade, to a national average of 10.2 cents per kilowatt hour (kwh). The U.S. Energy Information Administration predicts an additional 15% increase by the end of next year.

Those numbers belie much steeper hikes in local markets. Customers of New York City's Consolidated Edison (ED) will pay about 22% more this summer than last year. Tampa Electric is seeking a 31% bump, while some business customers of Dominion Virginia Power (D) are looking at rate hikes of 36% in 2008. Hardest hit is Hawaii, which relies on oil to generate most of its electricity. Electric bills there have shot up 78% since 2000, to an average of 29 cents per kwh.

But even states blessed with relatively low-cost hydroelectric power are seeing prices rise. Idaho Power is seeking an additional 10% rate increase on top of the 12% it got in May, in part to help pay for $578 million of work on transmission lines and substations. The Edison Electric Institute, the trade group for investor-owned utilities, says its members are investing $31 billion in transmission operations alone between 2006 and 2009, a 60% increase over the prior four years. Utilities say rate hikes will help pay to replace old facilities, and that construction is made costlier by mounting prices for materials such as copper wire, concrete, and steel.