An Electric Rate Formula

By Pam Blair

Putting together your power bill is a science. Like a chemist mixing liquids in a lab, it requires adding a specific amount of each ingredient to create a formula that allows the utility to stay in business and provide you with the electricity you can count on day in and day out.

Start with the cost of buying or generating power. Add in the distribution lines, electrical facilities and the utility’s building. Account for the employees who keep your electricity flowing 24/7 and keep the utility in business. And don’t forget to factor in the amount of electricity you use.

Prices vary by locality due to the availability of power plants, the type and cost of fuels used to produce electricity, and both state and federal regulations.

According to the U.S. Energy Information Administration (EIA), electricity prices are highest in Hawaii, where most of the electricity is generated with fuel oil. That is the same reason prices are high in rural Alaska. Idaho has among the lowest prices, due to the availability of low-cost hydroelectric power.

In 2008, Hawaii had the highest average price of electricity at 29.20 cents per kilowatt-hour (kWh), followed by Connecticut at 16.95 cents per kWh. Coal-dependent West Virginia had the lowest average price at 5.59 cents per kWh, followed by Wyoming, 5.68 cents per kWh, and Idaho, 5.70 cents per kWh.

The average retail price for U.S. residential consumers was 11.3 cents per kWh.

Producing Power the Major Expense

The cost of generating electricity is by far the largest component in the price you pay for power. Nationwide, it accounts for more than two-thirds of the cost.

Some fuels are cheaper than others.

The Bonneville Power Administration’s wholesale cost for priority firm hydropower in 2008 was 4.75 cents per kWh. However, that didn’t include transmission charges or fish and wildlife recovery costs of nearly $1 billion a year.

At Black and Veatch—a company that has been involved in constructing coal, gas and wind plants—analysts report a modern coal plant of conventional design, without technology to capture carbon dioxide before it reaches the air, produces power at about 7.8 cents a kWh. A high-efficiency natural gas plant is 10.6 cents, and a new nuclear reactor 10.8 cents.

It says a wind plant in a favorable location costs 9.9 cents per kWh, but since a utility needs conventional generators as a backup, that pushes the price to more than 12 cents, making it more than 50 percent more expensive than coal.

Between 1999 and 2008, the national annual average residential natural gas price more than doubled, according to the EIA. But prices in individual states differ greatly based on a market’s proximity to producing areas, the number of pipelines in the state, average consumption per residence, transportation, state regulations and degree of competition.

The price of coal also varies by mining method, geographic region, coal quality and transportation costs. Where coal beds are thick and near the surface, as in Wyoming, mining costs and coal prices tend to be lower than where the beds are thinner and deeper, as in Appalachia.

Heating oil prices are determined by the cost of crude oil; the cost of producing, marketing and distributing the product; and the profits or losses of refiners, wholesalers and dealers. Prices can change dramatically. If enough heating oil is in storage and temperatures do not drop rapidly, prices are fairly steady. A rapid change to colder weather can affect supply and demand, driving up prices.

Power plant construction and maintenance costs also impact the price of electricity.

Other Factors Affect Prices

When you need electric power, all you have to do is flip a switch or plug into an outlet. That convenience requires an investment in equipment and manpower.

The power delivery system includes transmission lines, substations, distribution lines, transformers, power poles and meters. Maintaining and operating all of that equipment requires workers. Local office staff are needed to provide customer service and handle billing.

All of that adds to the cost of electricity.

So do federal and state regulations.

Efforts to increase the use of renewable energy—notably wind and solar—results in paying for often higher-cost generation. It also requires upgrading the power grid to incorporate and deliver it.

Some utilities offer customers the option to pay a premium to support the production of "green" power.

The U.S. Congress is considering legislation that would require power generators—most notably coal producers—to reduce their impact on the environment. That also would increase electricity costs.

In the end, however, the primary factor that affects your monthly bill is how much energy is used by the appliances, heating and cooling system, lights and electronics in your home. n

A Glance At Common Charges

Electric bills and terminology vary by utility, but all include two specific items.

• Basic or facilities charge: A monthly fee designed to collect a percentage of the utility’s fixed costs of doing business. It covers such things as billing, customer service, meter reading, poles and wires. It is assessed regardless of the amount of electricity used, so all who benefit from access to the service share in the cost.
• Energy charge: The actual price you are charged for electricity. It is calculated by multiplying the kilowatt-hour (kWh) rate by the number of kilowatts used. Generally, it accounts for the bulk of the bill. Many utilities have different rate schedules for different classes of customers, such as residential, commercial, industrial and irrigation. Some also have a sliding scale, with those using a larger share of power paying a higher rate on amounts exceeding a certain level.

Depending on the utility, region of the country and customer choices, the bill also may include line item charges for generation, transmission, distribution, fuel, peak and off-peak rates, public purposes and green power. An energy rate adjustment may be assessed to recover the utility’s cost to buy or produce power in excess of a certain price. A Power Cost Equalization deduction offsets the higher cost of power residential customers in rural Alaska pay than in urban areas of the state.

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