Chicago Electricity Rates Are Still Too High

Chicago electricity rates are not falling as fast as they should be.  Natural gas prices have plummeted in recent years due to breakthroughs in drilling technology.  Natural gas is a major fuel used to generate electricity across much of the country.  Because of this, it would be reasonable for one to expect that electricity prices would follow natural gas prices down.  While this has held true, to a certain extent, electric prices inChicagoand other parts of the country have not fallen at the same pace as natural gas.

Since last year, natural gas prices have fallen around 40%.  This is on top of an already steep decline from the heights of 2008.  Yet, nationwide, electricity prices appear to be on their way back up after seeing declines in recent years.

There are many factors at play besides fuel costs that will continue to push electricity prices higher.  Regulatory cost is a factor that can’t be overlooked.  A number of new rules passed by the EPA recently have added a compliance cost to electricity producers that will ultimately be passed through to Chicago electric companies and finally to the end consumers.  The new rules include tighter air quality restrictions on both coal and gas fired power plants as well as rules meant to conserve fresh water.

Utility hedging may be another factor that has kept some of the benefit of lower natural gas prices from materializing in electricity bills.  Electric providers who often have fixed rate obligations to consumers tend to hedge themselves against rapid price movements in natural gas prices.  This protects them, and ultimately consumers, from big jumps in cost but it also limits the ability for utilities and consumers to see the benefits of rapidly falling prices as well.

The cost of generating the electricity is only a part of the rate equation.  About 40% of the cost of electricity is in the infrastructure required to distribute the electricity from the power plant to homes and businesses.  These distribution costs are going up after years of under investment in infrastructure.

According to the EIA, electricity rates inIllinois are slightly below the national average across all sectors but 4% above the national average when just looking at residential rates.  Commercial electricity rates inIllinois by contrast, are 15% below the national average.