There have been a few posts recently (well, really all around the year) about the high electricity prices we pay in Massachusetts, why delivery rates are so high, what's that charge, etc., and every time these posts go up, it brings out a lot of misconceptions about how electricity rates work and how they are set in the state. I thought I would make a comprehensive (READ: Looong) post to clear up some of these misconceptions. Just my understanding of the facts and process behind rates, and I will try to limit opining too much.

In this post, I'll go over:

• What are all of these charges on my bill?
• Why are supply charges so high?
• Why are delivery charges so high?
• Why are Eversource and National Grid so much more expensive than municipal light plants?
• So what can we do about it?

In full disclosure, I spent almost a decade working in energy consulting with utilities and governments (though never worked at a utility).

TLDR: It's complicated (but of course, this is Mass), and there is not one single reason why Massachusetts electricity costs are among the highest in the country. A lot of little things add up to something substantial, and the context, constraints, and regulation that Eversource and National Grid operate under are very different than those faced by municipal utilities.

One thing that is important to note, however, is that Eversource and National Grid aren't allowed to just make wild profits: everything is regulated by the DPU through rate cases or through program filings designed to meet Massachusetts' climate and energy goals. Eversource/Grid have to justify their investments to the DPU and get a fixed, pre-approved rate of return that they can only exceed on a limited basis if they meet certain performance metrics.

Also, if you own your own home, take advantage of Mass Save programs that you're already paying for. Install solar. Advocate for municipal aggregation in your community if you don't have one and consider whether the greater price stability/potential for savings is right for you. Other third-party supply can be a crapshoot.

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What are all of these charges on my bill?

Electricity bills have two components: supply and delivery. Supply charges are the cost of the electricity. When you are on basic service, you can choose to have your rates change by month or every 6 months. Electric utilities are not allowed to profit on electricity supply as a result of the electric sector restructuring from 1997. You're paying the same price Eversource/National Grid pays when you're on their basic service rate.

We also have a deregulated supply market, so you can potentially save money with a third-party supplier. This can be challenging with competitive suppliers: while sometimes they offer promo rates for the first year (increasing thereafter), they can be very predatory, targeting low-income residents with lower English language proficiency. Some have cancellation fees and jump to higher rates in the long run if you're not able to jump around on promo rates (like Comcast except you do actually have choice).

The AG's office has issued a report every few years on their overcharging in their capacity as the ratepayer advocate for Massachusetts residents and estimates customers on competitive supply paid nearly $600 million in excess of basic service from 2015-2023. Ultimately these folks need to extract profit somewhere that Eversource/NGrid are not allowed to and rely on locking people into more expensive rates to cover the cost of offering promo rates. The Senate (endorsed by the AGO and City of Boston) passed a bill to ban competitive suppliers from signing new contracts in the residential market as a result, though the House prefers an approach with higher regulation (and banning them from selling to low-income customers).

Alternatively you may live in a community that has a municipal aggregation program where your municipality procures electricity supply on behalf of the entire municipality, typically on 2-3 year terms. Most municipalities have municipal aggregation programs (often with options to buy more renewable generation), and I personally saved hundreds of dollars on my muni aggregation during the 2022-23 spike even with paying a premium for the 100% renewables option.

Delivery charges are broken down into several components (numbers from Eversource bill from Eastern MA as a point of reference):

• Customer charge ($10/meter): Flat charge per meter that aims to account for the fixed cost of providing service to each customer.
• Distribution ($0.094/kWh): This is the cost of bringing power from the transmission substation to end users and includes the cost of financing all of the local infrastructure investments needed, from substation upgrades to new powerlines to enabling more renewables to be connected to the distribution network.
• Transmission ($0.041/kWh): This is the cost of maintaining and operating the regional grid and bringing power into the local distribution system.
• Transition (minimal and fluctuates): During the restructuring legislation where the utilities had to spin off their owned generation assets, they were given a charge to cover the cost of those stranded assets as a result of the legislation.
• Revenue decoupling (fluctuates): I will explain this further below, but the idea is that this is a charge the trues up for the utility the difference between their approved revenue requirement and what is actually collected (and it's also going away).
• Energy Efficiency ($0.031/kWh): This is the cost of Mass Save.
• Distributed Solar ($0.008/kWh): This is the cost of the MA Solar incentive program SMART.
• Renewable Energy ($0.005/kWh): This goes to the Renewable Energy Trust Fund that pays for the Massachusetts Clean Energy Center's programs.
• Electric Vehicle Program ($0.001/kWh): This is the cost of the EV make-ready program that provides rebates for EV chargers.

Why are supply charges so high?

Massachusetts electricity generation is highly dependent on gas (over 70%). However, we also lack pipeline capacity to bring more gas into the region and rely on a liquefied natural gas tanker to bring gas into the system through the terminal in Everett. In fact, Mass received 99% of the nation's LNG imports in 2021 and 82% in 2022.

(Fun fact: This LNG is all imported from overseas: there are no LNG tankers that comply with the Jones Act, an over 100-year old protectionist law that requires all ships that move goods from one US port to another be US-owned, crewed, built, and registered. This means that even though ports from other parts of the country are exporting record amounts of LNG overseas, none of it can come to us!)

Because of this very high dependence on gas + our colder winters (relative to the country, not to New England, but we also have the highest % of homes that use gas for heat than all other states in New England after RI&g=040XX00US09,23,25,33,44,50)), Massachusetts' electricity supply has the weird feature of being more expensive in the winter than in the summer even though the electricity system peak is in the summer. Nearly every other state is the other way around matching the peak.

When it's unusually cold, heating usage for gas takes priority over electricity generation, which limits availability of gas for power plants (driving up costs). Almost all gas power plants in Mass can then switch to burning oil to continue producing power, but oil is more expensive for power generation than gas. During the February 2023 cold snap where it hit negative temperatures in Boston, spot prices for electricity in the region exceeded $0.50/kWh (for just the supply!).

Dependence on gas leaves us highly vulnerable to market volatility (see Winter 2022-23), which should be improved as offshore wind and more solar come online. The final approval of the transmission line project to bring generation down from Hydro Quebec last year should also help eventually improve stability and put further downward pressure on rates.

How are delivery charges so high? Who gets to decide these exorbitant rates?

Transmission charges are regulated by the Federal Energy Regulatory Commission, because transmission assets and grid management are by their nature interstate, and the federal government has jurisdiction over interstate commerce.

All other delivery charges are regulated by the Department of Public Utilities and/or were mandated by the Legislature. Every 5 years, the investor owned utilities file a rate case before the DPU, which involves thousands of documents, spreadsheets, witness testimony, etc. over what is typically at year+ long process (the DPU's order itself is usually 500-800 pages...). The DPU adjudicates and takes into account intervening testimony and arguments from parties like the Attorney General's office (in its capacity as the Ratepayer Advocate), the Department of Energy Resources, and advocacy and other groups (like Cape Light Compact, CLF, Acadia Center, and other affected businesses). As you might expect, the utilities aim high and the intervenors and regulators typically push them down.

How are these charges set? Let's separate out what we can call "cost of service" charges and "policy" charges.

Policy charges are straightforward: these are the costs of implementing ratepayer-funded energy mandated by legislation supporting achieving Massachusetts' clean energy and climate mitigation goals. As noted above, this includes Mass Save, the SMART solar incentive, the EV Make Ready program, etc. Most of them are fairly small, but they add up to about 20% of the delivery charge. Utilities cannot profit off of program implementation in service of public policy. Typically when the DPU approves a ratepayer funded program and its budget, they even will specify the amount that can be spent on administrative costs. All of these programs are paid for solely by the ratepayers.

Cost of service charges are more complex and are the primary substance of the rate cases. This all starts (traditionally--there's a new paradigm called performance-based ratemaking that I won't go into here because this essay is long enough already...) with:

• The revenue requirement: The utility establishes how much revenue it needs to deliver service (includes O&M, depreciation and amortization, taxes, return on rate base). DPU scrutinizes this and makes adjustments as part of their rate case.
• Revenue decoupling: Since 2008, there has been a policy called revenue decoupling where sales are "decoupled" from the revenue requirement established. Represented by the charge on your bill, this is meant to be a reconciling mechanism between expected and actual sales to avoid a disincentive for utilities to encourage energy efficiency and renewables. (This is on its way out because with the growing focus on electrification, there no longer needs to be a means for utilities to avoid not meeting their revenue requirement from declining sales from energy efficiency and solar.)
• The cost of capital/rate of return: The utilities are private corporations but heavily regulated. They also have to make very long-term, expensive investments that would otherwise be potentially risky to investors putting up the capital. Since there is a public interest in ensuring utilities have access to capital at low rates/low risk, the DPU determines a fixed rate of return they can achieve from their rate base to serve as an ROI for investors. This includes cost of debt and return on equity to shareholders. In Eversource's most recent rate case, the approved weighted average cost of capital/rate of return to investors was 7.06%, divided between debt at 3.93%, preferred stock at 4.56%, and common equity at 9.8%. That's more than the cost of issuing municipal bonds, but we're not talking Apple or NVIDIA profit margins here.

This is all to say that we have a complex, highly-regulated process behind how delivery charges are set by regulators. The image people seem to bat around of Eversource execs lining their pockets with excess profits wrung out of Massachusetts residents through exorbitant rates is simply not true. They get to profit, but in a fixed, limited way that keeps capital available from investors to be directed into infrastructure. (Don't point me to National Grid's numbers because the vast majority of NGrid's revenue and profit comes from operating much of the electric and gas grid in the UK).

The only other way outside of the performance-based ratemaking structure in which the utilities can earn additional profits is through successfully achieving its goals through Mass Save for promoting energy efficiency and electrification. From 2022-2024, the performance incentive available was $150 million (though DPU reduced it by 10% because the utilities dragged their feet during the regulatory process).

But why is it so expensive? Well the policy charges are one thing and they add up. In total, it's close to 3.5 cents/kWh. It's like 10% of your bill now but not nothing. Massachusetts' nation-leading energy efficiency programs don't come free.

Another thing to consider is that a lot of the costs to run a distribution grid are fixed. Infrastructure costs are hard costs that are spread across the rate base. Massachusetts has something like the 4th or 5th lowest electricity usage per capita in the country, so those costs are spread across less usage than a state like Florida, which has more than double the per capita usage.

Why are investor-owned utilities so much more expensive than municipal utilities?

Well the obvious first answer is profit. But as we've seen above, the rate of return is not by itself the explanation (and municipal utilities themselves have costs of capital as well and need to issue tax-exempt bonds to finance the high capital costs of infrastructure, albeit at a lower cost).

Another contributing factor is taxes (which are included in the revenue requirement). Municipal utilities and all of their assets are tax free, whereas Eversource apparently paid $62 million in taxes in 2014 in Boston alone (2% of the City's budget).

One of the biggest factors, which I'll break down in further detail, is regulatory: municipal utilities are basically never subject to any regulations the state passes on the electricity system and supply (and compliance always adds to costs).

But let's once again look at the two types of charges: supply and delivery. The reasons, as you will see, are primarily related to policy and regulation (or rather, deregulation).

Supply charges: Unlike Eversource/NGrid who had to spin off their assets and purchase power on the open market to pass onto their customers at cost, municipal light plants were not subject to the electricity deregulation legislation from 1997. Many municipal light plants purchase their power through MMWEC which IS allowed to own assets. In fact, it owns 12% of the Seabrook nuclear plant and 5% of Millstone Unit 3 nuclear plant. It also has the rights to about 4% of the Hydro-Quebec Interconnection and a few other long-term hydro contracts.

In total this means that a lot of municipal light plants have roughly 50% of their generation coming from long-term, more stably-priced contracts (with the rest coming from the wholesale market), most of which is zero-emissions generation (mostly from the nuclear). And since MMWEC and its members are obligated to deliver the cheapest power possible, they will never allow their lower power capacity onto the open market, which forces Eversource and NGrid to buy high-priced fossil fuel generation from the wholesale market. This really came to a head in Winter 2022-23 when the impacts of the Russian invasion + high inflation drove basic service rates to record highs on the wholesale market but had a much more limited impact for municipal utilities. Since most muni utilities are smaller towns, their peaks in usage are also much lower, meaning less buying of power on the spot market when it's at its most expensive.

One of those regulations I mentioned that municipal utilities are not subject to is the increasing requirements for renewable electricity generation under the state's Clean Energy and Renewable Portfolio Standards. While municipal utility electricity is lower-emissions because of nuclear/hydro, municipal utilities are not required by law to source increasing amounts of their electricity from new solar and wind resources. This cost of compliance can add fairly significantly to the cost of energy supply--and when Eversource/NGrid fail to source enough electricity from new solar and wind resources, they have to pay a penalty (Alternative Compliance Payment).

Not having to source increasing amounts of NEW renewable electricity generation like Eversource/NGrid and their suppliers have to helps them to keep costs down and limit the amount of the cost of the state's renewable electricity policies get passed onto their customers. That is not to say that municipal utilities are not contributing to new renewables (e.g. Berkshire Wind Power Cooperative), but they don't have an aggressive state policy impacting their supply rates in the same way.

Delivery charges: Once again, let's separate out policy charges and cost of service charges:

• Policy charges: That $0.035/kWh I mentioned earlier for Mass Save, solar programs, EV make ready programs, and more? They exist in very limited fashion in most municipal utilities. The money that pays for 75% of insulation upgrades, $10,000 for heat pumps, 0% loans to finance Mass Save projects, annual incentive payments for solar generation, retail rate compensation through net metering for solar? That comes from these charges that municipal utilities by and large do not include. Consequently, incentives are also much more limited. Some municipal utilities choose to try to come closer to matching Mass Save (and have higher costs). But Mass Save is state mandated and only for Eversource and NGrid, and the legislatively-mandated savings Mass Save has to achieve keep increasing, as does the charge.
• Other policy-driven charges that show up in the distribution charge: This includes things like grid modernization planning and investments (see the recently-approved Electric Sector Modernization Plans, which authorizes billions in new spending). Also things like how Eversource and NGrid must provide discounted electricity rates to low-income customers, which are then spread out across all other customers. Municipal utilities don't have to do these things so often don't choose to, keeping their overall rates lower.
• Infrastructure and operational complexity: I'm just gonna paste in something from a post by /u/An_Awesome_Name here since they explained it very well: "Outside of NYC, and maybe a few other places, the grid in the immediate vicinity of Boston (say inside of 128) is one of the highest electrical load areas per square mile in the entire world on a hot summer afternoon. Air conditioners, trains, high-rise buildings, universities, hospital campuses, and general industry all suck down huge amounts of power compared to residential and light commercial areas, and we have a lot of all of them. It may sound counter-intuitive because everything is close together, but the higher the capacity of a power line, the more expensive it is to build and maintain, especially when lots of them are underground. The maintenance required just to a keep a power grid this complex operational is going to be more expensive than above ground, low capacity lines in most of the rest of the country." A small, mostly bed-room community outside of the urban core with all lines overhead is simply going to be cheaper to maintain than the core Boston grid. Rates for ConEd in NYC compared to National Grid in upstate NY reflect this, even though both are for-profit investor-owned utilities regulated by the NY DPS.

So what can we do about it?

As I mentioned earlier, on the supply front, one of the best things we can do is keep enabling more offshore wind to come online, which reduces our dependence on volatile gas generation. Similarly, the hydro coming down from Quebec that hopefully will come online in a few years will also add a stabilizing, lower cost source of power. If we can cut out most of the LNG deliveries alone, that could be quite beneficial.

On the distribution side? Well, that's complicated, and there aren't really clear answers here.

• Stop trying to hit our climate change targets? I'm not here to debate the merits of the Commonwealth's goals to achieve 85% greenhouse gas emissions reductions by 2050, but it is a fact that it has costs and implications for system planning, in addition to the benefits. All those incentive programs don't come cheap. Additionally, there are significant costs to the new infrastructure needed to integrate new renewables and serve increasing electricity loads as we grow as a state + get more EVs on the road and heat pumps installed (dozens of new substations needed for solar, offshore wind, batteries, more electricity demand). We need to switch from a centralized system with big power plants to a decentralized system with many renewable generators. That takes major investments. We're also likely to switch to a winter-peaking system by the mid-2030s if we are on target for our climate goals, and that will put us into new territory.
• More gas infrastructure? Some might say "well let a new gas pipeline be built so we can get more gas into the state," but it's not all that simple. For one, our neighboring states also have climate goals and don't want to bring in new gas pipelines, so where are we going to put it? Additionally, if Massachusetts is committed to weaning itself off of gas to meet climate goals, how do we pay for the pipeline? Most gas infrastructure is depreciated over a 50 year lifetime, but we'd have to accelerate the depreciation if we are serious about being mostly off of gas by 2050. A very expensive band-aid and another stranded asset if we're serious about hitting our goals. Considering how long it's taken to get the Hydro Quebec transmission line through planning and into construction, it would probably be 5-10 years if we started trying to build a new pipeline from PA to here today.
• Re-regulate the utilities? The impacts of the electric sector deregulation from 1997 are complex and fuzzy. The one thing we know we can say about deregulation is that it shifted all of the profit-making for a for-profit industry to just delivering electricity. By restricting these utilities to only profiting from infrastructure and power delivery, private utilities are incentivized to make more infrastructure investments (that they profit from). Does this lead to utilities putting infrastructure-first over other alternatives? Probably. It's also likely that the move from vertically-integrated utilities to distribution utilities with no control over generation assets has increased costs and limited the scope of planning (something municipal utilities also can do). Additionally, there is an interesting working paper that argues that market hurdles to participate in the deregulated market and market dynamics increases profit margin for generators and cost of power to utilities even when generation costs are lower to power producers as a result of deregulation. Would re-regulating help? I really don't know.
• Public utilities all around? Would allowing for more municipal light plants or having the state take over the grid help? I don't know. It probably would have some growing pains as you'd have municipalities with no experience delivering a utility service having to staff up to run one. Would it be faster and more nimble? Proooobably not. But would it reduce costs in the long term (after factoring in the borrowing cost to buy tens of billions of dollars of assets)? I don't have an answer for that.

What can you do about it personally?

• Mass Save: If you own your home, take advantage of it. There are a LOT of rebates available, and you can get a 0% loan of up to $25,000 ($50k if it includes a heat pump) over 7 years from your choice of local bank/credit union. If you make <60% of the state median income and are a renter and you have a landlord that will actually pick up the phone/answer emails, Mass Save delivers all of its services for free depending on your building. It's not a perfect program (what bureaucratic $4 billion program is?), but you're already paying for it. Might as well get your money's worth.
• Solar: Again, if you own your own home, you're paying for the SMART solar program. Take advantage of it. Retail rate net metering (what lets you get a 1 for 1 credit on your bill for excess generation) is probably not going to last forever in its current form. The incentive program is currently being revamped and extended, as it has expired for some areas in Mass.
• Municipal aggregation: Look into your community's municipal aggregation program and see if it could be right for you (or advocate for one if you live in a community that doesn't have one and isn't served by a municipal utility). Residents are opted into it when it's set up by default unless they're on a third party supply contract. Municipal contracts are not guaranteed to be cheaper than basic service, but they have on average saved money compared to basic service over the past several years.
• Competitive third-party supply: See what I said earlier, and buyer beware. On average, people across the state are not saving money third-party suppliers. If you think you can be in the minority, best of luck to you. But make sure you read up on what happens to your rate after the initial term, and beware of cancellation fees.

If you made it this far, hopefully this helped answer any questions you had (or maybe just created more frustrations at the size of your bill). Happy to answer any questions or discuss anything further if you disagree or want clarification. And let me know if you think I got anything wrong!