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A Project of The Annenberg Public Policy Center

Group Blows Fuse With Electric Bill Claim

A conservative group goes too far in TV ads that claim a new EPA regulation on coal power plants will make Ohio’s electric bills “skyrocket.” Utility officials say it’s too soon to determine how big the impact will be.

Nationally, projections from the Energy Information Administration show only a slight fluctuation in the residential price of electricity over the long run. The EIA factored in the regulation in its projections.

There’s reason to believe there might be more of an impact in price in Ohio, but it’s too early to predict what that would be.

The sponsor of the ads — an advocacy group that won’t disclose whether or not it gets funding from the coal industry — tries to prove its claim by citing marginal wholesale electricity costs. But those costs have a limited impact on consumer rates.

The TV spots, produced by American Commitment, attack Ohio Democratic Sen. Sherrod Brown, zeroing in on his support for the Environmental Protection Agency’s Mercury Air Toxics Standards.

The rule requires coal power plants to significantly reduce hazardous metal emissions by 2015. The EPA says the regulation will prevent up to 11,000 premature deaths each year but will cost the industry billions of dollars in upgrades.

American Commitment is a 501(c)(4) nonprofit advocacy group, which means it can raise unlimited amounts of money and does not have to disclose its donors. The group’s president, Phil Kerpen, is a former vice president at Americans for Prosperity, another conservative 501(c)(4) group.

In early June, American Commitment spent nearly $1 million on ads urging lawmakers to support Oklahoma Republican Sen. Jim Inhofe’s resolution to overturn the EPA rule.

Since the resolution failed, American Commitment has been attacking senators in competitive campaigns — including Brown — who voted to uphold the regulation. The group spent $1.2 million on the two Brown attack ads alone.

Kerpen declined to reveal his group’s contributors or say whether his group takes money from the coal industry. He told us that disclosing American Commitment’s contributors “would chill their free speech rights.”

Our thanks to Jim Watson of Hamilton, Ohio, who sent one of American Commitment’s two Ohio ads to Spin Detectors, through which we ask readers to help us monitor political claims. Watson told us the ad’s use of the word “skyrocket” caught his eye.

Analysis Says Otherwise

The EPA’s Mercury Air Toxics Standards for the first time will regulate heavy metal emissions at coal-fired power plants, which produce the largest amount of mercury in the air.

The EPA finalized the rule in December under the Clean Air Act, giving the industry until 2015 to comply. The agency says the rule will prevent each year up to 11,000 premature deaths, 4,700 heart attacks and more than 500,000 sick days. The EPA says the associated health benefits will be worth $37 billion to $90 billion a year. But there also is a cost. The standards require power plants to install scrubbers, filters and injection units to capture mercury, arsenic and chronium as well as acid gases — all of which the EPA predicts will cost the industry $9.6 billion a year.

Both ads say Brown “voted to increase our electricity costs,” while the text on the screen reads: “Ohio: Electric bills will skyrocket.”

The EPA’s assessment of the rule predicts prices will rise by 3.1 percent — or $3 to $4 per month — in 2015 before the increase falls to less than 1 percent by 2030.

The Energy Information Administration, which is an independent agency within the Department of Energy, considers (see page iii) the regulation in its long-term outlook. The agency predicts a modest bump in overall electricity prices, projecting a 3 percent rise between 2010 and 2035 (see page 50).

The EIA attributes the “relatively modest” price increase to the slow-rising price of natural gas, which is fueling an increasing number of the nation’s power plants. The EIA also said the industry has multiple methods for generating electricity that don’t require the installation of the emissions-capturing technology, including the use of natural gas, nuclear energy and renewable sources.

Broken down by sector, prices will only fluctuate on the residential level. However, the EIA’s long-term outlook didn’t explain the rule’s impact on the residential level.

The EIA predicts the average price per kilowatt hour for residential customers nationwide will be 11.8 cents in 2015, using inflation-adjusted 2010 dollars.

The price will drop in 2020 to 11.6 cents. And then by 2035, it climb back up to what it was in 2015, in inflation-adjusted dollars.

Nationwide, the average customer uses 958 kilowatt hours a month. That means the average residential bill will fluctuate between $113.04 and $111.13 in 2010 dollars.

Incomplete Forecast

American Commitment could cite the EIA — as well as the EPA — to safely claim that electricity costs will increase under the regulation. Instead, the group refers to a marginal subset of electricity costs to say bills will “skyrocket.”

Specifically, the group’s ads cite a spike in the price of “capacity” in 2015 after the EPA rule takes effect.

Capacity is a portion of wholesale electricity. Power companies in some states buy capacity years in advance to ensure they can meet customer demand, plus have a reserve on hand. In other words, power companies reserve access to electricity years before they actually buy it.

The New York Times described capacity this way: “[I]t is as if a restaurant charged upfront for a reservation for a table, independent of the price of the food. The way the electric system works, the equivalent in a restaurant would mean paying for a table of adequate size, whether or not everybody showed up.”

In 2011, capacity made up 15.5 percent of electricity’s wholesale price. The actual cost of energy made up 73.4 percent.

To support the “skyrocket” claims, American Commitment’s two ads cite a Chicago Tribune article about rising capacity prices. The article talks about a dramatic rise in the cost of capacity payments, but it does not actually use the term “skyrocket.”

The term “skyrocket” was used in a letter to the editor in The Cleveland  Plain Dealer, and that letter is cited in one of the ads. The ad’s text reads: “Northern Ohio: Price increase will be … household budget-busting.” The narrator says: “Northern Ohio is going to be hit harder than anywhere else in the country.”

The ad’s small print credits the letter to Hal Quinn but fails to note that Quinn is president and CEO of the National Mining Association.

Quinn claims electric bills will “skyrocket” based on rising capacity prices.

Quinn, letter to the editor, June 5: The price of securing sufficient capacity will jump from the current $16 per megawatt-day to $136 in 2015. In northern Ohio, the price increase will be a household budget-busting $357. According to PJM, prices are increasing because of the unprecedented retirement of existing coal-fired generating plants resulting from EPA regulations that take effect in 2015.

Quinn’s letter fails to tell the whole story.

While capacity prices affect consumer electric bills to an extent, other factors — such as low natural gas prices — may soften the impact.

PJM Interconnection, the organization that sets capacity prices, said it’s too early to tell what impact those prices will have on electric bills. Capacity prices are set three years in advance. The actual cost of electricity for that period remains unknown.

Power companies in Ohio and 12 other states purchase capacity at an auction overseen by PJM, which manages the high power grid in those states. PJM sets capacity prices based on factors including projected demand and the available supply from power plants. Fewer power plants — less supply — will impact the capacity price.

It’s true coal power plants are closing because of the EPA mercury rule. FirstEnergy, the power company serving northern Ohio, is retiring several coal power plants, stating that compliance with the EPA mercury rule is too costly.

PJM explains that the regulation-related closures have led to higher capacity prices.

PJM press release, May 18: Capacity prices were higher than last year’s because of retirements of existing coal-fired generation resulting largely from environmental regulations which go into effect in 2015. … The retirements impacted northern Ohio to a larger extent than the rest of PJM for several reasons including inherent transmission restrictions, and the level of retirements in that area relative to the rest of PJM.

But in the same press release, PJM says capacity’s cost has a limited impact on consumer rates.

PJM press release: Capacity is a fairly small component of the retail price of electricity, and the cost of capacity at the retail level tends to be averaged out over several years. … In addition, if natural gas prices remain low, that would tend to restrain retail electricity prices.

The Plain Dealer writes that the impact of this year’s capacity auction won’t be known for some time.

Plain Dealer, May 22: No one disputes that customers in northern Ohio will feel the effect of the auction. How much rates will increase for consumers is the question that experts can’t answer yet because the prices set in the auction don’t kick in until June 1, 2015. They will stay in place for one year.

Forecasting the final customer rate is premature, said Andrew Ott, PJM senior vice president for markets.

Mark Pruitt, principal consultant at The Power Bureau and former director of the state-run Illinois Power Agency, told us that it’s too early to safely predict capacity’s impact.

He described capacity as a “minor cost variable” known in advance. The actual price of electricity, a “major cost variable,” is set in “real time.”

“So, while capacity costs are set to increase over the next few years, it is possible that low natural gas fuel prices may drag overall electricity supply prices lower,” Pruitt said. “Given these factors, it is not possible to establish with certainty where prices will settle in 2015.”

Ben Finley