Rising electric prices are finally getting attention; PUC action pending?; MACT rule; 200 generating plants shut down

ABC27 (in Harrisburg) has reported on rising utility rates, refunds and PUC investigations:

Many of you have complained about bills that doubled, tripled and even quadrupled, and many of you are now getting refunds because of those complaints.

This story reflects the broader trend of rising electric prices and declining electric production:

The electricity price index soared to a new high in January 2014 with the largest month-to-month increase in almost four years, according to the Bureau of Labor Statistics. Meanwhile, data from the Energy Information Administration, a division of the U.S. Department of Energy, indicates that electricity production in the United States has declined since 2007, when it hit its all-time peak. The U.S. is producing less electricity than it did seven years ago for a population that has added more than 14 million people.

This development was predictable as long ago as May 2012, when the wholesale capacity auction for 2015 was held among utility suppliers.

These price increases result from the loss of over 200 generating plants across 25 states (between 2012 and 2017).

The primary cause of the massive plant shutdowns is the EPA's Maximum Achievable Control Technology (MACT) rule.

With the loss of 200 generating plants, this problem is not going away. Price increases will become more widespread and worse very soon. The Pennsylvania PUC has no power to repeal the MACT or to rebuild the 200 lost plants. If the PUC tries to solve the problem by restricting retail utility prices, the result will be shortages.

The effect upon real estate values is very hard to predict, as owners may be forced to sell their homes or face foreclosure. Buildings that use little electricity may rise in value. Buildings that use gas may not be immune, as wholesale gas prices have been affected as well. Regardless of the existence of alternative fuels, a sudden forced conversion of a large portion of the real estate of an entire region of the country will not be smooth and will create many disruptions in the real estate industry and beyond.

Electricity prices rising; War on Coal.

I have written previously about rising electricity costs resulting from the shutdown of coal generators in the northeastern United States.  The coal shutdowns are necessitated by new federal regulations that are expected to cause more than 200 plants to close. Electricity rates are expected to rise drastically by 2015. 

Last week, an advisor to President Obama provided further context, advocating a "war on coal:"

Daniel P. Schrag, a White House climate adviser and director of the Harvard University Center for the Environment, tells the New York Times "a war on coal is exactly what's needed." Later today, President Obama will give a major "climate change" address at Georgetown University.

“Everybody is waiting for action,” Schrag tells the paper. “The one thing the president really needs to do now is to begin the process of shutting down the conventional coal plants. Politically, the White House is hesitant to say they’re having a war on coal. On the other hand, a war on coal is exactly what’s needed."

Record electricity prices were seen in the United States in May. 

This news should affect decisions about how buildings are heated, pricing strategies for rental units and whether utilities should be included in the tenants' rental package.

  

200 + coal fired electric generators face shutdown by 2017.

Click here for a previous article about rising utility costs resulting from decreased coal production.  Electric distributors (including those in Pennsylvania) have already signed contracts to pay massive cost increases for electric capacity beginning in 2015.  These increases will be passed on to consumers.

For those who would like more bad news, the Daily Caller reports the following:

Within the next three to five years, more than 200 coal-fired electric generating units will be shut down across 25 states due to EPA regulations and factors including cheap natural gas, according to a new report by the American Coalition for Clean Coal Electricity (ACCCE).

Pennsylvania is one of the states facing shutdowns. 

Homeowners and investors must consider the potentially massive utility increases.  Investors in particular must factor these costs into potential purchases as well as decisions regarding rental rates and income qualifications for tenants.

My own prediction is that properties serving fixed income residents will face the most hardships from these increases - unless there are corresponding government subsidies for fixed income tenants to cover the costs of rising utility prices.  In that event, owners of middle class properties (and their tenants) will be the hardest hit. 

EPA MACT rule; S.J. Res 37; Increased electric utility costs throughout the Northeast by 2015

Electric utility rates are set to increase tremendously over the next three years in Pennsylvania and throughout the northeast, according to PJM Interconnection:

Last week [mid-May 2012] PJM Interconnection, the company that operates the electric grid for 13 states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia) held its 2015 capacity auction. These are the first real, market prices that take Obama’s most recent anti-coal regulations into account, and they prove that he is keeping his 2008 campaign promise to make electricity prices “necessarily skyrocket.”

The market-clearing price for new 2015 capacity – almost all natural gas – was $136 per megawatt. That’s eight times higher than the price for 2012, which was just $16 per megawatt. In the mid-Atlantic area covering New Jersey, Delaware, Pennsylvania, and DC the new price is $167 per megawatt. . . .

Why the massive price increases? Andy Ott from PJM stated the obvious: “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.” . . .

These are not computer models or projections or estimates. These are the actual prices that electric distributors have agreed to pay for new capacity. The costs will be passed on to consumers at the retail level.

emphasis added

Just as importantly, these increases will make it much more expensive to own and operate real estate. Landlords should factor these costs into any long-term leases, unless the tenant is solely responsible for all utility costs. Even so, landlords should anticipate the effect such an increase will have on their tenants' ability to stay in business or on the ability of residential tenants to afford the rent. Purchasers should factor these increased costs into the cash flow projections for prospective properties.

These increased costs will place downward pressure on real estate prices and rents.  These increased costs should also provide an additional factor in support of owners' tax assessment appeals.

The U.S. Senate is currently considering S.J. Res 37, which would disapprove many of EPA's recent regulatory requirements that have created these costs. Specifically, Resolution 37 would strike down EPA's Maximum Achievable Control Technology (MACT) rule that has or will force the shutdown of so many coal fired generation plants throughout the northeastern United States.

Harrisburg; Real estate taxes; Municipal charges; market valuation; assessment appeals

Two days ago, I linked to a story about the possibility that Pennsylvania's capital city would more than double property taxes, while raising fees for municipal services like trash, sewer and water. I speculated on the effect such increases would have on real estate values and prices.

Harrisburg quadrupled the trash rates only two years ago. Doubling those rates now (as the current recommendations suggest) would amount to an eight fold increase since the end of 2007. Raising property taxes by 117% on top of the trash increase (together with 20% increases in the already-high sewer and water rates) would seriously affect the bottom line of investment properties within the city. An adverse affect on the profitability of investment properties is more than a mere academic or political matter. Operating revenue is a major component in valuation of investment properties. When net revenue declines, market value declines also.

Harrisburg skyline (city-data.com) - the battleground for upcoming assessment wars




A reduction in the market value of investment properties will result in applications by owners for a corresponding reduction in the assessed value of those properties. While local tax authorities will be reluctant to approve such reductions, the courts are the final arbiters of such matters. Declining real estate values (with the resulting loss of tax revenue) will offset many of the gains the city hopes to realize by raising taxes.

Assessment litigation, already common in Harrisburg and Dauphin County, PA, will become even more common for many years to come if the latest tax recommendations are enacted.

Harrisburg City; Increased property taxes, sewer, water and trash

The City of Harrisburg is considering multiple tax increases in order to avoid bankruptcy, according to the Patriot-News today:

Buried in the 25-page report is a list of "potential deficit reduction actions" the city could take. They were not mentioned in the news conference nor fully explained in the report.

Those potential actions include doubling the parking tax, increasing water rates by 20 percent, increasing sewer rates by 20 percent, doubling sanitation fees, doubling parking violation fines, instituting five furlough days a year for employees, increasing property taxes by 117 percent in 2011, and selling the city’s parking garages.

All of these items are considered high already by local residents and investors. Increasing these items would create an negative impact on property values, especially for investment properties. All of these items would reduce NOI (net operating income), which is a major component of valuation.

As a silver lining, once the new taxes take effect, property owners could apply for a reduction in their assessment. Assessment reduction is a difficult process and involves many variables. These new taxes are only recommendations at this point, so it is impossible at this point to know exactly what will take place or how much it will affect real estate values.
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Update - click here for more discussion of how this proposal would affect assessments.
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Update - click here for a discussion of the effects on valuation and sales.
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Update - click here for a discussion of the potential for increased tax sales and related problems.