The Northampton generating station in Northampton is seen March 13, 2024. Responding to public anger over soaring energy costs, Pennsylvania lawmakers in both parties have voted in support of a massive tax cut that would lower electric bills for customers across the state. The Associated Press

HARRISBURG — Responding to public anger over soaring energy costs, Pennsylvania lawmakers in both parties have voted in support of a massive tax cut that would lower electric bills for customers across the state — although they have said little publicly about how to pay for the $1.7 billion hole the measure would create in the budget.

Legislators in both parties are touting it as the largest tax cut in Pennsylvania history, although it’s not clear whether it will actually become law.

The proposed change would eliminate a 5.9% state tax on the sale of electricity. It would take effect immediately and apply to all customers, including businesses and nonprofits. Utilities would be required to pass the savings on to customers or face fines.

The state House, where Democrats have a narrow majority, passed the measure unanimously last week as part of a bill that would dramatically change the way utility profits are regulated. House Republicans criticized the changes to utility regulation, but voted in favor of the legislation after it was amended to include the tax cut.

“There is no other way for the legislature to lower people’s electric bill immediately,” said state Rep. Carl Walker Metzgar, R-Somerset, who introduced the tax cut amendment.

“Everything else is pie in the sky.”

The state Senate has not taken up the regulatory changes, but approved the tax cut in expedited fashion last week as the centerpiece of a broader package that would also repeal a sales tax exemption for data centers and expand a tax credit that funds private school scholarships.

A spokesperson said Democratic Gov. Josh Shapiro supports the cap on utility profits, but did not address his position on the tax cut. The profit cap follows the approach the governor outlined in a letter sent to utility leaders in May, warning them to stop seeking “unacceptably high” rate increases, or face his public opposition.

Shapiro and legislative leaders are currently in the thick of negotiations over the state budget. Republican leaders in the state Senate said in a statement Tuesday that they expected a deal “in the days following July 4.”

Asked how the state could afford such a large tax cut, state Rep. Jordan Harris, D-Philadelphia, the chair of the House Appropriations Committee, told Spotlight PA: “Everything is on the table right now, and anything that’s gonna help people is gonna be on the table until we’re done.”

Fair returns

The bill began life in the state House as a way to curb utility profits.

The average electric bill in Pennsylvania has risen by more than 60% over the past five years, according to data compiled by Heatmap News and the Massachusetts Institute of Technology.

Several factors have contributed to the increase. The rapid growth of data centers has contributed to a surge in demand, prompting a spike in wholesale prices, which are passed on to residential customers. There have also been delays in bringing new generations online.

The tax cut could offer fast relief for residents squeezed by rising bills, as concerns over affordability are top of mind for voters ahead of the November election. But it would also cost the commonwealth an estimated $1.7 billion in revenue in the next fiscal year, without an obvious way to make up the shortfall.

Even without the tax cut, spending is set to outpace available revenues, making it likely that lawmakers will need to dip into the rainy day fund to balance this year’s budget.

Republican leaders have argued that Pennsylvania needs to cut spending, while Shapiro’s proposed budget would boost state spending by roughly 5%.

The state Senate passed a similar tax cut to lower electric bills in 2024, but it did not ultimately become law.

In a local radio interview, state Senate Majority Leader Joe Pittman, R-Indiana, acknowledged that the tax cut “would have an impact” on the state’s deficit, but added that “there’s a shared understanding that affordability is a major issue.”

While most Senate Democrats voted in favor of the tax cut, some criticized it as a political stunt.

“What taxes will go up to cover it? What services will be cut?” state Sen. Lindsey Williams, D-Allegheny, one of six Democrats to vote against the tax package, asked during the floor debate on the bill.

“No one is answering those questions and no one will.”

Profit formula

Consumer advocates have long argued that excessive utility profits also play a role in driving up residents’ bills. In their view, the profits that the state Public Utility Commission allows utility companies to earn are too high, given that their status as monopolies makes them a relatively safe investment.

By law, utilities are entitled to recover “reasonably incurred” expenses, as well as the opportunity to earn a fair return on their investment. The Public Utility Commission considers rate requests in complex and technical legal proceedings that can last months.

“They don’t need to be making as much profit as they are making now,” said state Rep. Elizabeth Fiedler, D-Philadelphia, chair of the House Energy Committee, who introduced the original legislation.

Fiedler said there is a “shared frustration” among lawmakers in both chambers and both parties about utility costs.

Fielder’s proposal would cap the profits that investor-owned utilities can earn based on a formula tied to the yield on U.S. Treasury bonds. Alternatively, a utility company could hold a “sealed bid competitive auction process” to determine the rate of return required to attract investment.

In a typical rate case, a utility’s experts and consumer advocates use the same financial models to come to very different conclusions about the profits that utilities need to earn in order to attract continued investment, said Patrick Cicero, an attorney at the Pennsylvania Utility Law Project.

The bill is an attempt to be “more granular and precise” in setting profits, said Cicero, who previously served as the state’s official consumer advocate.

“Why approximate when we don’t have to?”

Changes to the profits that utilities earn could add up to millions of dollars in savings for customers, supporters say.

A reduction of 2 percentage points in the profits of PPL, which serves more than 1 million customers across central and eastern Pennsylvania, could save a typical residential customer almost $60 on their electric bill by 2030, according to a report by Synapse Energy Economics, a consulting firm.

Credit concerns

Opponents say the profit cap is an untested policy that would harm utilities financially and drive investment from the state.

“Trying to undo a century’s worth of process on the fly is not sound energy policy,” said Andrew Tubbs, president and CEO of the Energy Association of Pennsylvania, which represents electric and natural gas utilities.

The bill “wouldn’t just change how rates are set, it would take Pennsylvania and make us really outside of the mainstream.”

No state regulates utility profits this way, although similar legislation has been proposed in New York. New Jersey is considering tying profits to performance, including affordability and reliability.

The returns available to investors allow private water utilities to attract the money they need to make infrastructure improvements, Jenn Kocher, vice president of communications for the National Association of Water Companies, said in a statement.

Capping those profits “directly threatens the safety and reliability of water and wastewater in Pennsylvania,” said Kocher, who was previously a spokesperson for the state Senate’s Republican caucus.

In the state House, Republican lawmakers were largely critical of the bill — before voting in support of it once the tax cut was added.

The Public Utility Commission is neutral on the legislation to cap profits, according to a spokesperson.

Two of the agency’s five commissioners, however, wrote to state Senate President Pro Tempore Kim Ward, R-Westmoreland, to express their opposition, arguing that the proposed changes “will not make a positive contribution and may make matters worse.”

Additionally, they argued, legal challenges would be inevitable, and the costs of that litigation would be passed on to ratepayers.

Another commissioner, Vice Chair Kimberly Barrow, took a different view, saying at a recent legislative hearing that she was “very pleased” to see the bill advance in the House.