Washington, D.C.  — The American Economic Liberties Project today released a new paper, “Rate of Return Equals Cost of Capital: A Simple, Fair Formula to Stop Investor-Owned Utilities from Overcharging the Public,” which sheds light on how investor-owned utilities (IOUs) overcharge ratepayers and offers concrete recommendations to ensure rates are fair and aligned with public interest.

“For decades, investor-owned utilities have manipulated the regulatory process to secure unreasonable profits for investors at the expense of the public,” said Mark Ellis, Senior Fellow for Utilities at the American Economic Liberties Project. “Regulators award utilities rates of return—the compensation to investors for assuming the risk of providing capital to the utility—far above what is necessary to attract financing in capital markets. In doing so, regulators enable utilities to extract from consumers tens of billions of dollars in unearned profits each year. The stock market currently values these excess profits – the expected future unearned wealth transfer from customers to utilities – at approximately $1 trillion.”

“The solution is simple: IOU rates of return should equal their true, market-based cost of capital, in accordance with the century-old legal standard for setting utility rates,” added Ellis. This is not just about lowering utility bills—it’s about restoring trust and accountability to a system that hundreds of millions of Americans rely on.”

Under the standard cost-of-service regulatory model, where utilities make money based on their level of investment, inflated RORs create an incentive for utilities to over-invest in unnecessary or inefficient projects. The result is a cycle of relentless rate hikes that leave households to bear the financial burden without any corresponding benefit.  Between 2020 and 2023, average residential electricity rates charged by IOUs increased nearly 50% more than inflation.

The new paper delves into the failed regulatory approach that has allowed IOUs to enjoy ratepayer-guaranteed returns nearly double their market-based cost of capital. The paper shows how the problem of excessive RORs is driven by regulators’, public advocates’, and consumer groups’ reliance on flawed financial models and outdated assumptions.

Looking forward, the paper calls for codifying the long-standing regulatory principle to align rate of return with the actual, market-based cost of capital. This straightforward reform, coupled with standardizing the rate-of-return calculation methodology and empowering public advocates, would save consumers tens of billions of dollars annually. These changes would also transform IOUs’ financial incentives, thereby ensuring that utilities prioritize the public interest over profits in their infrastructure and energy transition investments.

Read the full paper here.

Learn more about Economic Liberties here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; foreign trade arrangements support domestic security and democracy; and wealth is broadly distributed to support equitable political power.