ROE Games: Households Get Squeezed

Electric meter on bright orange wooden wall — Photo: panumas nikhomkhai / Shutterstock

The fight over utility profits is, at bottom, a fight over who bears the cost of a capital‑intensive grid: households struggling with rising bills, or investors expecting stable, near‑double‑digit returns.

Key Points

Investor‑owned utilities have seen profit shares rise to roughly 14–15% of the average electric bill in recent years, even as many customers struggle with affordability.
The core lever in this debate is the allowed “return on equity” (ROE) that regulators grant utilities on their capital investments, commonly around 9–10% nationwide.
Consumer advocates argue that today’s ROEs are often higher than actual investment risk, driving unnecessary capital spending and adding billions to customer costs.
Utilities counter that cutting ROE threatens credit ratings and raises borrowing costs, potentially undermining reliability and needed grid upgrades.

How Regulated Utility Profits Really Work

To understand why utility profits have become a political flashpoint, you have to start with the mechanics of rate‑of‑return regulation. In most states, investor‑owned utilities are legal monopolies for electricity, gas, or water service; in exchange for exclusive territory, they submit to price regulation by a public commission. Commissions calculate a “revenue requirement” intended to cover the utility’s prudently incurred operating costs plus a fair return on the capital shareholders have invested in wires, pipes, plants, and IT systems.

That shareholder return is the allowed return on equity, or ROE. If a utility has, for example, $5 billion of “rate base” financed 50% with equity and the regulator sets a 10% ROE, shareholders are authorized to earn $250 million annually on that equity slice, on top of interest on debt and full recovery of operating costs. Profit therefore scales with the size of the rate base: every substation, data center connection, or water main replacement that goes into rate base earns that ROE for decades.

This structure is not a hidden trick; it is the explicit design of rate‑of‑return regulation. The tension arises because the same formula that provides capital stability also creates a powerful incentive to spend more capital—and the bill for that spending ultimately lands on households and businesses.

Profit Shares Are Rising Just As Bills Become Harder To Pay

Over the past several years, many U.S. households have seen electricity bills increase faster than general inflation. Investigative work by the Energy and Policy Institute (EPI) and others has shown that investor‑owned electric utilities collectively retained about 12.8% of their revenue as profit between 2021 and 2024—roughly 13 cents of every dollar customers paid. Preliminary 2025 data suggest margins climbing to around 14.6–15%, meaning close to $30 of a typical $200 bill is pure corporate profit.

In dollar terms, EPI estimates that electric utilities garnered roughly $244 billion in profits from household bills between 2021 and 2025. That is not the entire story behind rising bills—fuel costs, storm recovery, and transmission investments matter, too—but it is a large and growing slice. At the same time, many commissions continue to authorize ROEs around 9.5–10%, a level critics argue is generous relative to broader capital markets.

These numbers have sharpened public perception that utility bills are not only paying for necessary infrastructure and energy but also delivering outsized and growing returns to shareholders. That perception, backed by quantitative analysis, explains why utility profits have moved from a niche regulatory topic to a mainstream affordability debate.

Why Return on Equity Is The Battleground

ROE has become the central policy lever because it directly links the cost of capital to customer bills. Nationally, the average authorized ROE for electric utilities in 2024 was about 9.7%. Industry surveys and expert testimony often treat something in the 9–10% range as “normal” for investor‑owned utilities in today’s environment. Yet estimates of the actual cost of equity—that is, the return investors require given risk—have often come in lower. One analysis from New York University’s Stern School of Business, for example, pegged the utility sector’s cost of equity at around 6.3% in early 2025, below the broader market.

That gap between authorized ROE and estimated risk‑based cost of equity underpins the affordability‑side critique. If regulators are consistently setting ROEs several percentage points above what capital markets require, then, in this view, they are embedding “excess” profit into every kilowatt‑hour sold. Advocacy groups such as the American Economic Liberties Project have extrapolated that excessive ROEs may be costing U.S. customers tens of billions of dollars annually, on the order of $300 per household per year.

For consumer advocates and some state policymakers, trimming ROE looks like the cleanest, most direct way to relieve pressure on bills without cutting into operating budgets or necessary maintenance. Governors’ task forces and affordability dockets—in places such as New Jersey—have explicitly called for reassessing authorized returns to ensure they align with actual investment risk and do not reward over‑building.

How Utilities Defend Current Profit Levels

Utilities, unsurprisingly, tell a different story. Their core argument is that a healthy, predictable ROE is not a windfall but a prerequisite for raising the enormous capital required to modernize aging grids, harden systems against extreme weather, and connect new loads such as data centers and electrified transportation. From their perspective, an allowed 9.5–10% ROE reflects the risk of long‑lived, politically exposed investments that cannot be quickly redeployed if regulation turns hostile.

Credit‑rating agencies lend some support to the idea that regulatory climate and profit policy matter for financing. In Connecticut, for example, several utilities, including Eversource and Avangrid, saw their ratings downgraded in part due to what agencies described as an inconsistent or unsupportive regulatory environment. Fitch has warned more broadly that escalating affordability pressures increase the risk that regulators will resist rate increases, potentially making cost recovery less certain and weakening the sector’s outlook.

However, it is important to separate two claims. One is that arbitrary, unpredictable or retroactive cuts to allowed returns can spook investors and impair credit quality—a proposition with real‑world examples behind it. The other is that any reduction in ROE, even when carefully calibrated to market conditions, will necessarily produce downgrades or starve utilities of capital. The evidence for that stronger claim is far weaker in the material at hand; detailed, utility‑specific credit analyses tying modest ROE cuts to concrete financing failures are largely absent.

Where The Evidence Is Strong—and Where It Is Thin

The public debate often moves faster than the evidence. On the affordability side, there is solid, empirical grounding for a few key points. First, regulated utilities have indeed enjoyed rising profit shares in recent years, with average margins around the mid‑teens and some utilities and regions significantly higher. Second, authorized ROEs around 9–10% are common and, in some cases, have remained elevated even as risk‑free interest rates and sector‑specific risk estimates have shifted.

What is weaker in the current record is granular, jurisdiction‑specific proof that a given utility’s allowed ROE is legally or economically excessive. Many critiques point to national averages and sector‑wide studies but do not always unpack the mix of fuel costs, storm surcharges, transmission riders, and profit that actually drive a specific customer’s bill. Similarly, while there are strong theoretical and anecdotal reasons to believe high ROEs encourage “gold‑plating”—spending more capital than strictly necessary—the supplied materials do not include engineering audits or prudence reviews demonstrating that a particular capital plan is oversized relative to reliability needs.

On the utility side, the claim that ROE cannot be cut without severe financing consequences is also under‑documented. Downgrades linked to contentious regulatory environments show that investor confidence can be shaken by policy shifts, but they do not establish that every basis‑point reduction in ROE is dangerous. In fact, some analysts argue that regulators can offset a lower ROE by modestly increasing the equity share in a utility’s capital structure, preserving credit metrics while still delivering ratepayer savings.

How States Are Testing The Line Between Affordability and Investment

Several states are now treating ROE not as a fixed technical parameter but as an explicit policy lever in affordability strategies. Reporting shows commissions and legislatures in states such as California, Michigan, and others wrestling with where to set returns in light of both rising bills and massive infrastructure needs. In California, for example, regulators have approved slight reductions in profit margins for major investor‑owned utilities—on the order of a few tenths of a percentage point—despite consumer groups urging much steeper cuts that they say could save customers billions over time.

Elsewhere, administrative law judges or staff experts have repeatedly recommended lower ROEs, only to see commissions adopt higher figures in final orders, reflecting the tension between economic modeling and political risk tolerance. Legislative proposals in multiple states aim to cap ROEs directly, eliminate special adders on transmission projects, or tie future profit increases to concrete performance metrics such as verified bill reductions or reliability improvements.

These experiments share a common premise: that today’s balance between investor returns and household affordability is off‑kilter, and that commissions have more room to adjust ROE downward without breaking the capital‑formation model. Utilities and many financial analysts remain skeptical, but the direction of travel is clear—profit policy is no longer a back‑office technicality; it is becoming a front‑line affordability tool.

What A Serious Rebalancing Would Require

If policymakers want to move beyond rhetorical skirmishes and actually “right‑size” utility profits, several pieces of analysis need to happen at the utility and state level, not just nationally. First, regulators and consumer advocates need robust bill decomposition: a clear, public breakdown of how much of recent bill increases comes from profit margins versus fuel, storm recovery, transmission, and other riders. Without that, ROE debates risk chasing headline numbers rather than real cost drivers.

Second, commissions need rigorous, utility‑specific cost‑of‑equity studies grounded in current capital‑market data, not just historical precedent. The goal is not to punish utilities but to match allowed returns to actual risk as closely as possible. Evidence from finance suggests that, at least in some periods, authorized ROEs may sit above risk‑based estimates by several percentage points; narrowing that gap could yield substantial bill savings without destabilizing financing if done predictably and paired with sensible capital‑structure policy.

Third, there is a case for strengthening scrutiny of what goes into rate base in the first place. Performance‑based regulation, least‑cost planning standards, and “anti‑gold‑plating” rules can ensure that only necessary, cost‑effective investments earn the regulated return, reducing the incentive to build for its own sake. Some states are also exploring bans on charging customers for certain non‑core expenditures—such as lobbying—so that profit margins reflect utility operations, not political activity.

Finally, transparency and public engagement matter. Rate cases are dense and technical, but they are also where the trade‑off between affordability and investment is decided. As more states convene “affordability dockets” and publish accessible summaries of ROE, profit shares, and bill impacts, the politics of utility profits will likely grow sharper. The challenge for regulators is to navigate that politics without losing sight of the underlying engineering and finance: keeping the lights on, the water clean, and the bills genuinely tied to the cost—and not more than the cost—of doing so.