November 2026
PROBLEM
About a fifth of what you pay an investor-owned utility is not fuel, wires, or repair crews. It is profit, guaranteed by the state on every dollar the utility invests, plus the income taxes customers cover on that profit. No market sets that rate. A state commission does.
Investor-owned utilities serve about 70 percent of American electricity customers under a bargain: a state-granted monopoly in exchange for regulated rates. By law, a utility is allowed to earn profits high enough to attract investors, and no more. Those profits are set as a percentage of the amount of money shareholders have invested, called the return on equity.
Commissions award far more. Authorized returns on equity nationally cluster around 10 percent; standard finance models put a utility’s actual cost of equity near 6 percent. The stock market agrees. Investors pay about $200 for every $100 shareholders have invested, which is possible only if the authorized return on equity exceeds what investors require. The gap persists because both utilities and consumer advocates start from whatever was awarded last time, and neither asks for the number the law calls for. Customers pay for the very process that overcharges them: the utility’s case and, in most states, consumer advocates’, too.
The overcharge runs roughly $60 billion a year nationwide, about $450 per American household. Utilities requested a record $31 billion in rate increases in 2025, double the prior year, and 2026 is running at the same pace. Utilities are expected to invest $1.3 trillion from 2026 through 2030, about 40% more than the previous five years after adjusting for inflation.
IDEA
State elected officials should direct the state utility commission to stop setting return on equity through litigation and start pricing it: the statewide return on equity should be set equal to the current yield on the 10-Year Treasury plus 2 percent; any utility that believes the default understates what its investors require may instead hold a sealed-bid auction of new equity whose clearing return becomes the utility’s authorized return for that year. The process resets each year: the utility can accept the updated Treasury plus 2 percent rate or run an auction.
THE BIGGER PICTURE
When the processes used by government agencies end up benefiting some actors more than others, and in particular when they benefit large corporations at the expense of consumers, it only enhances the public’s belief that the larger system is not working in their interests. Fundamentally, a fair market works to make sure that the playing field is level for all participants. Whatever the logic of its origins, the mechanism by which the return on equity is set for utilities no longer reflects the actual cost of capital, and instead creates a benefit for investors at the expense of consumers while also perverting the investment decisions utilities make. By letting the market set the real price, the imbalance is eliminated. The monetary benefit to consumers is real, but so is the reinforcement of basic democratic principles. The system can no longer be exploited by those with greater resources and insider knowledge to their own benefit.
EXPECTED OUTCOME
This approach changes the reward system for utilities. Today a utility earns more by spending more, whether or not customers benefit. A market return removes that reward, so capital decisions like building new lines or new generation turn on whether the investment is actually needed, which is how every other industry already works.
As a result, every household and business served by an investor-owned utility would pay less, with no reduction in service or needed investment. The only thing that changes is the excess return paid to utility investors. Resetting authorized returns to market saves roughly $450 per household per year nationwide. Savings begin the first year; there is no transition period and no new market to build.
EVIDENCE
The auction answers the cost of capital question directly. Critics of a lower authorized return warn that capital will not show up. The auction makes that argument unnecessary, because it does not assume a return is sufficient; it discovers the return that is. If a utility’s cost of equity really is above Treasury plus 2 percent, then investors will bid the return they require, and that becomes the rate. Capital adequacy is guaranteed by construction rather than predicted by a model, and the resulting number defends itself: it is what willing investors just accepted in open competition. Nothing here is experimental. Similar auctions have sold U.S. Treasury securities for decades; they work for the FCC and electric capacity. This change builds no new machinery; it points to a proven one at the last major price still set by skewed debate in an obscure hearing.
The number checks out. Wall Street’s long-run forecasts for the whole stock market cluster around 7 percent. Regulated utilities are safer than the market, so their expected returns are lower. The Supreme Court has held that what matters is the end result, not the method used to reach it, and no method observes the market-required return more directly than asking the market.
The idea is already moving. It has been endorsed by five former commission chairs. The Pennsylvania House passed it unanimously, and it has been introduced in both chambers in New York. New Jersey’s utility commission is reviewing it, and Delaware’s governor has asked that state’s commission to consider it.
CONSIDERATIONS
Benefits. Immediate rate relief, a number any customer can verify, and shorter, cheaper rate cases. The mechanism is also self-correcting: if utility risk rises from wildfire exposure or demand uncertainty, the next auction clears higher on its own.
Risks. Early auctions may price high while the instrument is unfamiliar; the premium should fade as the security becomes routine. Utilities will claim a lower return is an unlawful taking. The auction answers that claim directly: a utility that believes the return is confiscatory can prove it in the market by achieving a higher one. Warnings that capital will flee to higher-return states misunderstand how capital markets work: share prices adjust to authorized returns, so new investors earn about the same everywhere. Commissions will need to run auctions, which they can assign to independent administrators.
FAQ:
Who is likely to support this idea?
Consumer and ratepayer advocates, AARP, large commercial and industrial customers, data-center developers facing rate pressure, and affordability-focused lawmakers in both parties.
Who is likely to oppose this idea?
Investor-owned utilities and their trade associations, utility shareholders, and the expert-witness industry the current process supports – essentially those who benefit from the status quo.
Is a return of roughly 6 percent really enough to attract capital?
If it is not enough, the auction clears higher and that becomes the authorized return. For context, forward return forecasts for the whole stock market sit around 7 percent, and utility equity is safer than the market.
Didn’t we already try competition in electricity?
Restructuring built a new market for a complicated product whose value changes by the hour and by location, and switched over all at once. This idea opens utility equity to a market that already exists, the deepest in the world, for a product that is identical everywhere: a rate of return. It proceeds one utility at a time, with the default formula as a backstop throughout.
Is this deregulation?
No. The commission, the service obligation, and rate regulation all remain. One input moves from litigation to market: the price of capital.
Where can I learn more?
Model legislation and supporting materials are available at marketclear.org/resources.