Your Utility Regulator Is Probably Making Hash of Everything
PLUS: Washington State wins a race against food and pharmacy deserts.
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Earlier this month, the Washington D.C. Court of Appeals threw out a rate increase that was requested and received by Pepco, the capital’s electric utility, for 2024-2026. The court directed Pepco and the District’s utility regulator, the Public Service Commission, to take another whack at determining the appropriate amount to charge residents for that period.
The case occurred because the District’s Office of People’s Counsel — which advocates for residents harmed by the city’s monopoly utilities — alleged that the PSC didn’t hold a proper hearing before approving Pepco’s rate request. Where it should have held a more court-like proceeding, the PSC instead held a “legislative style hearing … in which the parties were limited to presenting oral arguments and had no opportunity to present witnesses or to cross-examine adversarial witnesses.”
This is a big deal in D.C. politics, because Pepco bills are skyrocketing a few months ahead of a primary election for the city’s open mayoral position, as well as several city council positions — and when I say skyrocket, I mean hundreds or even thousands of dollars a month for some customers, basically overnight. The two main contenders in the mayor’s race are criticizing each other for failing to adequately oversee the PSC.
The court ruling gives advocates another chance to secure lower rates, at a time in which the political establishment will have a desperate desire to see rates decline too. But this episode also, more broadly, is emblematic of the below-the-radar dysfunction and corruption that plagues utility regulators nationwide.
As utility bills climb and “affordability” becomes the hot political word of the moment, it’s worth pointing out the vary salient fact that utility regulators are making hash of everything, approving rates above and beyond what they should, while green-lighting projects they shouldn’t. There’s a nationwide crisis of corrupt or inept regulators (or both!) having the discretion to line the pockets of utility shareholders at residents’ expense, and doing just that.
From D.C., we can cross the country to Arizona to see another example. There, Attorney General Kris Mayes is challenging the Arizona Corporation Commission (which regulates utilities) for allowing a special agreement between Tucson Electric Power and a data center developer. Mayes’ allegation is that the Corporation Commission illegally delegated its authority to set electric rates to the utility and the data center developer, who are apparently working out the data center’s cost of electricity on their own.
“The Commission does not have the power to let a utility and a data center operator quietly agree to set their own rates, cut the public out of the process, and call it a day. If we allow that here, we are telling every large energy customer in Arizona that they can negotiate sweetheart rates outside of public oversight — and ordinary Arizonans will be left to pick up the tab,” Mayes said.
And those sweetheart rates for individual corporations tend to translate into higher rates on everyone else, to make up the difference.
DC and Arizona regulators may have gone the extra mile to ensure that ratepayers were shafted, and may be forced to reconsider, but their conduct is hardly unique. In fact, in general, utility regulators have been quietly awarding outsized profits to monopoly utilities with little attention or accountability, for years.
As a reminder, most utilities, though publicly regulated monopolies, are also owned by private investors, making them investor-owned utilities, or IOUs for short. So any excess profit lines the pockets of those investors, shifting money from Main Street to Wall Street. (I’m going to focus on electric utilities here, but the same can be said for gas and water.)
The amount utilities are allowed to charge ratepayers is set during court-like proceedings known as rate cases, in which utility regulators sit as judge and jury. According to longstanding court precedent, utilities are only supposed to receive a “return on equity” equivalent to what they would need to attract investment on the open market — and that return, or ROE, determines a big chunk of what you pay in your monthly bills.
Since monopoly utilities are a very safe, almost-zero-risk investment with guaranteed profits, that return should be relatively low. Instead, regulators keep approving returns for utilities way above market rate, as if utilities were a super risky investment requiring outsized returns to draw in capital.
In fact, regulators are awarding returns to utilities that are between 30 and 50 percent above the cost of equity they’d likely receive in the market. As my colleague Mark Ellis has calculated, these excess profits “cost utility customers approximately $50 billion per year, or about 13.6% of total IOU gas and electric revenue,” which comes out to more than $300 per year per household.
Another 2019 study of U.S. utilities found that for years regulators have been increasing the amount of return they allow utilities to make based on no good economic evidence, “highlighting a disconnect between what regulators claim to be doing and what they are actually doing.” I.e., regulators claim to be watching out for the public, but are actually extracting public money to send to utility investors.
All told, the nation’s average electricity rate today is 40 percent higher than it was in 2019, as a direct result of regulators failing in their chief duty: Determining just and reasonable rates. (You can use this handy new calculator from the Energy and Policy Institute to see how much of your utility bill is going to profits versus maintaining or upgrading service.)
So what to do about this? Get better regulators and give them less to do.
Utility regulators, depending on the state, are either appointed by the governor or elected. That means they can be ousted and replaced with better ones, given sufficient pressure. Monopoly utility leaders use this play themselves, in reverse, working to oust any regulator who dares threaten their gravy train.
But perhaps more important is adopting new rules that would constrain regulators in the first place, taking away their discretion to award sky-high, fantasy-land returns. States could adopt legislation (we wrote a model here!) to require that rates be rooted in real-world, market data, adhering more to the standard to which utility regulators are supposed to stick, rather than the corrupt, made-up one they currently employ.
Email or call your state legislators and tell them to pick it the model legislation and run with it if they want to actually lower costs for their constituents.
Want to learn more? Join me and an amazing group of legislators and experts for a virtual webinar on “Lowering Utility Costs in an Age of Data Centers” on Thursday, March 26th at 2 p.m. EST. RSVP here.
UPDATE: A few weeks back, I wrote about a race among several states to become the first to ban restrictive deed covenants that dominant retailers use to block the entry of new grocery stores and pharmacies in local markets. Well, the race now has a winner: Washington State, where Gov. Bob Ferguson signed a ban into law this week. Kudos to Rep. Darya Farivar for her championing of the bill, and hopefully this is the first of many dominoes to fall.
SHAMELESS SELF-PROMOTION: I spoke to Action News Jax about Florida legislators gutting a data center regulation bill. (Read it here.) I also spoke to the Cleveland Plain Dealer about Ohio legislators attempting to ban nondisclosure agreements in data center deals. (Read it here.)
SIMPLY STATED: Here are links to a few stories that caught my eye this week.
The Washington Post apparently uses surveillance pricing in some form or fashion.
Utah is on the front line of the effort to ban “prediction markets,” while Arizona Attorney General Kris Mayes filed criminal charges against Kalshi, a leading prediction market firm, for running an illegal gambling operation. (Background on this issue here.)
“Across 24 states, Meta, Google, and Microsoft are giving exponentially more to influence state-level elections this cycle than they have in the past.”
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— Pat Garofalo