Energy Institute at Haas

Utility companies recover their capital costs through regulator-approved rates of return. Using a comprehensive database of utility rate cases, we find a significant premium for regulated returns on equity relative to several capital cost benchmarks. We show that firms decide strategically when to initiate new rate cases, such that regulated returns respond more quickly to increases in underlying capital cost benchmarks than to decreases. Higher regulated returns incentivize utilities to own more capital: a one percentage point rise in return on equity increases capital assets by 3–4%. Overall we find excess costs to US consumers averaging $7 billion per year.