Excess profits by investor-owned utilities cost Minnesotans hundreds of millions of dollars
A paper published this month concludes that profits generated by investor-owned utilities are drastically driving up electricity and gas rates, and calculates the “ongoing excess wealth extraction from utility customers at over a trillion dollars” nationwide.
“Rate of Return Equals Cost of Capital: A Simple, Fair Formula to Stop Investor-Owned Utilities from Overcharging the Public” is the title of the new white paper published by the American Economic Liberties Project.
The paper is an analysis by Mark Ellis, the former Chief Economist and Chief Corporate Strategist for a large for-profit utility company, and current expert consultant on issues related to utility finance and regulation.
Ellis argues that utilities have long been collecting unfair profits, at a direct cost to American ratepayers:
"Utilities have been awarded ROEs [returns on equity] approximately twice their actual, market-based cost of equity — in other words, twice what is ‘just and reasonable’ — for over a decade.... The result is a vicious cycle of ever-increasing rates.... Economywide, excess IOU RORs cost utility customers approximately $50 billion per year, or about 13.6% of total IOU gas and electric revenue."
A company’s cost of equity is what its investors require (expect to earn) if they purchase stock in the company. A return on equity is what the company earns on its investments. In each utility rate case, the Public Utilities Commission authorizes a utility company to charge customers rates that include what it determines to be a return on equity that fairly balances the interest of the company and its shareholders with ratepayers’ need for affordable service.
Now let's put this in a concrete, local context.
In Xcel Energy's last request for a Minnesota electric rate increase, CUB's expert witness, Steve Kihm, estimated Xcel's cost of equity was 7.0%, using observations of publicly available data.
In this rate case, Xcel had requested an authorized return on equity of 10.2%, which would have cost Minnesota ratepayers $280 million per year above the company’s cost of equity. To quote Ellis, "This is excess utility profits — cost over and above a fair and reasonable rate of return — for which customers receive no benefit whatsoever."
After advocacy by CUB and others, the PUC increased Xcel's authorized ROE more modestly, to 9.25%.
Even with this lower increase, Xcel Energy, Inc. (the parent company of Xcel's Minnesota utility) reported an annual net income of $1.77 billion for 2023.
Now, Xcel is requesting to increase their ROE to an outrageous 10.3%. To achieve fairness to ratepayers, Xcel's ROE must come down substantially.
What you can do:
File a public comment with the PUC: Explain that you are concerned about Xcel's unfair profits, or describe how Xcel's proposed rate increase would affect you. (Reference Docket No. 24-320).
Support CUB: CUB will retain an expert witness and present analysis that Xcel's ROE is excessive and must be reduced. Our grants do not directly support this advocacy — contributions from people like you make it possible.