Return on Equity and Financial Integrity: Sustaining Investment, Reliability, and Affordability

Return on equity (ROE) is one of the most debated and frequently misunderstood elements of utility ratemaking. That matters more now than ever, as affordability concerns grow and utilities invest heavily to meet rising electricity demand. 

This paper, prepared by Concentric Energy Advisors, Inc., examines the role of ROE in utility regulation and, in particular, the relationship between authorized ROEs, customer bills and the cost of providing service, and utilities’ ability to attract the capital needed to provide safe and reliable service. The paper explores how the U.S. regulatory model has enabled electric utilities to finance capital-intensive infrastructure with reasonably priced investor capital while protecting customers through comprehensive regulatory oversight. 

The Executive Summary outlines the paper’s four principal conclusions: 

• Outside investment is critical for regulated investor-owned utilities to meet essential public needs. 

• ROE represents a relatively small component of the customer bill and should be considered in the context of the broader cost of providing electric service. 

• Utility returns on equity are among the lowest compared to other industries. 

• Regulated utilities’ ability to attract investor capital is critical for lower customer rates. 

Drawing on national and regional bill analyses, market and credit rating agency data, and historical case studies, the paper establishes a factual baseline for the ROE debate. It explains how ROE is determined, how authorized and earned returns differ, and where the equity return fits within the broader cost of electric service. The paper also examines the drivers of affordability pressures, the consequences of insufficient authorized ROEs, case studies of utility financial distress, common analytical errors in current policy proposals, and comparative benchmarks against other industries.  

Overall, the paper concludes that utility regulation requires balance: protecting customers while ensuring utilities can attract the capital needed to provide safe, reliable, and increasingly complex service. Undermining that financial foundation may appear to offer short-term bill relief, but over time it raises costs and risks for customers. 

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All views expressed by the authors are solely the authors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, related companies, or clients. The authors’ views are based upon information the authors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.