Karl Dunkle Werner and Stephen Jarvis “Rate of Return Regulation Revisited” (Revised August 2023) | WP-329R | Blog Post

Utility companies recover their capital costs through regulator-approved rates of return. Using a comprehensive database of utility rate cases we estimate that utilities’ current regulated returns on equity are significantly higher than various benchmarks would suggest. We show that regulated returns on equity respond more quickly to increases in benchmark measures of capital costs than they do to decreases. We then provide evidence that higher regulated returns on equity lead utilities to own more capital. A 1 percentage point rise in the return on equity increases capital investment by 5%. Overall we find excess costs to consumers of $2–20 billion per year.