Enacts the "fair authorized investment returns act"

Showing the cosponsors who are on Agora, A to Z. The official record may list more.

• Democratic1

Shown in neutral colors by design; Agora is non-partisan.

◆ The sponsor's argument

Why Shelley Mayer says this is needed

The American utility market rests on a social contract. State govern- ments sanction private, for-profit monopolies to provide the bulk of electricity and natural gas service. In return, these investor-owned utilities (IOUs) agree to deliver universal service and submit to cost- of-service regulation of their customer rates by state utility commis- sions. For IOUs, the cost of service includes a reasonable profit, expressed as a return on the equity capital invested in the utility. In principle, a utility's authorized rate of return must be "just and reasonable," sufficient to recover only the actual and prudent costs of providing service - including a fair return on invested capital. The constitutional standard, set forth in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944), and Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679 (1923), entitles utilities to a return sufficient to attract capital under prevailing market conditions, i.e., the market-based cost of capi- tal - but no more. There is a persistent tension in this model. As investor-owned busi- nesses, IOUs seek to maximize profits, which conflicts with regulators' obligation to achieve just and reasonable rates. Moreover, the ratemak- ing process is shaped by structural asymmetries in resources, informa- tion, and institutional position that favor utilities, a phenomenon well documented in the academic literature on regulatory capture and capital bias. As a result, authorized returns on equity have for decades substantially exceeded utilities' actual market-based cost of equity. Those excessive returns not only increase rates directly, but also encourage excessive rate base growth by rewarding additional capital investment at above-market returns. The current energy affordability crisis is perhaps the clearest illus- tration of this dynamic. Over the last three years, investor-owned util- ity residential electricity rates have increased nearly 50 percent more than inflation, while publicly-owned utility rates have increased well below inflation. Approximately one quarter of U.S. households have been unable to pay their utility bill in full at least once over the past twelve months. Meanwhile, IOUs requested a record $31 billion in rate increases during 2025 alone - double the prior year. Multiple lines of evidence indicate that authorized returns on equity systematically exceed utilities' actual cost of equity: *Market signals. Publicly traded utility holding companies typically trade at 2.0-2.3 times book value. As a matter of financial principle, a utility earning a return on equity equal to its cost of equity should trade at approximately book value. The persistent and substantial premi- um to book value is powerful evidence that authorized returns exceed what investors require. *Financial models. The Capital Asset Pricing Model (CAPM), applied to the low market beta of utility equities relative to broad market indices, suggests that a premium to the 10-Year Treasury risk-free rate of less than two percent is warranted. Discounted Cash Flow analysis leads to a similar conclusion. At a market equity risk premium of approximately 5.0 percent and a utility equity beta of approximately 0.35, the Capital Asset Pricing Model implies a utility equity risk premium of approximately 1.75 percent above the risk-free rate, support- ing the 2.00 percentage point spread established by this Act. *Wall Street forecasts. Major asset managers project long-term returns for U.S. equities of approximately 6-7 percent. Utilities are lower risk than the market as a whole, implying a cost of equity at the lower end of, or below, that range. *Academic consensus. Multiple peer-reviewed studies confirm that returns authorized by state utility commissions are substantially higher than utilities' actual cost of equity. That the return on equity awarded to utilities in any one jurisdiction is broadly consistent with those in

This is the sponsor's own case for the bill, quoted from their memorandum. It is not Agora's description of what the bill does.