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For many years, all electric utilities in the U.S. were regulated monopolies. Although some states deregulated electricity generation over the past 20 years, electric utility companies in other states today remain monopolies. Providing an essential service without facing competition, unchecked monopolies have little incentive not to overcharge customers. This presents a problem.
To address the issue, public commissions oversee these regulated utilities. Regulators decide how much utilities are allowed to charge in an effort to balance allowing the company to earn a fair return while also protecting consumers.
In their recent paper published in Energy Policy, Carnegie Mellon University's Paul Fischbeck and CMU alumnus David Rode show that this balance between utility companies and their customers has been shifting over time, in favor of the utilities.
Fischbeck, a professor of engineering and public policy (EPP) and social and decision sciences (SDS), and Rode, an adjunct research faculty at the Carnegie Mellon Electricity Industry Center who recently graduated with a Ph.D. in social and decision sciences, analyzed almost all of the electric utility rate cases in the U.S. from the past 40 years, a dataset consisting of roughly 1,600 cases. They found a growing gap between the rates authorized and the "riskless rate," or the rate of return for an investment with zero risk (like U.S. Treasury bonds). This gap is known as the risk premium.
"We noticed that, as interest rates declined over the past decade, the returns regulators were allowing utilities to earn didn't decline by as much," Rode said. "This created growing returns for utilities." The average risk premium in 1980 was about 3%. Today, it is nearly 7%.
