The American utility market is based on a social contract. The government sanctions private, for-profit monopolies to provide approximately 70 percent of electricity and 95 percent of natural gas deliveries in the United States. (The rest is provided by publicly- or cooperatively-owned utilities.) Utilities are granted regional franchises under the rationale that they are “natural monopolies” – their service can be most efficiently provided by a single entity.

In return, these private monopolies, called investor-owned utilities (IOUs), agree to deliver universal service and be subject to cost-of-service regulation (COSR) of their customer rates by state utility commissions (sometimes referred to as public utility commissions/PUCs or public service commissions/PSCs).

In principle, a utility’s “rate of return” – or the price it is allowed to charge customers – must be “just and reasonable,” sufficient to recover only the actual and prudent costs incurred in providing service to captive customers. But there is an inherent tension in this model. As investor-owned businesses, IOUs seek to maximize their profits, which often conflicts with regulators’ requirement to achieve just and reasonable rates. Moreover, IOUs often have the upper hand in their interactions with regulators, to the detriment of their customers. Over the last three years, IOU residential electricity rates have increased 49 percent more than inflation. In contrast, their publicly-owned counterparts have increased 44 percent less than inflation.

Raising the urgency of this issue further is the overwhelming and pervasive energy affordability crisis facing Americans across the income spectrum. A quarter of U.S. households have been unable to pay their utility bill in full at least once over the last 12 months. Meanwhile, IOUs requested a record $31 billion in rate hikes during 2025 alone – double that of 2024, while their CEOs pocketed $3 billion in salaries and bonuses between 2019 and 2023.

As explained in a January 2025 American Economic Liberties Project (Economic Liberties) policy brief, policymakers can act now to rein in the unjust and unreasonable utility profits realized by

IOUs across the country by passing legislation to realign utility investor incentives with the public interest. While state utility regulators may already be empowered to some degree, depending on existing state-specific frameworks, to make changes through traditional rate-setting forums, regulators are often faced with aggressive or alarmist predictions when even small changes are proposed, rendering systemic or meaningful change difficult to achieve without legislative direction and explicit authorization.

What follows is model legislation that can be adopted by most states to do just that. Importantly, this model legislation operationalizes the innovative concept first introduced in the January 2025 Economic Liberties paper: a true market-based approach to determining an IOU’s return on equity (ROE) through a Competitive Equity Auction. Specifically, the legislation requires any new, incremental equity issued by a monopoly utility to be competitively sourced, which will yield a direct, market-based data point that regulators must reference and use – rather than a continued reliance on outdated and skewed financial models used by utilities to justify decades of unreasonable profits.