Washington, D.C. – Amid an acute energy affordability crisis, the American Economic Liberties Project today released new model legislation that would provide relief to utility customers by reining in unjust and unreasonable monopoly utility profits. 

“A major driver of the energy affordability crisis is the fact that regulators gift excessive profits to  monopoly utilities, enabling unjustifiable payouts to shareholders at the public’s expense,” said Pat Garofalo, Director of State and Local Policy at the American Economic Liberties Project. “This model legislation provides state lawmakers with the solution their constituents have been demanding.” 

“This model legislation introduces a path toward operationalizing a market-based approach to determining utility profits,” said Marissa Paslick Gillett, Senior Fellow at the American Economic Liberties Project and former Chairman of Connecticut’s Public Utilities Regulatory Authority. “Every month when the utility bill arrives, the public sees the result of a system that prioritizes the utilities’ investors over consumers. It’s time to try something different and inject competition into more aspects of utility regulation. Currently, utilities use skewed financial models to argue they need outsized returns to attract investment. The legislation would compel regulators to let capital markets speak for themselves rather than relying on those flawed models. Any new equity issued by IOUs would be competitively sourced through an auction, with rates settling at the minimum return necessary for utilities to attract investment.”

IOUs finance their capital investments through a mixture of debt and equity. According to a longstanding regulatory principle and Supreme Court precedent, the return on equity authorized by regulators should not exceed the minimum level necessary to attract the needed capital in the capital markets. But current IOU returns on equity are far above this threshold, as shown by a January 2025 Economic Liberties analysis of IOU stock valuations and Wall Street market return forecasts. The stock market values excess returns on IOU equity at approximately $1 trillion, and our paper estimates they cost ratepayers $50 billion per year.

To rein in financial extraction and lower costs, this model legislation would subject any new IOU equity issuances to a Competitive Equity Auction. The proposed mechanism involves a sealed-bid auction overseen by the state utility commission, where qualified bidders (investors) declare the minimum return they would accept for investing a certain amount of equity capital. The commission would then make equity allocations to the most competitive bidders. The model legislation addresses various aspects of the auction process that a state utility commission would have to consider in implementing this novel concept, which will require tailoring to each jurisdiction. Restrictions on private equity bidders are also recommended along with other robust consumer protection measures.

The model legislation also prescribes the use of more rigorous methods for calculating “just and reasonable” utility returns, eliminating reliance on IOUs’ flawed financial models in the interim as auctions get up and running. The prescribed method synthesizes data from Wall Street forecasts, IOU stock market valuations, and other empirical sources.

Read the model legislation here.

Read Economic Liberties’ January 2025 whitepaper, “Rate of Return Equals Cost of Capital: A Simple, Fair Formula to Stop Investor-Owned Utilities from Overcharging the Public,” here.

Learn more about Economic Liberties here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; international trade arrangements that promote balanced trade and benefit workers, farmers and small businesses; and wealth is broadly distributed to support equitable political power.