Why electric companies may be in for a slide

Utilities, traditionally seen as defensive, face mounting political and regulatory pressure to curb electricity prices amid surging demand and conflicting energy policy signals, threatening their stable returns and dividends. Concurrently, while AI capital expenditure drives economic growth, private credit firms financing these projects are experiencing investor skepticism over credit cycle risks, potentially impacting future AI funding. The ongoing government shutdown further compounds market uncertainty by delaying key economic indicators like the September jobs report.

Analysis

Why electric companies may be in for a slide Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Quick Fix Electricity prices have rocketed at more than twice the rate of inflation since President Donald Trump’s return to office. That is going to create massive headaches for American utilities. Republicans have long argued that climate change policies drive up prices for ratepayers, while Democrats are seeking to blame Trump for slashing Biden-era subsidies for clean energy projects. Voter frustration with sky-high utility bills will test those talking points ahead of a 2026 midterm campaign that’s likely to be defined by cost-of-living concerns. Either way, utilities are in the crosshairs. Here’s why that should matter to investors: Utility companies are traditionally viewed as a relatively stable source of returns, falling into a defensive category of stocks that can be relied upon during periods of economic uncertainty. But in many markets, their ability to collect profits and pay dividends depends on the approval of state-level elected officials and regulators. A bipartisan focus on higher energy costs amid surging demand means utilities must balance conflicting political priorities that simultaneously force them to invest in new infrastructure while limiting their returns. “The pressure is likely to get worse before it gets better,” said Timothy Fox, a managing director at ClearView Energy Partners, which specializes in identifying risks for investors and corporate strategists. “It’s possible-to-likely that states will at least consider policies that restrain or set limits on their return on investment.” The first voter test is the New Jersey’s governor’s race, where Rep. Mikie Sherrill, a Democrat, promised to declare a state of emergency and freeze electric rates when she takes office. New Jersey utilities don’t control the price of generated power — they make their money building and maintaining poles and wires — and even a Democratic ally like term-limited Gov. Phil Murphy isn’t sure how Sherrill can follow through on that core campaign pledge. But Sherrill’s push is indicative of the broader political backlash that threatens utilities’ steady profits. In Indiana, Republican Gov. Mike Braun tapped a longtime consumer advocate to evaluate utility profits and has already recommended a reduction in rates. New York Democratic Gov. Kathy Hochul has sparred with Con Edison over proposed rate increases. And lawmakers from California to Florida are introducing measures to limit companies’ return on equity — a key financial metric that feeds into the dividends paid to investors. There’s also a looming supply problem: Amid partisan rancor, energy companies are being told to control costs and create new power supplies while being given conflicting signals about whether the new power should come from renewable energy or fossil fuels. Take PJM Interconnection, which runs the energy market for 13 states on the East Coast and in parts of the Midwest. That market — which includes the “world’s data center capital” in Northern Virginia — faces serious supply-demand problems that are driving up prices. An anticipated surge in electric vehicle usage and semiconductor manufacturing is also expected to boost future demand. Building new natural gas-fired power plants, the solution preferred by many Republicans, could take years. And clean energy projects favored by Democrats are hitting major snags in the Trump 2.0 era. Wholesale power supply prices are ballooning in PJM. A coalition of governors, including Murphy, Pennsylvania Democrat Josh Shapiro and Virginia Republican Glenn Youngkin, have delivered an ultimatum to PJM to bring down costs, but it takes time to build any kind of new power plants, and industry experts believe threats to leave the marketplace will go unfulfilled. Which brings us back to the utilities: A key part of utilities’ strategy is to keep their heads down and say they feel customers’ pain. Even before Sherrill’s rate freeze threat, the top lobbyist for New Jersey’s largest utility, PSEG, said the company was “very wary of becoming political players in a policy solution debate.” But as long as utility bills continue to rise, elected officials will feel heat from voters to bring down energy bills. And that could lead to meaningful policy shifts that could diminish profits and limit utilities’ investments in infrastructure to make their networks cleaner and more efficient. It’s Friday — Welcome to another edition of Capital Risk. The Garden State holds a very special place in our hearts here at Morning Money, and no one knows Jersey (and infrastructure) better than Ry Rivard. Send tips on anything energy or infra related to Ry at [e-mail]. And you can reach Sam at [e-mail] and Victoria at [e-mail] with all your econ policy thoughts, personnel moves or general insights. DRIVING THE DAY Federal Reserve Vice Chair Philip Jefferson speaks on the U.S. economic outlook at the Drexel Economic Forum at 1:40 p.m … Shutting down the shutdown The government shutdown could drag on for a while, which will delay key economic indicators and put a drag on growth while it lasts. Senate Majority Leader John Thune laid out one potential route to a deal in an interview with our Jordain Carney: getting eight to 10 Democrats to vote for the House-passed funding bill in exchange for assurances that there will be negotiations about health insurance subsidies after the government reopens. Will it work? MM caught up with Mike DeBonis, senior Congress editor at POLITICO, to ask about what’s next. The most likely path to reopening is through Senate gangs, or as DeBonis described them: “small bipartisan groups that come together on an ad hoc basis to deal with particular issues.” “That’s probably going to be the way out of this, just because the leadership-level talks are so fraught with internal politics of the parties,” he said. “Chuck Schumer cannot be seen, for various reasons, to be trying to cut a deal to end this thing with John Thune right now, or at least a deal that’s along the lines of what Thune is proposing. So it’s going to come down to the sort of back-channel talks to figure out a solution.” His bet on how long it lasts? “We’ve already blown past the deadline, so I don’t think that there’s going to be anything forcing action immediately,” DeBonis said. “Let’s say that something comes together. You’re looking at middle to end of next week before it actually comes to fruition. And that’s my best guess. Like, in a best-case scenario, you’re looking at probably a Thursday end to the shutdown, if for no other reason than senators love getting out of town for Friday. So that’s my educated guess. “I should caveat this: if it becomes clear that [the Thune framework] is not happening, then we’re in it for who knows how long. It could be several more weeks.” Macro Talking Points Investments in artificial intelligence have been a major driver of economic growth this year. Economist Jason Furman said the economy’s recent expansion could be closer to nil if not for tech spending. And given the degree to which CEOs have leaned into narratives that AI has made their companies leaner and more profitable, it’s natural that investors would buy up shares in hardware and computing behemoths that are facilitating the industry’s growth. The Wall Street firms financing AI’s growth in the U.S. aren’t getting the same love. “The companies that have put the most into AI capex — if they’re outside of tech — are not being rewarded anymore,” said Brij Khurana, a fixed-income portfolio manager at Wellington Management. “Private credit companies are the ones that need to fund this additional capex, because it’s not all coming from free cash flow.” Some of that may reflect wider concerns about where we are in the credit cycle, Khurana said. The combination of a weakening labor market and higher inflation has created uncertainty over the economic outlook. While warnings about AI-related investment bubbles are old hat at this point, it’s possible that investors are pricing publicly traded private credit firms to account for potential losses from defaults and delinquencies. Shares in private credit heavyweights like Ares Management and Blue Owl Capital, which have raised billions to support AI projects, began fading last month. An S&P index of publicly traded private equity firms has also trailed the market’s overall performance. The question now is how those firms will respond if financial conditions worsen. “The thing that’s holding up the U.S. economy is really AI capex, right now,” said Khurana. And the industry’s future ability to spend “is almost dependent on the funding markets being open to them.” Hassett File White House National Economic Adviser Kevin Hassett, who’s on the shortlist to be the next chair of the Federal Reserve, said in an interview with our Dasha Burns that central bank independence is important. But he argued that Fed board members have been “acting in a partisan way” and Trump is right to criticize them. So what does Fed independence mean to him? “An independent Fed is very transparent,” he said. “It tells you, this is what we think the economy is going to look like. They tell you why. They show you their models. They encourage debate about, like, what model is working best right now. They look at their errors and talk about why they made them, and do that in front of the public. So the wisdom of crowds can also affect the wisdom of the Fed. And so I think that the Fed is still kind of this thing that’s like the Wizard of Oz behind the curtain. And that, you know, is something I think in today’s age should change.” Not Jobs Day Today would have been the day we found out the government’s preliminary estimate for how many jobs were added in September. Instead, because of the shutdown, markets, businesses and the Fed are relying on private-sector data as they assess the economy’s health. The tally: Payroll firm ADP reported that private payroll employment fell by 32,000 last month. Outplacement firm Challenger, Gray & Christmas said U.S. employers announced 54,064 job cuts in September, 37 percent lower than announcements in August. And workforce intelligence firm Revelio Labs showed a 60,000 gain in jobs for September. Revelio estimated that the Bureau of Labor Statistics would have reported a net increase of 38,000 jobs for the month, just below the consensus estimate of 51,000, according to economists surveyed by the Wall Street Journal. We’ll likely have to wait until the shutdown ends to find out. Odds and Ends — The Trump administration is planning to roll out the first tranche of bailout payments for farmers in the coming weeks, likely using billions of dollars in funding from an internal USDA account, our Meredith Lee Hill reports. The utility sector, traditionally a defensive investment, is facing significant headwinds from mounting political and regulatory pressure that threaten its stable return profile. Electricity prices have risen at over double the rate of inflation, making utility bills a key political issue and placing companies in the crosshairs of both Republican and Democratic officials. This has led to specific actions that could cap profitability, including a proposed rate freeze in New Jersey, a recommended rate reduction in Indiana, and political sparring with Con Edison (ED) in New York over rate increases. The core risk for investors is a potential squeeze on the companies' return on equity (ROE), as policymakers seek to limit costs for consumers. This pressure is compounded by a supply-demand imbalance, particularly in the PJM Interconnection market, driven by new demand from data centers, EVs, and semiconductor manufacturing. Utilities are caught between the need to invest in new generation and conflicting signals on whether to pursue fossil fuels or renewables. This regulatory uncertainty directly impacts the earnings and dividend reliability of companies like PSEG (PEG). Separately, while AI capital expenditure is a primary driver of recent economic growth, the private credit firms financing this expansion, such as Ares Management (ARES) and Blue Owl Capital (OBDC), are experiencing investor skepticism, with their shares fading amid concerns over credit cycle risks and potential defaults.

Key Decisions for Investors

• Investors should re-evaluate the risk profile of utility holdings, as mounting political pressure to cap electricity prices directly threatens the sector's traditionally stable returns and dividend streams.
• Monitor state-level regulatory dockets and political rhetoric in key states like New Jersey, Indiana, and New York for early warnings of policy shifts that could negatively impact utility ROE and earnings.
• Exercise caution with private credit firms like ARES and OBDC that are heavily exposed to AI-related capital expenditure, as their recent underperformance signals market concerns about credit cycle risks despite the strong growth narrative.
• Anticipate heightened market uncertainty and reduced economic visibility as the government shutdown delays key data releases, forcing a reliance on potentially conflicting private-sector reports to gauge economic health.