New Aii Report Finds Utility ROEs Have Trended Downward Over Two Decades, Challenging Claims That Returns Are Driving Electricity Bills

Aii’s report warns that proposed blunt caps on utility return on equity (ROE) and more formulaic ratemaking could weaken financing for grid investment and raise long-term customer costs. It notes that authorized ROE has risen in only 20 of 69 electric utility rate cases since 2020 (29%), and that ROE applies only to the equity portion of capital, with debt recovered separately. The report cautions that weaker credit metrics and reduced financing flexibility could slow or make costlier the infrastructure needed to maintain reliability as demand and data center loads grow.

Analysis

The near-term market read is less about the report itself and more about whether it signals a firmer regulatory posture against ROE compression. If policymakers back away from blunt caps, the biggest beneficiaries are capital-intensive regulated utilities with heavy 5-10 year capex plans and repeated rate cases, because even a 25-50 bps change in allowed equity returns can move permitted cash flow and funding flexibility meaningfully when debt markets are tight. That should support the higher-quality end of the utility spectrum and lower the perceived refinancing risk embedded in utility credit spreads.

The second-order winner is the data-center load chain: utilities that can push through large-load tariffs and dedicated interconnection terms should see less cross-subsidy risk, while hyperscalers lose some of the implicit subsidy they have enjoyed in permissive states. Conversely, states that lean into politicized ratemaking risk forcing utilities to delay grid investment, which is bad for reliability but can paradoxically be good for merchant power and backup generation vendors if customers self-supply more. The key distinction is between equity-allowed return and total capital recovery; markets often focus on ROE headlines while the real driver is whether commissions allow timely rate-base growth.

Contrarian take: this is probably not a blanket bullish signal for all utilities. The consensus may be missing that “pro-grid” rhetoric can still coexist with lower earned returns if commissions allow capex but disallow costs, and that customer pushback on affordability may intensify after summer bills show up. The thesis is falsified if one or two high-profile state orders meaningfully cut allowed ROE without offsetting constructive riders; that would likely widen utility credit spreads and compress valuation multiples over the next 1-3 months.

Key Decisions for Investors

• Watchlist: buy XLU on a 2-3% pullback only if upcoming state commission decisions avoid explicit ROE caps; use a 3-6 month horizon and target modest multiple expansion, not earnings upside.
• Relative value: long higher-quality regulated utilities with large rate-base growth (NEE, DUK, SO) vs short politically exposed utilities in cap-heavy jurisdictions; the trade works if allowed ROE dispersion widens over the next 1-2 quarters.
• Credit overlay: favor utility bonds / hybrids over lower-rated muni-like utility credits if commissions signal stability; the catalyst is tighter utility CDS, but cut the exposure if spreads widen 20-30 bps on adverse docket outcomes.
• Alert for load-growth winners: if large-load tariff reform progresses, consider long utilities with data-center exposure and disciplined tariff design; avoid names where load growth is likely to be subsidized by residential customers.