Rate of Return Equals Cost of Capital: A Simple, Fair Formula to Stop Investor-Owned Utilities From Overcharging the Public

Written by Mark Ellis

Published January 2025 by American Economic Liberties Project

The American utility market is based on a social contract. The government sanctions private, for profit monopolies to provide approximately 70% of electricity and 95% of natural gas deliveries in the United States.1 In return, these private monopolies, called investor-owned utilities (IOUs), agree to provide universal service and to be subject to cost-of-service regulation (COSR) of their customer rates, usually by state utility commissions. The other 30% of electricity and 5% of gas are provided by publicly or mutually owned utilities.

IOUs are granted regional franchises not subject to competition under the rationale that they are “natural monopolies”: their service can be most efficiently provided by a single entity.2 In principle, utility rates must be “just and reasonable”: sufficient to recover only the actual and prudent costs incurred in providing service to their captive customers.