A \u2018perverse\u2019 and \u2018broken\u2019 system rewards more spending on utility infrastructure<\/p>\n
PECO argues for rate hikes by pointing to investments that shore up aging infrastructure in order to maintain reliability, especially during extreme weather events like the winter storm that dumped more than 9 inches of snow, capped with ice, across the region at the end of January.<\/p>\n
\u201cRate cases also ensure we recover the costs of investments needed to maintain and strengthen the grid through just and reasonable energy delivery rates,\u201d Womer said in an email. \u201cPECO\u2019s energy delivery rates and return on equity (ROE) are approved by regulators and apply only to the delivery portion of the bill.\u201d<\/p>\n
But it\u2019s that type of approval by state regulators nationwide that has some calling for reform.<\/p>\n
\u201cThese ROEs are too high and it\u2019s just kind of screaming in everybody\u2019s face,\u201d Ellis said.<\/p>\n
As part of his role at the American Economic Liberties Project, Ellis now provides expert testimony in ratemaking cases advocating for affordability. Previously, he worked for ExxonMobile, McKinsey & Company and then for Sempra<\/a>, a large energy company where he managed the cost of capital for their infrastructure projects. He\u2019s also a managing partner with Market Clear<\/a>, a company that is working to create an alternative solution for what he calls \u201cutility profiteering.\u201d<\/p>\n Ellis said the modeling that results in specific return on equity for monopoly utilities is a \u201cperverse\u201d system because it rewards spending more money, which is provided by ratepayers.<\/p>\n During a rate case, utilities will tell regulators the amount needed to spend on new and existing infrastructure and point to safety issues and reliability, he said. But determining what is actually required for safety is difficult. While Ellis did not participate as an expert in the 2024 PECO rate case, he said regulators, in general, do not ask enough questions to determine how much of a profit should be made from these upgrades.<\/p>\n \u201cIt\u2019s supposed to be the actual cost of capital. Like, what is the profit that [the company] would obtain if they were subject to competition?\u201d Ellis said. \u201cThat\u2019s the underlying principle going back 100 years. But for whatever reason, regulators set the profit much higher than the actual market-based cost of capital.\u201d<\/p>\n Ellis said the opaque nature of these rate cases makes it hard for the public to follow. Additionally, he said regulators are easily confused by these complex cases because they lack expertise.<\/p>\n \u201cSo when a utility comes in and says, \u2018I need to spend X amount of dollars for reliability or safety,\u2019 it\u2019s very hard for a regulator to say, \u2018No, you\u2019re overspending on safety.\u2019 So you just have this kind of broken system,\u201d Ellis said. \u201cAnd these experts that [utility companies] hire have developed this whole parallel universe. I call it utility land finance.\u201d Ellis explained that a company that faces market competition does not have an incentive to spend more, but rather figure out how to spend less to make a profit.<\/p>\n He added that regardless of whether a settled case agrees to a specific return on equity for shareholders, the company knows, in their own calculations, an ROE.<\/p>\n