Moves to rein in obscene utility profits picks up steam across the country - and here in DC
*Photo of the Pennsylvania Capitol (Photo by Peter Hall/Pennsylvania Capital-Star)
Many people sense they’re getting screwed over by their utility company because of corporate greed, but most don’t know that their utility’s profits are literally baked into their bills by regulator approval. Return on equity (ROE), sometimes called guaranteed shareholder profit (or returns), is a feature for every for-profit utility like Pepco, PG&E, and Duke Energy (to name a few). In DC, Pepco’s shareholder profit bounces between 8-10% depending on the year; utilities in other states can get even higher, further burdening residents.
ROE is a reward to investors for putting up money for capital (infrastructure) improvements for the utility, like upgrades to substations and powerlines. The ROE is pitched by the utility and then approved by the regulating agency (the Public Service Commission in DC), which determines what percentage utility investors receive from customer bills after a rate hike.
The problem? Current ROEs are massively inflated, allowing investors to reap in bloated profits on a low-risk investment. Lawmakers in the Dem-controlled Pennsylvania state house recognized this and set to decrease utility costs for residents by right-sizing private utility profits. Aiming for a reasonable return, the bill would establish the default ROE at “the 10-year U.S. Treasury bond yield plus two percentage points.” This baseline places utility investments back in reality while simultaneously protecting customers and rewarding shareholders.
Janeese Lewis George argued for something similar in DC during the mayoral primary, placing Washington Gas and Pepco’s inflated profits in the spotlight. In an op-ed for the 51st News, Lewis George aims to “right-size Pepco’s profits,” by shifting money that would have gone to investors and instead using it to lower overall bills. In essence, Lewis George is targeting the unfair ROE system where regular customers take on the financial risk of increasingly high bills so that private investors can reap outsized profits.
Of course this conversation of “reasonable return” is tied up in the fact very few people believe that essential public services (like our grid, healthcare, and so on) should be run for profit. As the quality of our necessities continues to decline while prices only increase, it’s become increasingly clear that the corporate-dominated model is in opposition to public benefit.
The obsession with shareholder profit permeates the entire business model, ensuring that short-term gains will always supersede the needs of the community, which simply wants reliable, affordable access to electricity. As corporations like Pepco continue to levy rate hikes on DC and are rewarded by massive ROE baked into bills, our utility model will go the way of housing and healthcare: a full-blown crisis.
Right-sizing utility profits is the proper thing to do immediately; that money should not be rewarded to shareholders for a low-risk investment. Instead, it should stay in the community or be reinvested back into the grid. But overall, this is a conversation about profiting off necessities: who our grid should serve, who should be the primary benefactors, and how government can step up to the plate to make our lives easier.