Affordable Electricity Requires Smart Investment
Earlier this year, Pennsylvania Gov. Josh Shapiro declared that the Commonwealth’s regulated utility system was "broken." In doing so, he gave voice to a frustration shared by millions of Americans confronting higher electric bills. Rising electricity costs deserve serious scrutiny, and elected officials are right to ask difficult questions about whether utility regulation is serving consumers.
The U.S. is in the midst of the largest expansion of electricity demand in a generation. Artificial intelligence, advanced manufacturing, domestic semiconductor production, and the continued electrification of the economy are placing unprecedented demands on electric grids that spent much of the last two decades serving relatively flat demand.
That broader challenge is the focus of a timely new report from the Alliance for Innovation and Infrastructure, an Arlington, Virginia-based nonprofit. In Ratemaking for a Reliable Grid, the organization argues that "current debates over return on equity, cost allocation, and utility earnings cannot be reduced to slogans about profits or overcharging."
The report's warning is especially relevant as policymakers search for ways to modernize the nation's electric infrastructure while keeping electricity affordable. The challenge is not whether to invest in the grid, but how to finance those investments quickly enough to keep pace with the economy's growing demand for power.
Unfortunately, some of the loudest policy debates have focused on the wrong target. Across the country, lawmakers have proposed limiting the returns investor-owned utilities are allowed to earn, arguing that lower returns will reduce customer bills.
That is an appealing political message. Everyone wants affordable electricity. But reducing one component of utility financing does not eliminate the need to build new infrastructure. It simply changes how those investments are financed — and often makes them more expensive over time.
Investor-owned utilities occupy a unique place in the American economy. They are privately financed but publicly regulated. In every state, the officials who regulate them are either directly elected or appointed by elected leaders.
Regulators review major investments, determine whether costs are prudent, and establish rates designed to protect consumers while allowing utilities to attract the capital necessary to maintain reliable service. This public oversight has existed since 1907, when policymakers recognized that electricity was not an ordinary commodity. Hospitals, manufacturers, households, and now data centers all depend on reliable power every hour of every day.
Critics often portray utility returns on equity as guaranteed profits. They are not. State commissions authorize utilities to earn a return only if they operate efficiently, complete projects successfully, and manage costs effectively. Moreover, the authorized return applies only to the equity portion of a utility's capital structure — not to every dollar customers pay on their monthly bills. Most approved rate increases reflect the costs of infrastructure, fuel, labor, equipment, environmental compliance, and financing, not simply shareholder returns.
Recent data also challenge the narrative that regulators are allowing ever-increasing utility profits. Authorized returns on equity have generally declined over the past two decades, and regulators routinely approve returns below what utilities request.
America's electricity needs are changing rapidly. AI data centers, manufacturing expansion, aging infrastructure, and more frequent extreme weather all require significant investment. As the Alliance observes, "Effective investment in future infrastructure is crucial for energy costs to remain low and consistent."
Why? Investors compare opportunities across industries. If policymakers artificially suppress returns below levels that reflect investment risk, capital does not disappear — it flows elsewhere. Higher financing costs, weaker credit ratings, and delayed infrastructure projects ultimately increase costs for the very ratepayers policymakers seek to protect.
None of this means utilities should receive everything they request. Strong regulatory oversight remains essential. Public utility commissions should continue to scrutinize spending, reject imprudent investments, and ensure that large new customers, such as hyperscale data centers, bear the costs they impose on the grid rather than shifting them onto other consumers.
Washington often frames energy policy as a choice between affordability and investment. That is a false choice. The most affordable electric system over the long term is one that invests before reliability deteriorates, bottlenecks emerge, and supply shortages drive prices even higher.
America's economic competitiveness depends on reliable electricity. AI leadership, domestic manufacturing, national security, and economic growth all begin with electric grids capable of supporting them. The future of utility regulation, as it has been for more than a century, should be to protect consumers, not discourage prudent investment needed to keep the lights on in an increasingly electric economy.
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