Rate of return regulation revisited

Karl Dunkle Werner and Stephen Jarvis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Utility companies recover their capital costs through regulator-approved rates of return. Using a comprehensive database of utility rate cases, we find a significant premium for regulated returns on equity relative to several capital cost benchmarks. We show that firms decide strategically when to initiate new rate cases, such that regulated returns respond more quickly to increases in underlying capital cost benchmarks than to decreases. Higher regulated returns incentivize utilities to own more capital: a one percentage point rise in return on equity corresponds to an increase in capital assets of 2%–4%. Overall we find excess costs to U.S. consumers averaging $7 billion per year.

Keywords: utility; rate of return; regulation; electricity; natural gas; capital investment (search for similar items in EconPapers)
JEL-codes: L51 L94 L95 Q40 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2026-07-31
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Published in Journal of Public Economics, 31, July, 2026, 259. ISSN: 0047-2727

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:138375

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