Utilities earn excess profits at ratepayers' expense. Competitive markets can fix that.

$65B+
Estimated annual excess returns earned by U.S. utilities above true market cost
$500
Estimated annual savings per household if returns were set by competitive auction
2.4×
Average price-to-book ratio of U.S. utility holding companies — market evidence that authorized ROE consistently exceeds the true cost of equity

For decades, utility regulatory commissions have authorized returns on equity well above the true market cost, inflating customer rates and insulating utilities from the discipline that markets impose in every other capital-intensive industry.

MarketClear works with regulators, policymakers, and industry stakeholders to evaluate a straightforward alternative: let competitive auctions determine the return that equity investors actually require, rather than asking commissions to estimate it. This approach produces a transparent, market-based answer to one of the most contested questions in utility regulation.

We provide research, analysis, model legislation, and implementation guidance to support jurisdictions considering this reform. The case is not complicated: when the return on equity is set by the market rather than by regulatory proceeding, customers pay less, and the billions in excess returns that currently flow from ratepayers to utility shareholders begin to return to the households and businesses that paid them.

View Model Legislation

Team & Advisors

Team
Mark Ellis
Mark Ellis
Research Director
Pioneered the competitive direct equity model through expert witness work in utility regulatory proceedings. Over 30 years in energy strategy and finance, including 15 years as Chief of Corporate Strategy and Chief Economist at Sempra. Previously at McKinsey, ExxonMobil, and Southern California Edison. MS, MIT Technology and Policy Program; SB magna cum laude, Harvard College.

[email protected]
(619) 507-8892
Joel Hornstein
Joel Hornstein
Executive Director
Career focused on building marketplaces for services previously obtained bilaterally — including ApplePie Capital, AutoFi, GLG, and OnDeck Capital. Most recently served as CEO of Structural Solutions LLC, where he invested in highly differentiated strategies across multiple sectors. Formerly Citigroup's first Managing Director of Capital Allocation. Earlier career in private equity (Fremont Group), consulting (McKinsey), and investment banking (Goldman Sachs). JD, Yale Law School; AB magna cum laude, Harvard College.

[email protected]
(917) 836-0339
Caleb Nicotri
Caleb Nicotri
Associate
Joined MarketClear after spending his first two years as an associate with Structural Solutions LLC (led by Principal Joel Hornstein), where the team focused on addressing market inefficiencies across several investment sectors. BA in Economics with distinction, University of North Carolina at Chapel Hill.

[email protected]
(985) 400-8765
Advisors
Jeff Ackermann
Jeff Ackermann
Advisor
Former Chair of the Colorado Public Utilities Commission (2017–2021), where he presided over major clean energy developments including accelerated coal retirement, grid modernization, and transportation electrification. Also served as Chair of NARUC's Energy Resources and the Environment Committee (2019–2020). Prior to the Commission, served as Director of the Colorado Energy Office in the Hickenlooper Administration. MNM, Regis University; BA in Environmental Economic Policy, Albion College.
Michael Bloomberg
Michael Bloomberg
Advisor
Executive Director of The Future of Heat Initiative, supporting regulators and policymakers on the energy transition. Previously founded Groundwork Data, focused on research and technology services for regulators. Earlier served as chief of staff to the mayor of Holyoke, MA, and as a professional at Bridgewater Associates. MBA, Cornell Tech; BA, UMass Amherst.
Kent Chandler
Kent Chandler
Advisor
Senior Fellow in Energy and Environmental Policy at the R Street Institute. Former Executive Director and Chair of the Kentucky Public Service Commission, and former Assistant Attorney General advocating for consumers before state and federal agencies. Leadership roles at NARUC and NERC's Member Representatives Committee. JD, Northern Kentucky University; BS in Finance, Murray State University.
Stephen Fischmann
Stephen Fischmann
Advisor
Former Chair of the New Mexico Public Regulation Commission. Co-founder of the Quality Growth Alliance and former Chair of the Southwest Energy Alliance. Served in the New Mexico State Senate advancing consumer protection and responsible energy regulation. BA and MBA, UCLA.
Lynne Kiesling
Lynne Kiesling
Advisor
Director of the Northwestern University Institute for Regulatory Law & Economics. Economics faculty at Northwestern since 2000, researching regulation, market design, and electricity industry innovation. Faculty fellow at the Paula M. Trienens Institute for Energy and Sustainability. Member, US DOE Electricity Advisory Committee. Senior fellow at the Abundance Institute and AEI. PhD in Economics, Northwestern; BS cum laude, Miami University.
Joshua Macey
Joshua Macey
Advisor
Professor of Law at Yale Law School, where he teaches and writes about energy law, environmental law, bankruptcy, and financial regulation. His recent work focuses on electric grid reliability and the clean energy transition. Three-time recipient of the Morrison Prize for most impactful sustainability-related legal academic paper in North America. Previously Assistant Professor at the University of Chicago Law School and Visiting Assistant Professor at Cornell Law School. Earlier worked at Morgan Stanley and clerked for Judge J. Harvie Wilkinson III, U.S. Court of Appeals for the Fourth Circuit. Co-author of a leading energy law casebook. B.A., Yale College; M.Sc., London School of Economics; J.D., Yale Law School.
James Van Nostrand
James Van Nostrand
Advisor
Director of the West Virginia University Center for Energy and Sustainable Development and Professor at WVU College of Law since 2011. Most recently served as Chair of the Massachusetts Department of Public Utilities until November 2025. Earlier career as a partner at Perkins Coie representing leading utilities in retail rate proceedings, and as Assistant to the Chairman at the New York Public Service Commission. LLM in Environmental Law, Pace University; MA in Economics, SUNY Albany; JD with High Honors, University of Iowa; BA with Highest Honors in Economics, University of Northern Iowa.
Jon Wellinghoff
Jon Wellinghoff
Advisor
Former Chairman of the Federal Energy Regulatory Commission (FERC, 2009–2013), the U.S. agency regulating interstate transmission of electricity, natural gas, and oil. Earlier Nevada career included private energy law practice, authoring the state's Renewable Portfolio Standard, and serving as Nevada's first Consumer Advocate for public utility customers. JD, Antioch School of Law; BS in Mathematics, University of Nevada-Reno.

Resources

Legislative drafts and explainers on competitive direct equity in utilities

Legislative & Policy
Explainers & White Papers
Third Party Research

Frequently Asked Questions

Common questions about competitive utility equity and MarketClear's model

Download the FAQ — a printable PDF version for sharing with stakeholders
Competitive Direct Equity refers to the process in which equity stakes in regulated utilities are priced through a transparent, market-based auction — rather than through regulatory commissions setting an authorized return on equity (ROE) that may deviate significantly from the true market cost of capital. MarketClear aims to introduce this competitive mechanism for the first time into an industry that has historically operated without it.
The relevant comparison is not the headline allowed ROE, but the return investors actually earn on the price they pay. In today's market, utility holding company equities typically trade at significant premiums to book value, frequently above 2.0x. Investors buying at those levels are not earning the stated allowed return on equity; their effective return is much lower, often in the mid-single digits.

A simple example illustrates the point: a utility earning a 10% allowed ROE on $100 of book equity generates $10 of earnings. A public market investor who buys the stock at 2.0x book pays $200 but still only receives $10 — an actual return of 5%. Under Competitive Direct Equity, an investor buys directly into the operating company at $100 (book value). Even if the allowed ROE is lower, say 6%, earnings on $100 equal $6 — an actual return of 6%.

In other words, a lower ROE on a fair entry price can produce the same or better realized return than a higher ROE embedded in a stock trading at a large premium.
This approach is better than the status quo, but it kicks the can down the road. The core problem is not that regulators lack a codified process; it is that any process requiring regulators to estimate what markets would produce is vulnerable to the same manipulation and capture that has distorted ROE determinations for decades. FERC is the cautionary tale: it has a codified methodology, revised it extensively, and still produces results that bear little relationship to what investors actually require. Codifying a flawed process does not fix it; it just makes it harder to challenge.

The principle that "regulation is a surrogate for competition" reflects a recognition that regulation is a necessary evil, not a normative good. The goal is not to build the best possible regulatory process for estimating the cost of equity; it is to replace that estimation with actual market evidence wherever possible. Any codified calculation, however well-designed, still asks a commission to guess what a competitive market would have produced. An auction does not guess; it asks the market directly.
Municipalization is a legitimate policy option in principle. In practice, it is an extraordinarily expensive and legally complex undertaking. Governments would need to purchase utilities at fair market value, which at current price-to-book ratios of ~2.3x reflects exactly the inflated profits that municipalization efforts seek to address. Customers would, in effect, pay a premium to buy back the very overcharges they are trying to eliminate.

For those who do want public ownership, Competitive Direct Equity actually facilitates municipalization rather than foreclosing it. CDE allows a public buyer to leg their way in — starting with a minority stake that earns a good return, building familiarity with the business as an investor, and potentially gaining board representation and influence over strategy over time. In many cases, that combination of changed incentives and partial ownership may achieve the oversight and accountability that municipalization was meant to deliver, without full acquisition ever being necessary. And given how rapidly utilities are growing their equity bases, combined with the high rate of capital turnover under CDE, it is entirely possible for a public owner to achieve majority control within a decade, without ever paying a takeover premium.
Better grid planning, investment, and utilization could produce real customer savings — but this is inseparable from the rate of return issue. Utilities are enthusiastic advocates for transmission expansion not because it lowers bills, but because it puts more capital in the ground. Every dollar of new transmission investment earns the same inflated return as every other dollar in rate base. Better grid investment is not a solution to over-earning; it is an opportunity to do more of it. Any savings from improved utilization would be a one-time benefit; the return on the expanded capital base is recovered from customers year after year.

ROE reform does not preclude better planning and operations. If anything, as the perverse incentives decline, operational improvements become relatively more attractive. CDE also points toward a better framework for executive compensation — under CDE, the auction spread between authorized ROE and Treasury rates becomes a natural performance metric, aligning executive incentives with the interests of customers rather than against them.
The opposite is true. Excessive ROEs create a "capital bias" — utilities are incentivized to invest as much as possible, because every dollar of investment earns roughly two dollars in stock market value. The result is capital spending per kWh delivered that is more than 2.5 times higher today than 25 years ago. Customers pay for all of it.

Lowering ROE doesn't reduce investment; it redirects the incentive toward investment that actually serves customers rather than investment pursued for its own sake. Bringing ROEs into line with the cost of capital would enable every dollar of utility revenue collected for capital investment to go approximately 25% further, meaning customers could support meaningfully more investment at the same rate level.
Capital bias exists because every dollar of equity invested into rate base earns an above-market return, which the market then values at roughly 2.3x. This creates a powerful incentive to grow the equity base as fast as possible, regardless of whether the investment serves customers.

CDE addresses this at the root. When a third-party investor provides equity capital at or near the true cost of capital — say 6% rather than the currently authorized 10% — two things happen. First, the regulator has direct market evidence of what investors actually require, making it harder to justify the inflated ROE. Second, as ROE converges toward the cost of capital, the market-to-book ratio declines toward 1.0x. At that point, investing an additional dollar in rate base creates roughly one dollar of value, not two. Investment must stand on its own merits, not on the multiplier effect of an above-market return.

Under CDE, income is fully distributed rather than reinvested at the holdco's discretion, and each new tranche of capital investment is subject to its own competitive determination of fair return. The incentive to invest for investment's sake is eliminated at the source.
This question usually reflects a confusion between ROE and profit margin. A utility's profit margin — net income as a share of revenue — is typically around 20–25% when grossed up for income taxes, which are passed through to customers. ROE is different: it's net income as a percentage of the equity book value on which that income is earned. The two are not the same number and shouldn't be compared directly.

There is also a tax dimension. Utilities collect from customers the state and federal income taxes owed on their profits, at a combined rate of approximately 26%. So the customer cost of a dollar of excess ROE is actually $1 / (1 − 26%) = $1.35. The gross-up matters when sizing the true savings opportunity.

At current market-to-book ratios of roughly 2.3x, the gap between what utilities earn and what investors actually require translates to approximately $65 billion in excess customer costs annually — roughly $500 per US household per year. That's excess profit above a fair return, for which customers receive nothing in exchange.
Data centers are a double-edged sword. On one hand, they represent a significant new source of electricity demand, which spreads fixed system costs over more kWh and could in principle moderate per-unit rates for other customers. On the other hand, they typically negotiate confidential custom rates, effectively opting out of the standard rate structure and, with it, out of the burden of excessive ROEs. They have little incentive to advocate for systemic reform, since they've already insulated themselves from the problem.

More importantly, the surge in data center demand is being used to justify massive capital investment programs, all of which earn the same inflated return as every other dollar in rate base. Unless ROEs are corrected first, the energy transition and AI buildout will simply be another occasion to extract above-market returns from captive customers at larger scale.
Utilities and their advocates sometimes argue that elevated price-to-book ratios reflect factors other than excess ROEs, such as growth expectations, scarcity value, or the defensive characteristics of utility stocks. These explanations don't hold up under scrutiny.

The fundamental finance relationship is clear: a firm whose return on equity equals its cost of equity will trade at book value. A firm earning above its cost of capital will trade above book value, with the premium representing the present value of future above-market profits extracted from customers. This was articulated by economist Alfred Kahn fifty years ago and has been confirmed by academic researchers at Carnegie Mellon, UC Berkeley, and Columbia Law School.

Growth alone cannot explain a sustained P/B above 1.0, because growth only creates value when the return on that growth exceeds the cost of capital. Defensive characteristics explain why utilities' cost of equity is lower than the market average, not why their authorized returns should be higher. The market-to-book ratio of approximately 2.3x, sustained for over a decade, is most parsimoniously explained by exactly what the theory predicts: regulators have been authorizing returns roughly twice what investors actually require.
The better question is: given the incentives and institutional dynamics at play, how could they be right? Utilities fund their rate case costs through customer rates, maintain permanent regulatory affairs staff, retain the same small handful of expert witnesses across dozens of proceedings, and have spent over a billion dollars influencing politicians, academics, and consultants. Their opponents operate on fixed public budgets or are non-profits, face frequent staff turnover, and often rely on experts trained by utility-funded organizations using utility-approved methodologies.

The Averch-Johnson effect — the tendency of rate-of-return regulation to induce over-investment in capital — was identified as far back as 1962. Researchers at Carnegie Mellon concluded that what regulators say they're doing and what they actually do are different things. Columbia Law School found that authorized ROEs reflect political goals and regulatory capture more than finance theory. UC Berkeley reached similar conclusions in 2022. The pattern is consistent across states not because every regulator has made the same independent analytical error, but because they all operate within the same structurally tilted institutional environment.
Quite a bit. FERC already sets transmission ROEs, and has both the authority and precedent to strengthen its methodology. It has already banned two of the four models most commonly used in state proceedings, observing that they "defy financial logic." A FERC commissioner and federal lawmakers have already begun citing excess ROEs as a driver of rate increases, and there is bipartisan political pressure building.

FERC precedent has historically been influential in shaping state regulatory practice, as state commissions frequently look to FERC methodology for guidance on contested financial questions. None of this displaces state jurisdiction over distribution rates, but federal action can set a standard that raises the floor nationally and removes the circularity that currently allows flawed methodologies to persist state by state.
Performance-based ratemaking (PBR) and total expenditure (Totex) frameworks are designed to improve utility incentives, rewarding performance on customer service, conservation, and other public interest metrics. In principle, these are good ideas. In practice, they have largely failed because the financial incentive to invest dwarfs any reward or penalty regulators can practically impose for other behaviors. New York's experience is illustrative: utilities met performance targets in fewer than half of the measured categories across multiple years.

The core problem is that PBR operates within a system where the base return is already far above the cost of capital. Marginal performance incentives cannot compete with the financial distortion of earning 10% on an asset the market values at 2x. CDE addresses this directly by reducing the base return, which makes every other incentive relatively more powerful. CDE and PBR are complements, not substitutes — PBR can work as intended only once the outsized incentive to grow rate base has been neutralized.
The underlying cost structure is not the same across customer classes. Commercial and industrial customers often have different load profiles, higher utilization, and lower per-unit delivery costs than residential customers. Forcing rates to converge would move further away from cost causation, not toward it.

It is also self-defeating. If high-load customers are required to pay above their cost of service, they may reduce demand, self-generate, or relocate, undermining the very objective of spreading fixed system costs efficiently. And crucially, cross-subsidization does not eliminate excess returns; it simply reallocates who bears them. The overcharge to customers in the aggregate remains exactly the same.

ROE reform and rate equalization operate on entirely different levers. ROE reform reduces the total cost burden on all customers. If cross-subsidization made sense on policy grounds, it would be less harmful in a world where ROEs had already been corrected — but it makes no sense as a substitute.

Press

Research, commentary, and press coverage on utility ROE reform

Policy Adoption

Executive actions and legislation advancing utility ROE reform

Executive Action  ·  June 2026
Governor Meyer Calls for Resetting Delmarva's Profit Model
Delaware Governor Matt Meyer called on the Public Service Commission to reset Delmarva's profit model, explicitly asking it to consider whether a competitive determination is more appropriate than the utility's current guaranteed return of nearly 10%.
Download PDF
Executive Action  ·  April 2026
Governor Shapiro Letter to Pennsylvania Utility CEOs
Pennsylvania Governor Josh Shapiro sent a letter directly to the state's utility CEOs calling the regulated utility system "broken" and demanding a stop to excessive rate increases.
Download PDF
State Legislation
NY
Active  ·  2025–2026 Legislative Session
New York — Assembly Bill A11197 / Senate Bill S10424
The Fair Authorized Investment Returns Act — introduces competitive auctions to set utility equity returns, replacing the current regulatory estimation process and reducing excess costs borne by ratepayers.
PA
Active  ·  2025–2026 Legislative Session
Pennsylvania — House Bill 2224
Introduces competitive auctions to set utility equity returns, replacing the current regulatory estimation process and reducing excess costs borne by ratepayers. Introduced with 19 co-sponsors.
View on PA Legislature →

Additional Resources

Industry & Regulatory Response
Explainers
Regulatory Filings

The Statement

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Statement of Former Utility Commissioners Urging the Use of Competitive Equity Auctions to Determine Investor-Owned Utility Return on Equity

June 2026

We write as former utility commissioners to urge the use of competitive equity auctions, not adversarial litigation and administrative discretion, to determine the return on equity for investor-owned utilities.

Competitive equity auctions address a central weakness in modern cost-of-service regulation. Under current practice, the return on equity charged to customers is set through contested proceedings, expert testimony, and comparisons to returns awarded in other jurisdictions. That process is expensive, opaque, and circular. It leaves one of the most important components of customer rates to administrative judgment rather than market evidence. Investor-owned utilities are entitled to a fair opportunity to attract capital and earn a reasonable return. They are not entitled to returns above the level necessary to attract that capital.

We believe this reform would produce three important public benefits.

First, it would reduce rates immediately. Replacing today’s excessive authorized returns with a transparent, competitively determined return would lower the profit component embedded in customer bills. By design, competitive equity auctions satisfy the Hope requirement to balance the investor and consumer interests: investors won’t bid below a fair return, and competition ensures the rate is no higher.

Second, it would improve utility incentives. When authorized returns exceed the true cost of equity, every additional dollar of capital investment creates an opportunity to earn an above-market return, encouraging unnecessary or inefficient capital spending. A competitive equity auction would address this bias at its source. Existing investors would be paid the market-clearing return on capital they have already supplied, but future rate-base growth would no longer automatically become an opportunity to reinvest earnings at an administratively inflated ROE. Additional equity capital would have to compete for that growth at a market-clearing price.

Third, it would restore utility regulation to its original purpose. Public utility regulation was created as a surrogate for competition in industries where monopoly service was thought necessary. Where competitive markets can provide reliable price signals, regulators should use them. Commissions already rely on market evidence to determine the cost of utility debt: when a utility issues bonds, the market determines the yield, and regulators incorporate that cost into rates. There is no principled reason why equity capital should remain insulated from the same discipline.

In earlier eras, a market-based approach to utility equity may not have been practical. Capital markets were less liquid, less transparent, and less capable of pricing specialized instruments. That is no longer true. Today’s financial markets routinely price complex, long-duration, regulated, and infrastructure-linked assets. A properly designed competitive equity auction can produce fundamentally superior results to the current process of expert testimony and administrative deliberation, by revealing the minimum return investors actually require to supply capital to a regulated utility.

We believe that regulatory commissions have the authority to pursue competitive equity auctions within their existing ratemaking powers, and we encourage those who succeed us in these roles to do so. Legislation requiring adoption of competitive equity auctions would provide a stronger and more durable foundation for this reform.

This is a restoration of regulatory first principles. We respectfully urge your support.

Sincerely,

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