As watchdogs bite back, the US utility play enters a new era

State regulators have been knocking back utilities’ request for higher rates of return in a move that could change the investment case in this sector.

It seems not so long ago, in early 2022, we were writing about the opportunities US utilities provided for yield-hungry infrastructure investors, a theme that was only emphasised over the 12 months that followed as managers and investors searched for deals that could provide inflation pass-throughs.

Inflation is easing – 3.1 percent at the US’ latest count from November – although few consumers are feeling it in their pockets. Now, however, US regulators are clipping the wings of investor-owned utilities seeking higher returns on equity.

The latest came last week in New Mexico, where utility PNM Resources had requested from the state’s Public Regulation Commission a return on equity of 10.25 percent for 2024, above its current base rates of 9.57 percent. The New Mexico regulator was unimpressed, instead issuing a 9.26 percent return and ordered the company to return millions back to customers to penalise its investment in the 1.5GW Four Corners Generating Station coal-fired plant.

In November in Wisconsin, Wisconsin Power & Light was granted approval for an 8.4 percent rise on its return. That’s generous enough, but the Alliant Energy-owned subsidiary had been seeking a 14 percent rise until the regulator stepped in.

In Illinois, a host of decisions stopped utilities in their tracks. In November, the Illinois Commerce Commission approved a 9.44 percent rate of return to Ameren Illinois’ rate request for its natural gas delivery services, rejecting the company’s 10.3 percent request. That same day, the ICC approved return rates for gas delivery from People’s Gas and North Shore Gas 25 and 34 percent respectively lower than what was originally requested. In both cases, the ICC said “the gas system’s operations will not continue to exist in its current form” in the state’s clean energy future as a basis for its decision.

In December, the ICC returned to reject Ameren Illinois and ComEd’s integrated grid plans, finding that both companies failed to comply with several components of the state’s Climate and Equitable Jobs Act. “Illinois’ utilities are specifically required to consider affordability and cost-effectiveness so that customers are not unfairly asked to shoulder undue costs tied to the state’s energy transition,” said ICC chairman Doug Scott in a statement.

Similar cases have also been seen in Detroit and Connecticut and while different state laws will drive different dynamics, there are similar themes at play. Investors have seen the decarbonisation path as a reason to enter the US utilities space, but are now being faced with the realities of the huge investment in generation and transmission required to walk down that path.

Pat Vincent-Collawn, chief executive of the New Mexico-based PNM, expressed her disappointment in a statement following her regulator’s decision and said: “As we move forward it will require collaboration by stakeholders to achieve the clean energy transition while preserving the financial health of the utility.”

Some may think that even at the rejected and revised rates, the financial health of the utilities might still be satisfactory, but his point remains pertinent. The development is needed and it needs to be paid for. By whom will remain an open question for now, although perhaps an investor looking for yield might not be the right one for this field of play.