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NextEra's $67 billion takeover of Dominion shows the problem with utilities. We spend a lot, and get little in return. Why? Utility monopolies profit from gold-plating, waste and inefficiency.
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If there’s one obvious thing about this political moment, it’s that voters are furious about paying so much for electricity. In 2023, 70 million adults chose to forego food and medicine so they could afford their utility bills. Powerlines found dozens of significant rate hikes last year, as the price of electricity went up at one and a half times the rate of general inflation.
Voters have had enough, telling pollsters that electric utility prices are at crisis levels, and blaming excess profits for the problem.
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And policymakers, such as Pennsylvania Governor Josh Shapiro, are starting to talk about a revamp of the basic utility model.
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Investor-owned utilities, as well as some advocates for clean energy, disagree. They argue that the price hikes are necessary to address grid reliability, extreme weather, fuel price changes, the energy transition, old infrastructure, and so forth. The war in Iran is the latest argument for higher prices.
And there is some merit to that argument. Iran has raised costs, and someone has to pay them. But there is a problem with that argument as well. There are a variety of utility business models in America, and it turns out that publicly owned utilities are not raising prices nearly as quickly as investor-owned ones beholden to Wall Street. So something is going on with the specific Wall Street-driven business model.
Beyond that, there’s another more basic question. Investor-owned utilities, often consolidated into increasingly huge holding companies, have been hiking for years, which presumably should be bringing in a gusher of cash to fix the problems they observe with extreme weather and reliability. Yet we are constantly hearing that the U.S. doesn’t have a good electric grid, that we can’t keep up with demand, that China keeps expanding massively while we are stagnant.
If we’ve been paying so much more for so long, why do we still need more investment? Where’s all the f&$*#ing money going?
This discussion is now more important, because on Monday, NextEra, a Florida-based utility, announced the largest ever acquisition in the utility space, a $67 billion takeover of Dominion Energy. The companies are claiming the deal will lower electricity costs and speed up the deployment of infrastructure for data centers using renewable energy. But the real rationale for the deal is entirely about how we price utility services. And this deal, as I’ll get into, shows just how our regulatory scheme creates the incentive for utilities not only to overpay investors, but to waste money. Our money.
A few weeks ago, expert witness Mark Ellis posted the single most important chart that I’ve seen about utilities, and it answers the question of where all our money is going. The argument from utilities is that they need to charge higher prices, so they can do more investments. But what Ellis showed is that more financial investment is not resulting in more actual investment in the grid.
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Nearly all discourse in the utility space presumes the opposite. There’s a belief that more capital always means more electricity, that financial resources translate into actual resources. This assumption underpins a huge amount of advocacy around utilities, like climate groups seeking an energy transition or data center advocates saying we need more power. In fact, the rationale is backwards; investment is driving price hikes, not the other way around.
We can see this dynamic more clearly when we zoom out. Price hikes are more longstanding than we might want to admit. It you look at how electricity was priced over the last century, it looked a lot like a high-tech product, with constant innovation and lower costs for the first eighty years, followed by a period of political capture in the 1970s. The grid got better, even as prices came down. Then that dynamic reversed.
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This chart goes to 2002, but it’s gotten worse, especially since the deregulation of the sector by George W. Bush in 2005.
From the spending/investment side, there’s an argument that there’s a recent need to expand the grid, because of data centers. Or there’s a claim that supply chain snarls raised costs during the pandemic. But during the Obama administration, there was a big stimulus to spend more on the grid. And we have increased spending on the U.S. transmission system by five times over the past twenty years. Yet the utilities need more? What were they doing with these investments?
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Despite this massive spending, or perhaps because of it, the grid is unreliable now. Two weeks ago, the North American Electric Reliability Corporation (NERC), which is a very nerdy regulatory body that looks at the grid, issued a very serious Level 3 alert “focused on large load challenges.” Basically, data centers present huge concentrated loads on the grid, and may foster significant blackouts. If you look at the map, there’s a lot of high-risk, where demand is outstripping supply.
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And this situation isn’t new. NERC has been sounding the alarm on a mismatch of electricity demand and supply for years. Here’s a 2022 assessment, before the projections of blow-out data center demand. Blackouts have been a consistent problem across America for years, especially in states served by the Midcontinent Independent System Operator in the midwest and south.
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One obvious answer is that while utilities are putting a lot of cash into infrastructure, they aren’t actually spending it on the right things. For instance, it’s really cheap to generate power in some parts of the country, like Oklahoma, and expensive to generate power in other parts of the country that are heavy energy users, like Michigan. But those regions can’t ship power easily to one another. High-voltage transmission lines, basically a big set of high-tech extension cords, could connect these areas easily. Such investment is also a good deal, costing a fourth to build high-voltage lines as low-voltage ones.
Here’s a 2019 Wall Street Journal story on an entrepreneur named Michael Skelly who tried to build out a new energy system in the Obama era, when there was a big stimulus intended to re-architect the American economy after the Wall Street collapse.
Put it all on a big enough grid, one that could use the ample sunshine from the desert Southwest to keep Atlanta’s office towers cool, or the persistent wind in the Great Plains to run Midwestern factories, and you’d address the often-repeated critique of renewable energy: The sun isn’t always shining and the wind isn’t always blowing. On a big enough grid, that’s not an issue. There is wind somewhere and the clouds don’t cover the entire U.S.
But we never did build out these high-voltage interstate transmission lines, because of political opposition from local utilities and disinterest from the Obama administration. China, however, has done that, so it has cheap power now.
China built 80 times more high voltage transmission than the US in the second half of the 2010s. In the 2020s, China has completed more than 8,200 miles of ultra-high voltage lines while the U.S. has built only 375 miles. European utilities are rapidly increasing the minimum transfer capacity between countries to move power back and forth.
In fact, we are spending less on the high voltage efficient transmission than the less efficient low voltage transmission.
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So the U.S. isn’t spending on what we should spend on, but we are certainly spending. So back to the basic question - where’s all the f&$*#ing money going? In a 2024 report called Mind the Regulatory Gap, three analysts found where utilities are spending. And it’s on projects that are small and local, as opposed to interstate and necessary. For instance, there was a 26-fold increase in investment on these small projects, known as “supplementals,” from 2009-2023 in the mid-Atlantic region.
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I’m sure that’s not the only place they are wasting capital, but it shows the point. Still, why is there such waste? Well, there’s a lot of chatter in the utility space about planning, with various different levels of complexity that are mind-boggling, but the gist of it is simple. Utilities make money, even when they invest inefficiently. And there are incentives that push them to deploy capital to build things that aren’t necessary, or shouldn’t be a high priority.
Regulated electric and gas utilities are not like other businesses, they don’t profit by delivering low cost goods and selling at a markup for what customers will pay. In fact, every cent that a utility spends on operations, from the power lines to the Ozempic taken by employees bought on company health care, is reimbursed at cost by ratepayers, at a price set and overseen by government officials. Where they make their money is by deploying capital.
I described the situation in February of last year. Mostly, state public commission boards set prices, and they set those prices to let utilities earn a profit on their financing.
The basic idea is that a utility should be able to cover its costs, plus a reasonable return on the money it invested. There are normal costs, like employees, fuel, management, and so forth, which get passed along to customers.
But building a new power plant, transmission or distribution line, or pipeline, is handled slightly differently. When a utility builds something like this, they recover the cost over time, usually decades, with an extra charge to customers built into the rate. They also get to recover their “cost of capital,” which is to say, if a utility spends a million dollars on a new piece of equipment, they should not only get reimbursed for the million dollars, but also for the return they might otherwise have gotten for the million dollars if they had spent it on something else.
Utilities are supposed to borrow money at market rates and recover their cost of capital from customers by charging reasonable rates. But since they 1970s, they have demanded a much higher return on capital than the market charges them.
How much higher? The return on equity guaranteed to most investor-owned utilities is between 9-11%. Right now the best savings rate today on the site Nerdwallet, what you can get for putting your money in the bank, is 4.03%. So utilities get 5-7% percent more than anyone else for lending out their money.
Utility holding companies are essentially banks with a guaranteed return, borrowing money and then deploying it at a much higher rate. For instance, here’s an investor presentation from Exelon, with a list of allowed return on equity for its different subsidiaries, most of which are around 9.5%. (Holding companies that own subsidiaries in different states can also hide money from regulators, which makes these financing tricks easier.)
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This may sound outrageous, and it is. It’s why prices are so much higher than they should be. But it also distorts investment patterns. Investor-owned electric utilities want to maximize the amount of capital they deploy. They don’t care about being efficient with it, they don’t want to spend purely if it’s necessary, they don’t want to pay low prices for equipment, they don’t care if the grid is resilient, they just want to make sure they are deploying lots and lots and lots of capital so their regulators let them charge ratepayers costs that pay them a very high return on equity.
Do high-voltage interstate transmission lines offer as much profit? Nope. To build one of those projects, they often have to compete at the interstate level and undergo a layer of scrutiny or regional planning, neither of which they’re inclined to do.
As part of a basic arrangement going back to the early 20th century, investor-owned utilities get a guaranteed monopoly over a certain region, under the premise they have to offer universal service, invest in operations, and let state-level utility commissions set prices. But since they now get an excess return on equity for deploying capital, they do so, for local inefficient projects, while resisting more efficient attempts to move power around the country. In fact, many of those “supplemental” projects don’t even require the approval of local regulators.
And that’s just one possible area where these utilities are over-spending; they might be replacing poles or wires when it’s not necessary, they don’t negotiate aggressively on the price of equipment, and they have no incentive to hold down costs anywhere. They are truly paid to fritter away money, to gold-plate and waste. Some of that shows up in an excess profit margin, but most of it doesn’t. They are willing to waste $1000 to send an extra $60 to shareholders.
And with that, let’s get to the mega merger on deck. On Monday, NextEra announced the largest utility merger of all time, seeking to buy Dominion Energy for $120 billion. These are both giants, with pipelines, transmission projects, retail customers, and lots of subsidiaries across many different states.
The stated reason for the deal is data centers, but the real reason is NextEra wants to raise prices. They don’t say that directly, so I’ll unpack it for you. While both companies have a range of assets, the core of what they do is deliver electricity in regulated markets in four states. Most of Nextera’s revenue comes from its utility in Florida, called Florida Power and Light, whereas Dominion gets virtually of its profit from its regulated arms in Virginia, North Carolina, and South Carolina.
NextEra thinks Dominion isn’t deploying enough capital, and they think they can deploy more and raise prices. The numbers suggest as much. On May 1 of this year, Dominion said they project 5-7% earnings per share growth long-term. A few weeks later, upon announcing the deal, Nextera said they can squeeze out 9% earnings per share growth. There’s no way these numbers work unless Dominion deploys a lot more capital with higher prices.
Here’s a presentation from NextEra on what they think they can do with those same assets.
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There are many euphemisms in the merger documents that say this; here’s one bragging about the deal to investors, with me bolding the relevant part.
Anchored by a more than 80% regulated business mix, with approximately 11% regulatory capital employed growth across four fast-growing states with constructive regulatory environments.
They are bragging about how much regulatory capital they have, and the “constructive regulatory environments,” aka captured regulators. So there we go. Yeah, there are data centers involved, but the truth is NextEra thinks it can deploy more capital at higher prices.
There’s an easy solution here. If NextEra, or any utility, got a rate of return that matched what they borrowed in the markets, instead of regulators giving them too high a return, then they would no longer have the incentive to over-invest. America is actually really good at finance, and there is legislation to make this happen, that would just have utilities have to go to markets to finance investments, and then set the rate of return at exactly what they receive.
Ultimately, this problem is bigger than one merger, or even bigger than this one sector. The electric utility problem is similar to health care; hospitals are closing down, so are pharmacies, yet our premiums are skyrocketing. We have a lot of sticky-fingered middlemen in America. And this corruption shows up not as profits, but as waste. Sure, there’s some excess profits, utilities trade at about twice book value, which shows they are priced based on getting paid too much by customers. But it’s not just that we’re overpaying, it’s that our grid is getting worse. As in health care, the systems are degrading even as the financial resources we’re pouring into them grow.
So where’s all the f&@$ing money going?!? To Wall Street and waste. As with everything else in America, the important social resource created by our forebears used to be managed by engineers who focused on universal service and safety margins. Today it is run by financial engineers who prioritize returns on investment.
There are many elites who believe the narrative that we need more financial resources to power data centers and the climate transition and yada yada. But they are ignoring the bad incentives in the system. Even now, Dominion Energy “community relations specialists” are fanning out in Virginia to tell ratepayers how great this deal will be, and are calling in favors and promising money. Because of our regulatory system, the salaries of these people are 100% recouped in customer bills, which means Virginia residents are also paying the merger costs of a deal that will raise their electric bills.
The persuasion campaign could work on elites and certain parts of the environmental movement, who still buy into the “more investment” thesis. It won’t work on normal people. Most voters find it pretty annoying to have to deal with such nonsense as a giant set of financiers saying with a straight face “we’d like less money from our customers,” especially when they keep raising rates and enshittifying the grid.
The truth is, China gets a lot more bang for their buck. And we used to, as well. Until we stop encouraging utilities to waste our money, we will not only pay more, but we will soon begin regularly experiencing blackouts. And that’s why there’s a rebellion in America right now from normal people. We can all see it.
Thanks for reading!
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
cheers,
Matt Stoller
Here’s a response from a reader on the BIG piece on uniform rentals and the Cintas-Unifirst merger:
Matt,
Good Afternoon. Thanks for covering this. They’re crooks. We got involved with them at the beginning of our DME business for uniforms and carpet mats for the pharmacies. Stopped long ago.
One of the many tricks we caught them was their drivers would offer in house staff “free” items to try out. Think of air fresheners for bathroooms etc. Well then they start charging the rentals on the invoices for these free items. By the time that management finds out they have gotten many rental weeks. They must incentive the drivers with commissions on rentals so they push items like this, etc
They also at times would have front line staff sign documents like contracts with zero contact with somebody who actually has the authority to sign contracts for the business.
Best,
BL
And here’s a response from a reader on our piece on ambulances.
I am a proud Dealer of Ambulances waiting to try to retire after 33 years. This article is spot on and many Dealers like myself are hostages to price increases. I am embarrassed to look my friend and fellow EMT’s in the face and tell them that the $189,000 Ambulance I sold them in 2021 will require $277,000 just 4 years later. Manufacturers now have no patience. “As soon as we see your Wire Transfer Steve we can release it for transport”.
I can remember back in 1995-2005 when you could easily predict that the price of an ambulance would only increase $4500 per year on average. I also could get a build done in less than 4 months and often I did not have to pay for the Ambulance until my client paid me. The industry used to be family and I knew the owners as friends and family owners of the Manufacturer. Greed and consolidation have taken the joy out of supplying ambulances and many Dealers are mostly tired and want out. Now we are seeing a huge Consolidation of Dealers who need multiple States and multiple product lines in order to survive. You can find my Resume on Linked In, yes I am a certified Ambulance Geek and it has been an amazing ride.
Thanks for your research, awesome well researched and so timely !Montana's Premier Ambulance Dealership
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