The former industry insider and amateur wrestler Mark Ellis is exposing the little-known factors that electricity bills and threaten the ene
Excerpt from this story from Inside Climate News:
On a walk near his house, with views of the ocean, Mark Ellis speaks with urgency about how the utility business—the industry that long employed him—is harming the public with unsustainable rate increases.
He keeps coming back to the same point: The complexity of utility regulation is obscuring a transfer of wealth from the general public to shareholders on a vast scale.
He’s far from the first person to say this. But he’s getting attention to a degree others haven’t, thanks to the clarity of his message and his status as a former utility insider. He’s in the early stages of becoming an activist.
Ellis’ adversaries should know what they’re up against. He is a financial analyst, with degrees from Harvard and MIT, and he is a wrestler, with experience on the mat as recently as two years ago, when he was competing in his age division in national tournaments.
“I don’t like bullies,” he said. “I feel like there’s a lot of bullying going on with utilities. People need to stand up to the bully.”
U.S. households have seen their electricity prices increase by an average of 25 percent from 2020 to 2024, which exceeds the rate of inflation, according to the Energy Information Administration.
When electricity is unaffordable, the transition away from fossil fuels becomes expensive to the point that it stretches feasibility; ideas such as electrifying home heating and using electricity to power vehicles make less sense in purely financial terms.
Ellis, 55, isn’t saying the increases should be zero. He’s saying that the growth has been supercharged by the failure of regulators who have allowed utilities to earn a guaranteed profit that is larger than he believes is appropriate.
How Utilities Make Money
Let’s consider a hypothetical utility whose costs are split 50-50 between day-to-day operations and investment in long-term infrastructure. (The specifics here are simplified to aid in explanation.)
A utility can recover 100 percent of its operational costs from customers through rates. This is a pass through of costs, covering salaries, maintenance, fuel and anything else that isn’t a hard asset.
So far, this utility hasn’t made any profit.
Ellis explains, scribbling on his paper, that a utility pays for infrastructure with a mix of debt and equity. The company recovers these costs from customers through equal payments over the lives of the assets, so a power plant with a 30-year lifespan would be paid for with annual installments of one-thirtieth of the total.
Debt can include any kind of borrowed money, and the company can recover interest costs from consumers. Equity is the money the utility raises by selling stock to the public.
The equity portion of this mix is where “return on equity” comes into play, and this is where the main problem lies, according to Ellis.
If a utility has used equity to pay, say, $10 billion to finance assets that it’s currently using, including new assets and ones that may go back decades, it can charge customers each year for a percentage of this value. This percentage, set by state regulators, is the return on equity—one of the most important numbers in utility finance.
If regulators authorize a return on equity of 10 percent, which is about the national average, the resulting charge for one year is $1 billion.
This is the utility’s profit.
It’s not transparent to ratepayers. There is no line item on bills for profit. It’s baked into the underlying charges.
A casual observer may surmise that a 10 percent return on equity is about 10 percent of a household’s bill, but it doesn’t work that way. The actual amount varies based on the value of a utility’s assets, among other factors. Most of the time, profit is 15 percent to 20 percent of the bill. The research and advocacy group RMI has found that profit is 16.7 percent of a typical utility bill.
The $1 billion in profit in his example is grossly excessive, Ellis believes.
