By Jinjoo Lee

Utility bills are getting expensive and catching the attention of politicians. That means unpleasant surprises could be building up for utility investors.

Power prices have been rising faster than inflation for the past few years. Electricity prices in August were 31% higher than four years earlier, compared with about 19% for prices overall, according to data from the Labor Department.

Data centers' increasing power needs are partly to blame, but so are overdue investments to upgrade aging parts of the grid and costs associated with replacing old coal-fired power plants. Inflation for inputs from steel to labor all contribute to higher electricity bills.

These prices are bringing scrutiny on utilities' profits. Earlier this month, Indiana Gov. Mike Braun appointed a new commissioner to evaluate utilities' profits and cost-saving measures to help ratepayers, according to a press release. "I would also like to see the utilities' investors bear more of the cost of doing business," Braun was quoted as saying in the announcement. The average residential electric bill in the state jumped 17.5% this summer from a year earlier, or $28 a month, according to an analysis by consumer advocacy group Citizens Action Coalition.

In New Jersey, the two gubernatorial candidates have made rising electricity bills key talking points of their campaigns. Earlier this year, New York and Rhode Island introduced bills proposing to cap utilities' allowed return on equity at 4%. By comparison, electric utilities nationwide have historically on average been allowed to earn around 10%, according to data from S&P Global Commodity Insights.

Some companies classified as electric utilities in the S&P 500, such as Vistra and Constellation Energy, are owners of power plants in deregulated power markets. They stand to benefit more directly from rising electricity prices. But most other companies on that list are regulated utilities which, in return for being granted monopolies, are heavily regulated. Regulators get to decide how much utilities can spend on capital expenditures and the return they can earn on those investments.

The allowed return is supposed to reflect the cost of capital, or the return that investors require to buy utilities' stocks. Utilities tend to pay out a big chunk of their earnings on dividends rather than retaining it, which means they rely on equity raises to fund investments. Energy think tank Rocky Mountain Institute estimated that the return on equity accounts for 15% to 20% of customers' bills.

The return hurdle is a subjective measure, though. A return that seemed fair when customers' utility bills were rising slowly could start to look excessive when those bills suddenly skyrocket. Utility regulators tend to be elected or appointed by elected officials, so they aren't immune to political pressure.

Lillian Federico, research director at S&P Global Commodity Insights, said she hasn't seen this level of political focus on utility bills since the start of her career in the late 1980s. Conditions today mirror those times: Inflation is high, interest rates are elevated and utilities are making big investments on the grid, according to Federico.

Between 1990 and 2020, inflation was mild and electricity prices were rising at a moderate rate. Utilities' allowed returns kept widening compared with the benchmark risk-free rate, or 30-year Treasury bond yields. That spread peaked at about 8 percentage points in 2020, according to data from S&P Global Commodity Insights. It has since narrowed to about 5 percentage points, the lowest since 1999, because utilities' return on equity hasn't increased in tandem with the rise in rates.

The allowed return on equity is an easy political target. Yet Rodney Rebello, who co-manages the Virtus Reaves Utilities ETF, argues that many of the state proposals targeting utility profits could end up being more bark than bite. "Some proposals can take on a political tone, especially around election season, while others reflect real energy policy reform efforts," he said. Investors should still pay attention to it, though, because lowering the return on equity is a short-term lever that regulators can pull for bill relief, he said.

Despite the utility sector's reputation as a stable, boring sector, artificial intelligence's high demand for power has brought some enthusiasm to the sector. Electric utilities in the S&P 500 are up about 14% year to date, slightly outperforming the overall index. Their shares as a multiple of forward earnings are about 16% more expensive than the 20-year average.

Squabbles between utilities and consumer advocates aren't new, but they are likely to get more heated as electricity prices keep climbing. Between newly rising power demand and much-needed upgrades to the grid, power prices seem to have nowhere to go but up. The Edison Electric Institute estimates that its member companies are expected to invest more than $1 trillion in grid investments for the five years through 2029, an amount that took a decade to spend through 2024.

For utilities, higher pricing can invite more heat than profit. The more that AI pumps up demand, the more cautious utility investors need to be.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

September 25, 2025 05:30 ET (09:30 GMT)

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