How an obscure advisory board lets utilities steal $50b/year from ratepayers
The Society of Utility and Regulatory Financial Analysts is a hell of a henhouse fox.
I’m on a 20+ city book tour for my new novel Picks and Shovels. Catch me in NYC on WEDNESDAY (Feb 26) with JOHN HODGMAN and at PENN STATE on THURSDAY (Feb 27). More tour dates here. Mail-order signed copies from LA’s Diesel Books.
Two figures to ponder.
First: if your local power company is privately owned, you’ve seen energy rate hikes at 49% above inflation over the last three years.
Second: if your local power company is publicly owned, you’ve seen energy rates go up at 44% below inflation over the same period.
Power is that much-theorized economic marvel: a “natural monopoly.” Once someone has gone to the trouble of bringing a power wire to your house, it’s almost impossible to convince anyone else to invest in bringing a competing wire to your electrical service mast. For this reason, most people in the world get their energy from a publicly owned utility, and the rates reflect social priorities as well as cost-recovery. For example, basic power to run lights and a refrigerator might be steeply discounted, while energy-gobbling McMansions pay a substantial premium for the extra power to heat and cool their ostentatious lawyer-foyers and “great rooms.”
But in America, we believe in the miracle of the market, even where no market could possibly exist because of natural monopolies. That’s why about 70% of Americans get their power from shareholder-owned companies, whose managers’ prime directive is extracting profit, not serving their communities. To check this impulse, these private utilities are overseen by various flavors of public bodies, usually called Public Utility Commissions (PUCs).
For 40 years, PUCs have limited private utilities to a “rate of return” based on a “just and reasonable profit.” They always gamed this to make it higher than was fair, but in recent years, the “experts” who advise PUCs on rate-setting have been boiled down to a tiny number of economists, who have discovered that the true “just and reasonable profit” is much higher than it’s ever been considered.
Mark Ellis worked for one of those profit-hiking “experts,” but he’s turned whistleblower. On paper, Ellis looks like the enemy: former chief economist at Sempra Energy, an ex-Exxonmobile analyst, a retired McKinsey Consultant, and a Socal Edison engineer. But Ellis couldn’t stomach the corruption, and he went public, publishing a report for the American Economic Liberties Project called “Rate of Return Equals Cost of Capital” that lays out the con in stark detail:
https://www.economicliberties.us/wp-content/uploads/2025/01/20250102-aelp-ror-v5.pdf
I first encountered Ellis last week when he was interviewed on Matt Stoller and David Dayen’s excellent Organized Money podcast, where he memorably referred to these utilities as “pocket-picking machines”:
https://www.organizedmoney.fm/p/the-pocket-picking-machine
Dayen followed this up with a great summary in The American Prospect (where he is editor-in-chief):
https://prospect.org/environment/2025-02-21-secret-society-raising-your-electricity-bills/
At the center of the scam is a professional association called the Society of Utility and Regulatory Financial Analysts (SURFA). The experts in SURFA are dominated by just four consulting companies, who provide 90% of the testimony for rate-setting exercises. Just two people account for half of that input.
In order to calculate the “just and reasonable profit,” these experts make use of economic models. Even in normal economics, these models are the source of infinite mischief and suffering, built on assumptions that legitimize the most abusive conduct:
https://pluralistic.net/2023/04/03/all-models-are-wrong/#some-are-useful
But even by the low standards of normal economic models, the utility models are really bad. They rely on unique “risk premium” and “expected earnings” calculations that no one else in finance will touch. As Dayen explains, these models are “perfectly circular.”
This might be a bit confusing, but only because it’s one of those scams that you assume you must have misunderstood because it’s so, well, scammy. In the “expected earnings” analysis, the “just and reasonable profit” a utility is allowed to build into its rates is defined as “the amount of money it would like to make.” In other words, if a utility projects future revenues of $10 billion over the next ten years, that is its “expected earnings.” “Expected earnings” are treated as equivalent to “just and reasonable profits.” So under this model, whatever number the utility puts in its financial projections is the number that it’s allowed to take out of the pockets of ratepayers.
This is just as bad as it sounds. In 2022, the Federal Energy Regulatory Commission said that it “defied financial logic.” No duh — even SURFA’s own training manual says it “does not square well with economic theory.”
In the world of regulated utilities, this kind of mathing isn’t supposed to be possible. The PUC and its “consumer advocates” are supposed to listen to these outlandish tales and laugh the utility out of the room.
But it’s SURFA that trains the consumer advocates who work for the PUCs, the large energy customers, and community groups. These people — who are supposed to act as the adversaries of the companies that pay SURFA members to justify rate-hikes — are indoctrinated by SURFA to treat its absurd models as accepted economic gospel. SURFA has co-opted its opposition, transformed it into a botnet that parrots its own talking-points.
Because of this, the private power companies that serve 70% of US households made an extra $50b last year, about $300 per household. What’s more, because the excess profits available to companies that simply bamboozle their regulators are so massive, they swamp all the other tools regulators use to attempt to improve the energy system. No incentive offered for conservation or efficiency can touch the gigantic sums energy companies can make by ripping off ratepayers, so nearly all the incentive programs approved by PUCs have been dead on arrival.
What’s more, utilities are allowed to fold the cost of hiring the experts who get them rate hikes onto the ratepayers. In other words, if a utility hires a $10,000,000 expert who successfully argues for a $1,000,000,000 rate-increase, they get to recoup the ten mil they spent securing the right to rip you off for a billion dollars on top of that cool bill.
We often talk about regulatory capture in the abstract, but this is as concrete as it can be. Ellis’s report makes a raft of highly specific, technical regulatory changes that states or cities could impose on their PUCs. These are shovel-ready ideas: if you find yourself contemplating a sky-high power bill, maybe you could call your state rep and read them aloud.
ISSN: 3066–764X
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