Rate of Return for Fun and Profit
Steve Huntoon is the principal of Energy Counsel, LLP. Mr. Huntoon is a former President of the Energy Bar Association, and for over 30 years of practice in energy regulatory law he has advised and represented such companies and institutions as Dynegy, PECO Energy (now part of Exelon), Florida Power & Light (NextEra Energy), ISO New England, Entergy, PacifiCorp, Williston Basin (MDU Resources) and Conectiv (now part of PHI, and Exelon).
Let's admit one thing right off the bat. Rate of return is one of the most arcane subjects in utility regulation's ocean of arcania.
"Rate of return is one of the most arcane subjects in utility regulation’s ocean of arcania." – Steve Huntoon
But one thing that makes rate of return interesting is the amount of money involved. It's roughly $58 billion each year for electric utilities.1
Now you may be thinking, OK, so there's big money involved. But what's in it for me? In the spirit of BLUF, Bottom Line Up Front, let me tackle that question.
There is mounting evidence that investment in utility stocks has outperformed the broader market in the past, and will continue to do so. This is a conundrum. Regulated utilities are less risky than competitive industries, and therefore are supposed to produce a lower total return over time. But instead the opposite is happening.
We'll get into the evidence for this, and then speculate as to how this can be so. But if you want actionable intelligence up front, here it is: invest in regulated utilities.
Vanguard Group gives you low-cost index-fund options for utility investment. The symbol for the mutual fund is VUIAX and for the ETF is VPU. You may now skip the rest of this column if so inclined.