Retail Electricity Rates and Utility Return on Equity: State Primacy and Federal Influence
The retail electricity rates paid by end-use commercial and residential customers have long been a focus of federal, state, and local policymakers. In 1935, Congress passed the Federal Power Act (16 U.S.C. §§ 791a–823g), under which state and local utility regulators retain primary authority over retail electricity rate regulation. The law, in part, reflected views of the Supreme Court and others at the time about the scope of Congress's authority to regulate interstate commerce pursuant to Article I, Section 8 of the U.S. Constitution. In the years that followed, the Supreme Court has taken a more expansive view of Congress's constitutional authority, including over intrastate activities that substantially relate to interstate commerce. These judicial developments, along with the growing interconnectedness of the nation's electricity system since the early 20th century, have reduced some of the constitutional barriers to congressional regulation of retail electricity services and rates. Nonetheless, political opposition to an expanded federal role from many states, utilities, and others creates potential barriers to Congress's action in this space.
Instead of amending the Federal Power Act to create an explicit role for the federal government in setting utility retail policies, Congress has opted for other mechanisms to influence retail rates. Since 1978, one such mechanism has been Section 111(d) of the Public Utility Regulatory Policies Act of 1978 (PURPA; 16 U.S.C. § 2621(d)). This section's "states-must-consider" standards, as they are sometimes called, establish congressionally preferred policies that state and local utility regulators must consider adopting. The ultimate decision to adopt—or not adopt—the federal standards is made at the state level. Congress established 21 standards in Section 111(d) from 1978 to 2021 (the most recent year in which Congress amended the section).
A retail electricity rate issue receiving attention in the 119th Congress is the return on equity (ROE) utilities are allowed to receive on capital investments they make in their infrastructure (for example, transmission lines, distribution system equipment). ROE is, in part, meant to attract capital to the electricity sector. Utility regulators generally approve ROE levels that are comparable to returns in other industries with similar risk profiles. A lack of capital investment in electricity infrastructure could harm performance or have other negative consequences. Some advocates argue that current utility ROE levels are not economically justified and should be lowered in an effort to reduce retail electricity rates. H.R. 8568, introduced in the 119th Congress, would, among other things, direct FERC to establish a range of reasonableness for ROE comprising three specific data points based on financial markets information, as prescribed by the bill. Another bill, H.R. 7977, would, among other things, direct FERC to collect and make publicly available information from utilities about ROE and their capital structure.
If Congress chooses to address how utility ROE is calculated (or other retail policies), it could do so by amending the Federal Power Act to create a federal role over ROE, amending Section 111(d) of PURPA, or pursuing a variety of ways to have utilities voluntarily lower their ROE. Each of these options has potential trade-offs in terms of electricity reliability and affordability. Additionally, the traditionally limited role of the federal government in addressing retail policies could be called into question as part of any legislative debate on potential action.
The retail electricity rates paid by end-use commercial and residential customers have long been a focus of federal, state, and local policymakers. State public utility commissions (PUCs) generally have primary jurisdiction to set retail electricity rates and have often favored cost-based rates that allow regulated utilities to recover their costs, including a fixed rate of return on their infrastructure investments, known as return on equity (ROE). This report explores the history of electricity markets in the United States, the nature of and reasons for state primacy in setting retail rates, and federal options to influence those rates. This report also provides a brief introduction to utility ROE, which has been a topic of interest in the 119th Congress. Congress could consider a range of actions to change the process by which retail rates are calculated, or to change how inputs to rates (like ROE) are calculated. These options could be applied to ROE or numerous other aspects of retail rates and utility regulation.
In the early years of the electric power industry (i.e., the late 1800s and early 1900s), the federal government generally did not intervene, leaving oversight of the industry to states and localities. In the 1927 case Public Utility Commission of Rhode Island v. Attleboro Steam & Electric Co., the Supreme Court heard a challenge to the jurisdiction of the Rhode Island PUC, which had amended a contract between a Rhode Island power generator and a Massachusetts wholesale power purchaser to impose "reasonable" rates as determined by the PUC.1 Citing the impact on utility rates for Massachusetts-based customers, the Court found that the Rhode Island PUC's rate change placed "a direct burden on interstate commerce" in violation of Article I, Section 8 (the Commerce Clause) of the U.S. Constitution.2 In so ruling, the Court created a jurisdictional "gap" whereby no regulatory agency had oversight over these interstate transactions. The Court concluded that "if such regulation is required it can only be attained by the exercise of the power vested in Congress."3
In 1935, Congress amended the Federal Water and Power Act, renaming it the Federal Power Act (FPA) and adding a new Title II that gave the recently created Federal Power Commission (FPC) authority to regulate interstate wholesale sales and transmission of electricity.4 The terms of FPA explicitly delineate its reach:
The provisions of this subchapter shall apply to the transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce, but except as provided in paragraph (2) shall not apply to any other sale of electric energy or deprive a State or State commission of its lawful authority now exercised over the exportation of hydroelectric energy which is transmitted across a State line. The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy, but shall not have jurisdiction, except as specifically provided in this subchapter and subchapter III of this chapter, over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter.5
The FPA mandates that all rates and charges for jurisdictional sales and services be "just and reasonable" and requires all public utilities engaged in these jurisdictional sales and services to file rate schedules with the Federal Energy Regulatory Commission (FERC), the successor agency to the FPC, for review and approval.6 The FPA also empowers the federal government to conclude, on its own motion or in response to a complaint, that existing rates are "unjust, unreasonable, unduly discriminatory or preferential" and authorizes the Commission to "determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and . . . fix the same by order."7 These federal authorities extend only to "the sale of electric energy at wholesale in interstate commerce."8
This broad authority to regulate and adjust electricity rates and services continues to apply only to wholesale interstate sales and interstate transmission services.9 State PUCs retain sole authority to set rates and otherwise regulate intrastate electricity transactions, including sales to commercial and residential consumers and the rates they pay. State PUCs also retain sole regulatory authority over intrastate transmission services, including exclusive authority to permit the construction and operation of transmission facilities themselves (and approve an ROE for the utility constructing the facilities).
The FPA's federal/state jurisdictional divide was likely informed by several variables. At the time Title II of the FPA was adopted in 1935, the Supreme Court took a more limited view of the scope of Congress's authority under the Commerce Clause.10 However, during the New Deal and into the latter half of the 20th century the Supreme Court adopted a more expansive view of Congress's power to regulate interstate commerce. In NLRB v. Jones & Laughlin Steel Corp., the Supreme Court held that Congress's authority to regulate interstate commerce extends to intrastate activities that "have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions."11 As the Court recognized several decades later in United States v. Lopez, this expansion was not merely jurisprudential, but also came to reflect a shift in the nature of commerce itself and the extent to which some local activities have regional or national impacts.12
The changing nature of the energy industry and electricity markets since the time of the FPA's enactment has been recognized by the Supreme Court. Regarding the legislative history of the FPA, the Court has observed that "no party to these cases has presented evidence that Congress foresaw the industry's transition from one of local, self-sufficient monopolies to one of nationwide competition and electricity transmission. Nor is there evidence that the 1935 Congress foresaw the possibility of unbundling electricity transmissions from sales."13
While a shift in the interpretation and application of the Commerce Clause may have removed some of the constitutional barriers to congressional regulation of retail electricity services and rates, the shift did not affect the scope of the FPA. Section 201(b) of the FPA continues to limit the reach of Title II of the FPA to the "transmission of electric energy in interstate commerce and to the sale of electricity at wholesale in interstate commerce," with explicit limitations on FERC's authority over "facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter."14 This jurisdictional split has been largely left in place since enactment of the FPA despite the increasingly interdependent nature of the nation's electricity infrastructure and markets.
Notwithstanding the limitations on federal authority Congress imposed under the FPA, there have been some federal legislative efforts to influence retail electricity regulation. These efforts have often been done through Section 111 of the Public Utility Regulatory Policies Act of 1978 (PURPA).15 As the nation's electricity generation capacity grew and the scope and interconnected nature of the electricity grid expanded, the division of state and federal regulatory roles remained largely unchanged until the 1970s. The first significant change was an internal one: the Department of Energy Organization Act of 1977 created the Department of Energy as well as FERC, an independent agency.16 The Act transferred many of the jurisdictional responsibilities of the now-defunct FPC, including many of those assigned by Title II of the FPA, to the newly created FERC.17 One year later, Congress passed and the President signed into law PURPA.18 Title IV of PURPA focuses primarily on policies promoting energy conservation and efficiency, including some measures intended to advance those goals at the intrastate and consumer levels where the federal government previously had not participated based on the traditional understanding of federalism as applied to the electric power industry.
Section 111 of PURPA represents perhaps the federal government's most substantial effort to regulate retail sales and intrastate transmission of electric power to date.19 Section 111 requires state and local utility regulators to consider a list of federal "standards" set forth in Section 111(d) for retail electricity operations.20 These include standards for rates that vary based on time of day or the seasons, net metering, conservation and demand management measures, and others.21 Section 111(a) clarifies that the state PUCs are not obligated to adopt these federal standards, but instead they are required to "consider" the standards and to "make a determination concerning whether or not it is appropriate to implement" them.22 State PUCs may thus conclude that a particular federal standard or standards should not be implemented in their jurisdiction.
Congress has amended PURPA Section 111(d) four times since enactment to include additional standards to be considered by the states—in 1992, 2005, 2007, and 2021.23
PURPA's discretionary approach to retail electricity regulation seeks to maintain the historical deference to state regulators with respect to retail transactions, as explained above. It also does not direct state government actors to take any sort of mandated enforcement action, a mandate that could constitute a violation of the Tenth Amendment. The Tenth Amendment provides that "[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people,"24 a reflection of the constitutional structure of dual sovereignty and in the decision at the founding to withhold from the federal government the power to directly regulate state governments. While the Tenth Amendment is often referenced as a limitation on the affirmative authorities granted to the federal government elsewhere in the Constitution, it also acts as a stand-alone limitation on the exercise of federal authority.25
In its 1982 decision in FERC. v. Mississippi, a closely divided Supreme Court rejected a Tenth Amendment challenge to Section 111 of PURPA and its "states must consider" language, holding that "Congress could have pre-empted the field … PURPA should not be invalid simply because, out of deference to state authority, Congress adopted a less intrusive scheme and allowed the States to continue regulating in the area on the condition that they consider the suggested federal standards."26 The Court further concluded that "[t]here is nothing in PURPA 'directly compelling' the States to enact a legislative program"; rather, because the provision "simply [conditions] continued state involvement in a pre-emptible area on the consideration of federal proposals, they do not threaten the States' 'separate and independent existence' . . . and do not impair the ability of the States 'to function effectively in a federal system.'"27
In the years following FERC v. Mississippi, a series of Supreme Court cases elucidated the "anti-commandeering doctrine." This doctrine generally prohibits the federal government from directly compelling states to enact or carry out a federal regulatory program.28 For example, in Printz v. United States, the Court struck down a federal law that would have required state and local law enforcement to administer background checks on potential handgun purchasers, holding that
[t]he Federal Government may neither issue directives requiring the States to address particular problems, nor command the States' officers . . . to administer or enforce a federal regulatory program. It matters not whether policymaking is involved, and no case-by-case weighing of the burdens or benefits is necessary; such commands are fundamentally incompatible with our constitutional system of dual sovereignty.29
Thus, in addition to the political and statutory constraints on federal regulation of retail electricity markets described previously, the constitutional prohibition on commandeering further restricts certain federal actions. In later cases striking down challenged federal laws under the anti-commandeering doctrine, the Court distinguished those laws from the more "modest" requirements of PURPA, while observing that FERC v. Mississippi was "decided well before" the Court's later cases setting forth the anti-commandeering doctrine.30 The Court's decision that Section 111 of PURPA is consistent with the Tenth Amendment remains controlling precedent and has never been revisited by the Court. However, recent and proposed legislation must comply with recent jurisprudence, including by adhering to limits on Congress's ability to enact federal legislation requiring the states to take specific actions.
When state PUCs set electricity rates, they aim to ensure that utilities recover their cost of service, including a reasonable ROE. In practice, the PUCs balance competing interests, including (1) approving sufficient investment in infrastructure for safe and reliable electric service; (2) providing utility investors with sufficient financial returns to continue to attract capital to the sector; (3) protecting consumers from unnecessary expenses; and (4) complying with energy policies set by state legislatures, such as state renewable energy standards or mandatory efficiency improvements.
Utility regulators frequently face trade-offs between reliability and affordability. Often, utilities must invest in new or upgraded equipment to ensure electricity system reliability, but this investment frequently leads to higher rates for consumers.31
Electric utility infrastructure projects can require large capital investment. Typically, utilities spend money up front for investments and then recover the cost of the investment through electricity rates over the lifetime of the project. To attract the up-front capital needed for these long-term investments, utilities must be able to offer a rate of return that is competitive with returns investors could receive on projects of similar risk profiles.32
State PUCs can determine the appropriate return using various financial tools and economic models.33 FERC uses similar tools and models in its analysis for approving ROE for capital investments within its jurisdiction, an approach validated by the Supreme Court in the 1944 decision Federal Power Commission v. Hope National Gas Company.34 Because most capital investments—and associated ROE—are under state jurisdiction, the bulk of this analysis focuses on state jurisdictional issues.
Some policymakers and consumer advocates have become increasingly focused on utility ROE as a way of addressing affordability concerns. They say that approved ROE values have become higher than economically justified.35 Some evidence suggests that information asymmetries and other factors affecting state PUC decisionmaking processes may lead to faster price increases compared to decreases when financial conditions change.36 A number of state legislatures are considering legislation that would address how utility ROE is calculated.37 As discussed below, legislation introduced in the 119th Congress likewise would address the methods by which utility ROE is calculated.38
It is unclear whether reducing utility ROE in the near term would lead to long-term cost savings for consumers. If investors found utility investment less attractive, then utilities could need to offer higher interest rates on debt to attract necessary capital investment, thereby driving up customer costs through a different mechanism.
If Congress chose to address how utility ROE is calculated and recovered through rates (or any other aspect of retail electricity prices), it would initially face consideration of how to approach the jurisdictional divide established by the FPA.
One approach could be evaluating whether to do away with the FPA's jurisdictional divide and exert federal jurisdiction over retail rates. This approach would allow Congress to directly set retail rate policies, presumably applying national standards and setting national policies for retail electricity rates. States, utilities, and other local policymakers would likely oppose this approach on the grounds that retail electricity policies are inherently local and should be set in accordance with state expertise and policy context. As noted above, state PUCs also have a long history as the primary regulators of retail electricity rates, which could further implicate federalism concerns were Congress to take this approach.
Another approach—and one historically used by Congress—could be to attempt to influence state and local retail policies through Section 111(d) of PURPA, as explained more fully above. This approach could avoid political pushback over exerting federal jurisdiction. A limitation of this approach is that congressionally preferred policies might not be adopted by utility regulators, leaving different retail rate policies in place throughout the country.
A third approach—and also one historically used by Congress—could be to legislate rate policies that apply to FERC-jurisdictional rates only (i.e., the sale of electric energy at wholesale in interstate commerce).39 This approach would preserve the FPA jurisdictional divide. In the context of utility ROE and broader concerns about affordability, this approach might have limited impact because FERC-jurisdictional costs are a small share of retail rates. One bill introduced in the 119th Congress, H.R. 8568, has a section addressing FERC-jurisdictional rates. Section 2 of the bill would, among other things, direct FERC to establish a range of reasonableness for ROE comprising three specific data points based on financial markets information, as prescribed by the bill.
A fourth approach could be to direct federal agencies to collect information about a policy topic, thereby increasing transparency on the issue. Increased data availability could assist state PUCs in addressing policy concerns or put public pressure on utilities to voluntarily modify their practices, thereby achieving policy goals without direct legislative intervention. In the context of utility ROE, one bill introduced in the 119th Congress takes this approach.40 Section 427 of H.R. 7977 would, among other things, direct FERC to collect and make publicly available information from utilities about ROE and their capital structure.
A final approach could be to provide incentives for utilities to voluntarily lower their ROE. While this policy approach can be effective in other sectors, it may have limited effectiveness for utilities because they do not generally receive much federal funding. Nonetheless, Congress could evaluate options to incentivize utilities to reduce their ROE voluntarily.
| 1. |
273 U.S. 83, 87 (1927), abrogated by Ark. Elec. Coop. Corp. v. Ark. Pub. Serv. Comm'n, 461 U.S. 375 (1983). |
| 2. |
Id. at 86. Article I, Sec. 8, Clause 3 of the U.S. Constitution grants Congress the power to "regulate Commerce with foreign Nations, and among the several states, and with the Indian Tribes." For discussion of the more limited interpretation of this legislative authority, see, e.g., Hammer v. Dagenhart, 247 U.S. 251, 272 (1918) (holding that "the production of articles, intended for interstate commerce, is a matter of local regulation" to which Congress's Commerce Clause authority does not extend), overruled by United States v. Darby, 312 U.S. 100 (1941). See also CRS In Focus IF11971, Congress's Authority to Regulate Interstate Commerce, by Bryan L. Adkins and Alexander H. Pepper (2021). |
| 3. |
Pub. Utilities Comm'n of R.I., 273 U.S. at 90. |
| 4. |
Federal Power Act, Pub. L. No. 74-333, title II, 49 Stat. 803, 847–863 (1935). The Federal Power Commission was dissolved in 1977 and its responsibilities under the FPA were largely transferred to Federal Energy Regulatory Commission (FERC) at that time. For further discussion of this transition, see infra note 17 and accompanying text. |
| 5. |
16 U.S.C. § 824(b). |
| 6. |
Id. § 824d(a). Public utilities, as defined by the FPA, are those owners and operators of facilities subject to federal jurisdiction. Not all electric utilities are public utilities. For example, publicly owned utilities are not subject to federal jurisdiction. |
| 7. |
Id. § 824e. |
| 8. |
Id. § 824. |
| 9. |
Id. § 824(b). |
| 10. |
See, e.g., Oliver Iron Co. v. Lord, 262 U.S. 172 (1922) (holding that the mining of ore is not "interstate commerce" even if the ore is loaded and transferred across state lines immediately after production). |
| 11. |
301 U.S. 1, 37 (1937). |
| 12. |
514 U.S. 539, 556 (1995). |
| 13. |
New York v. FERC, 535 U.S. 1, 23 (2002). |
| 14. |
16 U.S.C. § 824(b)(1). |
| 15. |
Id. § 2621. |
| 16. |
Department of Energy Organization Act, Pub. L. No. 95-91, 91 Stat. 565 (1977) (codified as amended at 42 U.S.C. §§ 7101–7352). |
| 17. |
16 U.S.C. § 7172. For a general overview of FERC, see CRS Report R48349, The Federal Energy Regulatory Commission (FERC): Authorities and Membership, by Paul W. Parfomak (2026). |
| 18. |
Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat. 3117 (codified as amended at 16 U.S.C. §§ 2601–2645). |
| 19. |
16 U.S.C. § 2621. |
| 20. |
Id. § 2621(a). |
| 21. |
Id. § 2621(d). |
| 22. |
Id. § 2621(a). |
| 23. |
Energy Policy Act of 1992, Pub. L. No. 102-776 §§ 111(a) and 712, 106 Stat. 2776, 2795, 2910; Energy Policy Act of 2005, Pub. L. No. 109-58 §§ 1251(a), 1252(a), and 1254(a), 119 Stat. 594, 962, 963, 970; Energy Independence and Security Act of 2007, Pub. L. No. 110-140 §§ 532(a) and 1307(a), 121 Stat. 1492, 1665, 1791; and Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, §§ 40104(a)(1) and 40431(a), 135 Stat. 429, 930, 1047. |
| 24. |
U.S. Const. amend. X. |
| 25. |
For further analysis of Tenth Amendment history and jurisprudence and a broader discussion of federalism, see CRS Report R45323, Federalism-Based Limitations on Congressional Power: An Overview, coordinated by Kevin J. Hickey. |
| 26. |
456 U.S. 742, 765 (1982). |
| 27. |
Id. at 765-66 (quoting Lane Cnty. V. Oregon, 7 Wall. 71, 76 (1869); Coyle v. Oklahoma, 221 U.S. 559, 580 (1911); Fry v. United States, 421 U.S. 542, 547, n.7 (1975); Nat'l League of Cities v. Usery, 426 U.S. 833, 852 (1976)). |
| 28. |
New York v. United States, 505 U.S. 144, 170 (1992) (citing Hodel v. Va. Surface Mining & Reclamation Ass'n, 452 U.S. 264, 288 (1981); see also New York v. United States, 505 U.S. 144, 174-78 (1992) (striking down a federal statute that required states to either regulate low-level radioactive waste generated within their borders according to the instructions of Congress, or take title to and possession of such waste); Murphy v. NCAA,584 U.S. 453, 474 (2018) (striking down a federal prohibition of state "authorization" of sports gambling and holding that Congress may not issue direct orders to state legislatures regardless of whether Congress is commanding "affirmative" action by the states or imposing prohibitions on state conduct). For further discussion of the Tenth Amendment and the anti-commandeering doctrine, see CRS Report R45323, Federalism-Based Limitations on Congressional Power: An Overview, coordinated by Kevin J. Hickey (2023). |
| 29. |
521 U.S. 898, 935 (1997). |
| 30. |
Murphy, 584 U.S. at 476. |
| 31. |
See case studies in Ryan Wiser et al., Lawrence Berkeley Nat'l Lab'y, Retail Electricity Price Trends and Drivers: Data Update—2026 Edition 32 (July 2026), https://emp.lbl.gov/sites/default/files/2026-07/Retail%20Price%20Trends_2026%20edition_JulyUpdate.pdf [https://perma.cc/N5EC-UJRV]. |
| 32. |
For additional discussion on utility financing, see National Association of Regulatory Utility Commissioners (NARUC), Cost of Capital and Capital Markets Primer for Utility Regulators (December 2019), https://pubs.naruc.org/pub.cfm?id=CAD801A0-155D-0A36-316A-B9E8C935EE4D. |
| 33. |
For an overview of some financial models used by state utility regulators, see NARUC and Ohio Public Utilities Commission, Rate Case Process and Rate-Based Ratemaking, pp. 26–34, https://pubs.naruc.org/pub.cfm?id=5388D3F9-2354-D714-5151-B5BB5E4F9446. |
| 34. |
320 U.S. 591, 605 (1944) ("Rates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed certainly cannot be condemned as invalid, even though they might produce only a meager return on the so-called 'fair value' rate base."). |
| 35. |
See, for example, Mark Ellis, Am. Econ. Liberties Project, Rate of Return Equals Cost of Capital: A Simple, Fair Formula to Stop Investor-Owned Utilities from Overcharging the Public (Jan. 2025), pp. 5–7, https://www.economicliberties.us/wp-content/uploads/2026/04/20250102-aelp-ror-v6.pdf [https://perma.cc/K9EG-8A4L]. |
| 36. |
Karl D. Werner & Stephen Jarvis, Energy Inst. at Haas, Rate of Return Regulation Revisited (Mar. 2025), https://escholarship.org/content/qt80m5j9vs/qt80m5j9vs.pdf [https://perma.cc/LMR4-JJ3Z]. |
| 37. |
For additional information, see Brian Joseph, Lawmakers Aim to Cut Utility Returns, LexisNexis, Capitol J. (Aug. 26, 2025), https://www.lexisnexis.com/community/insights/legal/capitol-journal/b/state-net/posts/lawmakers-aim-to-cut-utility-returns [https://perma.cc/4VQG-KADL]. |
| 38. |
Lowering Utility Bills Act, H.R. 8568, 119th Cong. (2026). |
| 39. |
See, for example, 16 U.S.C. § 824s. |
| 40. |
Energy Bills Relief Act, H.R. 7977, 119th Cong. (2026). |