Utility ROE Cuts Could Squeeze Grid Capex, Signal Slower Subcontractor Pipeline
Regulators nationwide are moving to squeeze utility profit margins, and a pending Maryland rate case involving Pepco could set a precedent that ripples through capital budgets for grid construction work, according to Utility Dive.
Background
Utility Dive reports that Pepco has asked Maryland regulators to raise its allowed return on equity to 10.5% from the current 9.5%, while the Maryland Office of People’s Counsel is pushing for 7.7%. That’s an unusually wide gap, and OPC head David Lapp told Utility Dive that Pepco “is investing too much too fast” in projects that could have been deferred. A ruling is expected in August.
This isn’t an isolated fight. Utility Dive notes that California regulators already cut ROE by 0.3 percentage points for the state’s three largest investor-owned utilities in December, and Pennsylvania is weighing legislation to tie utility ROE to 10-year Treasury bonds. Maryland has also passed laws requiring utilities to join regional transmission organizations specifically to eliminate ROE “adders” utilities earn for voluntary transmission membership. In Congress, Rep. Greg Casar’s Lowering Utility Bills Act has more than 20 cosponsors and would force utilities to use the lowest reasonable ROE in their regulator’s approved range.
The pressure is coming from real numbers. Utility Dive cites Lawrence Berkeley National Laboratory data showing investor-owned utility revenue requests hit $18 billion last year, the highest in decades, with regulators approving 64% of requested dollar increases over the past five years, up from 52% over the prior two decades. A March Pew poll found 85% of respondents believe utilities raising prices are simply “wanting to make more money.”
Analysis
For subcontractors working transmission and distribution, ROE is not an abstract financial metric. It’s the mechanism that determines whether a utility’s infrastructure spending pencils out. Utility Dive’s reporting lays out the mechanics: authorized ROE gets applied to a utility’s rate base, meaning every dollar spent on poles, substations, and transmission lines earns a guaranteed return once approved by regulators. A higher ROE makes capital-intensive buildout more attractive to utility management and their shareholders. Cut that ROE and the calculus shifts.
Pepco’s Robert Leming argues in the Utility Dive piece that Maryland’s climate and electrification goals “require investment to modernize and upgrade the system,” and that a competitive ROE is necessary to attract capital at rates that keep customer costs down long-term. But consumer advocates like Lapp and independent consultant Mark Ellis contend the opposite: high ROEs create what Ellis calls a “perverse incentive” that biases utilities toward expensive capital projects specifically because those projects grow the rate base that earns the return. If regulators nationally start following California’s lead and trimming ROE by even fractions of a percentage point, the math on marginal projects, the ones that aren’t strictly required for reliability, gets less attractive to utility finance teams.
That matters for the subcontractor pipeline because a meaningful share of line and substation backlog work isn’t emergency replacement. It’s discretionary modernization, grid hardening, and capacity expansion tied to growth projections. Karl Rabago, a former Texas utilities commissioner quoted by Utility Dive, argues that rate case ROE formulas have become disconnected from any real competitive benchmark and consistently justify increases. If that dynamic reverses under political pressure, and multiple states are now applying that pressure simultaneously, utilities may defer or rescope projects rather than risk rate cases that get contested project-by-project.
The credit rating angle adds a real constraint, not just utility talking points. Utility Dive notes several Connecticut utilities, including Eversource and Avangrid, were downgraded after regulators created what rating agencies called an “unsupportive regulatory environment.” A downgrade raises a utility’s borrowing costs, which can offset any ratepayer savings from a lower ROE and further tighten what utilities are willing to finance through new project starts.
What It Means for Subcontractors
- Watch the Maryland Public Service Commission’s ruling on Pepco’s rate case, expected in August. A final ROE materially below Pepco’s requested 10.5% could signal utilities in other states will scale back or delay discretionary modernization projects before finalizing 2027 capital plans.
- Line and substation crews bidding Exelon-affiliated utility work (Pepco, BGE, Delmarva Power) should track how the Maryland decision handles the “double leveraging” dispute between Pepco and its parent Exelon, since a ruling against that financial structure could reduce the utility’s effective returns beyond the headline ROE number.
- Contractors in California should note the December 0.3-point ROE cut already applied to the state’s three largest investor-owned utilities and factor a tighter capital environment into 2026-2027 bid assumptions for PG&E, SCE, and SDG&E work.
- Firms bidding transmission work in states weighing RTO-mandate legislation, following Maryland’s move to eliminate voluntary transmission ROE “adders”, should expect utilities to push back on non-essential transmission capex in those jurisdictions.
- Track H.R. 8568 (Lowering Utility Bills Act) in Congress. With more than 20 cosponsors, its provision tying ROE to the lowest end of a regulator’s reasonable range could, if it gains traction, compress margins on federally touched utility capital programs nationally.
- Pennsylvania contractors should monitor state legislation tying ROE to 10-year Treasury bond rates, since that formula would make future utility capex budgets move directly with interest rate cycles rather than negotiated rate case outcomes.
