Con Ed critics zero in on utility profits as proposed rate hike sparks affordability fears

Con Edison, the biggest utility in New York, has come under fire from lawmakers and advocates for proposing a double-digit percentage hike in rates.

But critics are zeroing in on one figure in Con Edison’s financial plans that’s driving that spike: the company’s profits, which are essentially guaranteed by the state. And as inflation and severe weather have already sent utility bills soaring, Lawmakers are going after the governor-appointed regulatory agency that sets utility rates, accusing it of rubber-stamping exorbitant costs at the expense of utility customers already stretched to the max.

“[Shareholders are] entitled to a fair return, but it can't be at a price that is unaffordable, and that's what's happened,” said state Sen. Shelly Mayer, one of the lawmakers pressing for utility reform in Albany.

As an investor-owned utility company, Con Edison is overseen by the New York Public Service Commission. The commission approves what utility companies can charge their customers, and authorizes each utility’s “return on equity” — the level of expected profit utilities can bake into people’s utility bills.

Utility companies typically submit proposals for those figures every three years, kicking off a monthslong process known as a “rate case” in which regulators, business groups and consumer and environmental groups weigh in. But some lawmakers say the current process is flawed.

"New Yorkers are sick and tired of this system that continues to rubber stamp outrageous rate hikes year after year while working families struggle to keep the lights on," state Sen. John Liu said in a recent statement, calling for an overhaul of the process.

In its latest proposal, Con Edison asked for an 11% hike in rates for the average electricity customer. Part of that hike is a 10.1% return on equity, or profits, up from its current rate of 9.25%.

The company says the return rate follows legal guidelines to be “fair and reasonable,” and ensures it remains financially stable, attracts new investment and maintains the cash on hand it needs to keep its sprawling infrastructure in shape.

Other utilities regulated by the PSC have had similar profit margins to Con Edison, hovering around 9% for the past decade, according to a recent investor report from the company. But critics say that while a 9%-10% return is industry standard, that standard is too high, driving up customers’ energy bills to boost shareholder profits.

Mark Ellis, senior fellow for Utilities at the American Economic Liberties Project, has worked in utility finance for more than 30 years. He argues the formulas Con Edison uses to determine its profits are obsolete.

“What the utilities have done is they've created a body of assumptions that … are not used anywhere else in finance, but they've convinced the regulator this is the right way to do it,” he said. “And so they've kind of promulgated this sort of bogus finance and it's very insular.”

According to Ellis, utilities have been awarded return rates that are approximately twice what the market would value them at. And the profits they generate come at ratepayers’ expense. Ellis said around 21% of a customer’s Con Edison bill goes toward profits.

Con Edison repeatedly declined to comment or make someone available to explain how it sets its rates. Company spokespeople referred Gothamist to an outside advocacy group, which declined to comment on the record.

Lawmakers intervene

A package of bills that passed the state Senate and Assembly tackled utility affordability, with one of the bills targeting the process by which utilities propose and regulators approve rates.

Mayer sponsored Senate Bill S1896, which aims to flip the process around. The Public Service Commission would propose a utility’s profit margin, and the utility would have a chance to refute it — rather than have the commission review and approve a proposal the utility drew up.

“The presumption should be that the return on equity sets a reasonable rate of return that is driven by the need to serve consumers with a quality product and delivery and they are valued above the shareholders' return,” Mayer said.

The package was included in the state Senate’s budget proposal for the coming fiscal year — but not in the governor’s or the Assembly’s.

A bill that state Sen. James Skoufis of the Hudson Valley introduced last month aims to lower consumer costs by capping profits at 4% instead. He said that still leaves plenty of profit for the companies’ shareholders, while providing customers with savings.

“They'll still make money, but we're going to put a cap on just how much money and put an end to the ripping off of New Yorkers from end to end in this state,” Skoufis said. “You look at a lot of for-profit sectors and industries in New York, and they would kill for a 4% profit margin. … So, you know, 9% is just highway robbery.”

But Con Edison has traditionally said as a utility it’s unlike other private-sector companies. Any interruption in service presents 8.5 million people with severe risks to health and safety, and can have devastating effects on the city’s economy.

Con Edison has argued it needs investor capital to harden its infrastructure against extreme heat, cold and storms that grow more intense each year with climate change. The company has also cited property taxes, new infrastructure investments, and operating expenses as some of the things driving up rates.

In a letter to regulators, Gov. Kathy Hochul, who essentially controls the Public Service Commission, opposed the rate increases and instructed the commission to reject Con Edison’s proposal.

“Utility companies shouldn’t be jacking up costs unnecessarily – especially if they’re paying their own staff too much,” the governor said in February.

The Public Service Commission said the agency doesn't comment on pending legislation. A spokesperson for the agency said he was also speaking for the governor's office in declining to comment.

“Enough is enough: The time to overhaul the PSC is now,” Skoufis said in a prepared statement, demanding the commission be dismantled and replaced with a consumer-focused regulatory board.

“The Public Service Commission is failing to meet its responsibility to set delivery rates for gas, electric, and other regulated utilities that are ‘fair, just and reasonable,’” Mayer said in a statement.

Rep. Ritchie Torres, a Bronx Democrat who last year reported residents of his borough are paying higher energy costs than other parts of the city, has repeatedly criticized Con Edison for its rates, and the prospect of a 9.25% return on equity. He said Skoufis’ bill “is diagnosing the right problem,” but he cautioned against setting a specific cap, and said the profit should instead be set by what’s known as the market cost of capital — in other words, the profit margin it would take to attract investors — rather than guaranteeing what he agrees is an artificially high rate.

He described high rates of equity as “the most regressive tax that most people have never heard of.”

Con Edison referred Gothamist to the Energy Coalition of New York, a group representing seven investor-owned New York State electric and natural gas utilities, for comment. The coalition, however, declined to comment.

Kim Fraczek, the director of the Sane Energy Project, a group focused on replacing the state’s fracked gas infrastructure with renewable energy, said the group broadly supports efforts to curb utility profits.

“I'm really pleased to see that legislators are now paying attention to the corporate utility investor-owned utility profits that are skyrocketing and causing our monthly bills to go up,” she said. “The corporate investor owned utility model, I think, does not prioritize public health and safety first. It prioritizes the profits of their investors.”