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Leonard Hyman & William Tilles
Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…
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Following the June 2026 primary elections in NYC, in which democratic socialist Mayor Mamdani’s preferred slate enjoyed considerable electoral success, much has been written about the political implications. Our take is really simple. The last time the democratic socialists gained power, especially in major US cities, many of their policies were adopted by Progressives or New Dealers. In either case, that meant a far more intrusive regulatory environment for utilities. The Progressives laid the foundation for our existing regulatory apparatus with scrutiny over operations and capital funding, while the New Deal experimented with outright public ownership as a means of reducing the influence of investor-owned monopolies such as the Southern Company. And now we’ve had roughly 100 years of experience with Progressive administrative reforms and 80-plus years with New Deal-inspired public ownership of utility assets. To us the results are pretty clear. Regulatory agencies were initially created, with the best of intentions, to represent the public’s interest versus powerful monopolies. Due to regulatory capture (i.e. domination of administrative proceedings by wealthy corporate interests), these once Progressive-inspired entities have been hollowed out like a cheap chocolate easter bunny.
But the main issue for us today is that leftist political movements always ask very unpleasant questions from an investor’s perspective. For instance, why do we need equity investors at all in a low-risk, monopoly business like electricity? Critics claim, not without some justice, that utility equity investors provide higher cost risk capital for a low-risk monopoly that does not require it. Stated simply, they ask whether equity investors are being paid too much for, in essence, doing too little. If we look around the world, we can see the difference and it’s not simply how generously equity investors are rewarded in other places, but rather how differently US utilities are capitalized. Comparatively speaking, we allow our utilities to employ an enormous amount of equity financing, around 50% of capital structures currently, in an extremely low risk monopoly business, which makes absolutely no sense. Why? Because business risk (potential revenue volatility) and financial risk (the percent of debt in the capital structure) are supposed to be inversely correlated. Meaning low business risk utilities with extremely stable revenue streams can tolerate the highest levels of (much cheaper) debt in their capital structures. And instead we do the opposite, which increases power costs dramatically. By contrast, the comparable percentage of equity in the capitalization of a typical French utility is zero because it is government-owned. In Japan, in the pre-Fukushima-Daiichi days, the utilities only had 20% equity layers and were highly regarded by investors. And when Bonbright published his seminal work on US utilities in the 1930s, he thought a 30% equity layer was just about right. This is our best evidence of regulatory capture in the US. From a comparable perspective, our regulators permit way too much equity in a low risk, monopoly business (thereby unnecessarily imposing higher costs on all energy consumers) and that equity is also being compensated at a historically relatively high rate as well.
To quantify the analysis, electricity consumers might easily pay 10-15% less if the industry paid no taxes and it were financed wholly by government-backed debt.
From a longer-term perspective, we have to admit that utility equity investors have had precarious moments. Greedy politicians in the Insull days, wildfires, economic depressions, war, oil embargoes, new technologies, nuclear meltdowns, and the like have all threatened what seems in good times like an easy, albeit capital-intensive business. The bigger question to us, which we think democratic socialists will ultimately ask, is: should electricity be treated as a business at all, given how essential it is to our survival? Instead, should it be treated like a human right, like access to food or health care? If it’s 120 degrees outside, having A/C is a matter of survival, not luxury. Ditto if it’s fifty below in winter. In extreme circumstances, consumers don’t have a lot of choice about electricity usage. These questions or issues lead to bigger questions of government ownership versus continuing private sector control.
Franklin Roosevelt’s New Deal likened government ownership of utility assets to a “yardstick” by which to measure the performance of the private sector and, in that way, ensure fair prices. But these new government entities had two huge advantages over their private sector brethren. Their financing costs were extremely low (because they were backed by the federal government) and they paid no taxes. The TVA seems to have worked just fine for about 75 years without a penny of shareholder equity in its capital structure. The New Deal’s solution was to provide people with one of the benefits of modern technology, but without the higher cost levels imposed by the equity investors themselves. Just government debt is financed at the lowest possible interest rates.
We think the investor risks from today’s political developments have to do with a changing mindset. The traditional left called shareholders financial predators, parasites, or people who take unfair advantage. Said differently there was a moral component implicit in how corporations should treat the working and middle classes. It is possible that we are beginning to see a resurgence of these themes today. But there is one big difference versus, say, 1935. Roosevelt’s people had two advantages in establishing a publicly owned utility: low-cost government financing and tax breaks. Today’s public power advocates or new New Dealers can also encourage investment with tax breaks and low-cost financing. However, as we enter this new build cycle for power generation with all its potential for data center-driven excess, they can also encourage greater use of lower-cost power-generating technologies such as renewables. Outside the US, electric utilities with heavy solar penetration are already offering free electricity to customers for several hours a day. We expect to see much more of this. It adds a whole new meaning to the phrase power to the people.
By Leonard Hyman and William Tilles for Oilprice.com
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Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…
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