@BloombergME @JaneAFlegal the issue in TX is not ROE, it's capex prudency (especially the gas utes)...TX ROEs are below avg and TX utes have among the lowest authorized equity ratios...
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Strap Cap
934 posts
@JaneAFlegal Respectfully -- i think youre still in the Tx mindset. I'm not suggesting a cap, which would likely get tossed in court anyway. Prudency review exists but is toothless and utilities write the capital plans. 10% on $5B is a lot more than 10% on $2B. That's the incentive.
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I think the utility ROE discussion is mostly not relevant to energy affordability, and potentially damaging. We have a scarcity problem. The way to lower prices is to build more supply and to get social programs off of bills.
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@EnergyLawJeff @JaneAFlegal There's an irony in ppl calling for cutting utility ROEs 200-300 bps, which on a ~10% base ROE is a 20-30% earnings cut (on a highly levered capital structure!), and then justify it by saying utilities are low risk!
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@JaneAFlegal And to be clear, appreciate the debate here! This is all important stuff.
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When affordability is top of mind for voters and for the public that regulators hear from and are accountable to, ROE is incredibly relevant. On big rate bases it also amounts to $100ms to even billions in customer costs. 1/
Jane Flegal@JaneAFlegal
I think the utility ROE discussion is mostly not relevant to energy affordability, and potentially damaging. We have a scarcity problem. The way to lower prices is to build more supply and to get social programs off of bills.
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@MichaelGiberso3 I don’t actually disagree with that…but this is again a different conversation and would be the case regardless of what the allowed ROE is
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@StrapCap It’s true with better foresight both utilities and IPPs could do more for less. But there are reasons to believe utility forecasts are biased by state political considerations and not in a way that would provide lower prices for captive customers.
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The simplest evidence that utility-regulated ROEs are higher than needed is that several utilities are lobbying for permission to put billions of generation investment onto the backs of regulated-utility ratepayers.
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@MichaelGiberso3 Hence why I caveated my response w/ “if it’s needed” … that q is beyond the scope of your initial tweet … my point is that it’s useful to consider why IPPs aren’t building and what will incentivize a buildout … the answer will take you to a diff place than “Ute ROEs too high”
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@StrapCap What happens if reg utes build it and the generation isn’t actually needed?
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@kchan55 I agree regulated entities should have lower allowed ROIC, but the IOU competition for capital is other US equities, which earn much higher ROIC and spreads vs CoC…the “too high ROE” argument essentially frames it as if the competition is bonds. ROIC>WACC to compete for capital
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@StrapCap Are those other public companies rate regulated? Are their prices set based on a regulator’s perception of the companies cost of capital?
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This post is a lot to take in. While I agree "We should be thinking bigger about utility reform," the author's ultimate opinion seems to be based on confusion or misinformation regarding the status quo. A thread 🧵
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@TKavulla @mattyglesias Buybacks? Bankruptcies? Come on, this isn’t a fair comparison
Regulated utilities are among the most levered businesses in the US
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I suppose I'd be more sympathetic to the argument @mattyglesias not to focus on investor-owned-utility equity returns if that hadn't become an attractive nuisance over the years: Every dollar that's spent costs more than it needs to given the risk profile of the industry, and now we face affordability problems that -- within this model -- potentially constrain capital spending that needs to occur.
Compare, for instance, the risk-taking merchant segment that is *more* leveraged than regulated utilities. The blue bar should be *below* the red bar!
And that's to say nothing about a business model that, as a practical matter produces returns only related to capital investments the utility itself makes, further magnifying the perverse incentive here and acting as a block to the cap-ex that might be deployed by others...
[source: principally A. Damodaran via Claude]
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@kchan55 Think the ROE argument is wildly overstated…Every single publicly traded equity in the market aims for ROIC > cost of capital…the value creation spread for utilities is actually tighter than most other businesses…and if you cut ROEs, the cost of capital will likely go up
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Are ROE's too high? Yes! They're higher than utilities' cost of capital. At their current level are they producing the results Matt wants? If they're lowered toward utilities' cost of capital, will necessary investment (per utilities' statutory obligations) go unmade?
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@Suicide95518428 Knife fight for Permian G&P…they’re doing a great job, but if they don’t spend it someone else will and take mkt share
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$TRGP reported Q4'25 EBITDA of $1.34 billion - beating Consensus by 5.6%. Midpoint of EBITDA guidance for 2026 of $5.5 billion was also inline with Consensus.
So why is the stock down 3%?
2026 CAPEX Sticker Shock - $4.5 billion of spend
GMAFB...
x.com/Suicide9551842…
SuicideBlonde@Suicide95518428
$TRGP reports BMO tomorrow. Consensus Q4'25 EBITDA = $1.27 billion 2026 EBITDA expectation is $5.48 billion while CAPEX is expected to be $3.83 billion Can they Beat? Let's see... Fun fact: Since 10/30/2020 (The darkest hour for Energy), $TRGP has outperformed $NVDA, and $LLY
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@BillBrewsterTBB @RagingVentures Among the least shareholder friendly of MLPs/midstreamers…over-earning…asset quality and balance sheet gap vs peers has narrowed…poor recent execution…sleepy mgmt…
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@RagingVentures Of all the things to short why EPD? Family owned, great assets, not levered.
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Who needed to buy $EPD up 5% at $37.20 ahead of the long weekend? Feels like short covering/de-grossing by some big book.
Cable stocks felt similar this week too.
Any other odd “funding” shorts that were up this week?
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Price of utilities look stooopid, especially when you consider the pressure regulatory will be under for rate cases with higher power prices. $xlu
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@StrapCap @JesseJenkins @Meta I mean we would much rather see a market mechanism buying that power to keep the plants viable than it to depend on a subsidy that is a substantial fraction of wholesale energy to be viable right
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.@Meta's big nuclear power purchase today containts laudible elements plus a DEEPLY PROBLEMATIC one: the purchase of 2.1 gigawatts of power — enough to meet ~10% of Ohio's entire electricity usage! — from two EXISTING nuclear power plants, which will do nothing but increase emissions AND electricity rates for PJM customers already grappling with huge bill increases, all while establishing a very dangerous precedent for the whole industry. Let me explain why...
Aniruddh Mohan@aniruddh_mohan
HUGE set of deals announced this morning by Meta for purchasing nuclear power. - 2.6 GW from Vistra including 2.1 GW of existing capacity from 2 plants in Ohio by end 2026. - +433 MW of uprates across the two Ohio plants + PA plant by 2034 ⁃ 1.2 GW from Oklo by 2034 with first phase online by 2030, site prep to begin this year (!) - 690 MW from Terra Power (Bill Gates backed sodium cooled reactor startup) by 2032, six more units later PPAs for the Vistra units support license extensions which Vistra claims would not be economic without Meta support
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@StrapCap @JesseJenkins @Meta And yeah there was a point even a few years back where people were worried about these plants closing right
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@xiaowang1984 @JesseJenkins @Meta I mean the strong show of support in the press release (Shapiro, OH/PA senators)+ C Wright at the press conference lauding the deal. They are going out of their way to support this as if they don’t fully understand the impact. Not referring to the technical logistics of it all
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@StrapCap @JesseJenkins @Meta If it's a retail agreement do they need state or federal blessing here? Meta still has to line up electricity any way it can right
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@xiaowang1984 @JesseJenkins @Meta I don’t disagree. Just surprising in a big election year where utility bills are a key issue that this gets state+federal “blessing” (did they actually think these plants were at risk of retiring?). I don’t believe META even announced a new data center associated with this deal
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@StrapCap @JesseJenkins @Meta Of course it's negative for ratepayers. But maybe this should also promote some looking in the mirror about the past view that avoiding all long term contracts for generation on the part of regulated utilities was good for the ratepayer.
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@xiaowang1984 @JesseJenkins @Meta Isn’t the “problem” here political? Meta and VST are free to do w/e they want, but all things equal this is a net neg for ratepayers, yet leaders at the state+fed lvl cheered this while yelling about other free mkt enterprise decisions hurting affordability (housing, cc, etc)
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@JesseJenkins @Meta This bemoaning signing existing capacity is just crying over spilled milk. The LSEs had the opportunity to lock up the generation on long term contracts at any time but they wanted to keep rolling short term when it was cheap. Now it's biting them in the ass
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@JigarShahDC Sure some IOU CEOs are overpaid, but cutting comp or reducing ROEs isn’t going to move things faster or help affordability (some exec pay gets disallowed anyway).
On affordability/data centers/nuclear, better to focus on rate design/cost allocation/BYOG vs who owns the infra
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@JigarShahDC This wouldn’t solve much
- the dreaded ROE is not a big part of the bill (limited cost saving)
- govt owned utilities wont move faster than IOUs
- you need to pay a premium to book — pension cost of capital is low but not free — the dreaded ROE not high enough to hit their IRR
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@MattZeitlin This has become a popular topic for good reasons, but I think misses broader context? Monopoly or not, reg utes are competing for capital against other sectors earning significantly higher ROIC. Affordability matters, but the idea that utility ROEs are “high” feels misplaced…
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Utility ROEs are probably going to come under tremendous pressure due to affordability concerns, and that’s fine, there’s no 11th commander that ROE should be 9.6% but we almost certainly need to invest *more* in the grid…so….the money has to come from somewhere….
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