When “Low Risk” Pays More Than “High Risk”

There is a puzzle buried in the latest round of US utility rate case decisions, and it cuts to the heart of how regulators price risk. Theory says higher-risk businesses should earn higher returns. The data from 224 PUC decisions — 115 electric and 109 gas — issued in the fifteen months to March 2026 broadly agrees. Up to a point. Then it gets complicated.

This piece unpacks what the numbers show across both electric and gas utilities, where they hold up against theory, where they diverge in interesting ways, and what the emerging pressure of social program mandates may be quietly doing to allowed returns — a pressure that may not yet be showing up in the headline statistics, but is building in the background.

The risk ladder — and where gas fits on it

Electric utility decisions divide naturally into four categories of ascending business risk. Gas utilities share the same taxonomy, but with a meaningfully different risk profile at each rung.

Limited issue riders address a single cost recovery mechanism without reopening the full rate structure. The ROE is rarely revisited; instead the return from a prior fully litigated order is usually carried forward. This is true for both electric and gas. For gas utilities, riders frequently cover pipeline replacement programs — large, multi-year capital programs with stable, predictable cost recovery.

Transmission is regulated by FERC for interstate gas and electric rather than the state PUCs. Three states — Alaska, Hawaii, and part of Texas — have intrastate pipelines that remain state-regulated.

Distribution delivers the commodity to end customers: electricity through the local low-voltage grid, gas through the local distribution pipe network. Both face the full weight of retail regulation, but gas distribution has one structural difference from electric: gas demand is highly seasonal (winter heating load dominates), which introduces a different kind of variability to the cost recovery calculation.

Vertically integrated utilities own generation, transmission, and distribution in the electric context. There is no direct gas equivalent in this dataset — gas utilities are almost exclusively distribution businesses. This means the electric dataset carries a risk tier that the gas dataset does not, which is one reason simple ROE comparisons between the two sectors can be misleading.

“Gas distribution and electric distribution face similar retail regulatory pressures — but gas has no vertically integrated tier in state PUC proceedings. The two datasets are not symmetrical.”

What 224 decisions show: electric and gas side by side

The tables below present allowed ROEs and equity ratios across filing categories for both sectors. Focus first on the fully litigated rows — those are the cleanest signal, since settlements involve trade-offs that can obscure the underlying financial logic. Many limited rider filings adopt ROEs and common equity ratios from prior litigated filings to save both customer costs and processing time. The two measures are closely linked, and any decision that omits one is excluded from the analysis entirely.

Return on equity — electric vs gas

Common equity / total capital — electric vs gas

The gas premium: real, but smaller than it looks

At first glance, gas utilities appear to earn higher returns than their electric equivalents in comparable filing categories. Gas distribution fully litigated averages 9.74% ROE versus 9.53% for electric — a 21 basis point premium. Gas limited issue riders show a wider gap: 10.40% versus 9.71% for electric — a 60 basis point premium.

But both comparisons require important caveats. The gas limited rider average almost certainly reflects the same carry-forward distortion as the electric equivalent: prior ROEs from a period when interest rates or competitive returns were higher are embedded in these filings without being revisited. That figure is a historical artefact, not a current market signal.

The distribution fully litigated comparison is more reliable, but even here the gap may be partly compositional. Gas distribution cases in this sample include a number of filings from jurisdictions with active pipeline replacement programs — multi-billion dollar capital programs that carry execution risk and regulatory lag risk not present in a typical electric distribution case. A 21 basis point premium for that additional risk is not obviously excessive.

The capital structure: the gap within gas is bigger than the gap between sectors

The equity ratio data for gas utilities contains two distinct stories. The first is the familiar gas-versus-electric comparison. The second — and far more striking — is entirely within the gas sector itself: the gap between gas distribution rate cases and gas limited issue riders is so large that it demands an explanation of its own.

Gas distribution fully litigated rate cases average 51.5% equity. Gas limited issue riders average 57.5% — a spread of 6 percentage points within the same sector, between cases decided by the same commissions, often involving the same utilities. That spread narrows when compared to the prior version of this data and merits continued monitoring, but it remains meaningful. For context, the gap between gas distribution and electric distribution fully litigated cases — 51.5% versus 50.8% — is now only 0.7 percentage points.

What explains the equity ratio premium for gas riders over gas distribution cases? One interpretation is mechanical: limited rider proceedings typically carry forward the equity ratio from a prior fully litigated order, and if those prior orders were set in a different rate environment, the embedded ratio may simply be stale. But that explanation is incomplete. A 57.5% equity ratio is not a historical accident — it is a number commissions either set or accept in each rider filing. If it were clearly wrong, interveners would challenge it and commissions would correct it.

A more pointed question is whether regulators are, consciously or otherwise, using the rider equity ratio as an instrument of infrastructure policy. Gas pipeline replacement programs — the dominant subject of gas limited riders in this dataset — require large, multi-year capital commitments. Commissions that want those programs to proceed have an incentive to make the financial terms attractive. A higher allowed equity ratio raises the cost of capital to ratepayers, but it also signals to the utility and its investors that the program will be adequately compensated. If the alternative is a deteriorating pipeline network, the implied bargain may be rational from a commission’s perspective, even if it is difficult to defend in a formal cost-of-capital hearing.

Typically, the higher the risk, the higher the equity ratio. This helps protect lenders. This is not shown in the statistics. In the electric sector, higher-risk categories (Vertically Integrated at 47.2% equity, Transmission at 41.0%) carry lower equity ratios than lower-risk categories (Distribution at 50.8%, Limited Riders at 51.6%). In the gas sector, distribution utilities at 51.5% carry less equity than limited issue riders at 57.5%.

“Whether regulators are actively encouraging riders through the equity ratio, or simply tolerating a carry-forward they have not revisited, the practical effect is the same: gas utilities financing pipeline replacement through riders are operating with a meaningfully more equity-heavy capital structure than gas utilities in full rate cases.”

Modigliani, Miller, and why the equity ratio matters as much as the ROE

In 1958, Franco Modigliani and Merton Miller demonstrated that in a world without taxes, a firm’s total cost of capital is independent of how it chooses to finance itself. More debt lowers the average cost of funds, but the increased financial risk drives up the equity return demanded by shareholders — and the two effects cancel out.

The real-world modification is the tax deductibility of interest. Because debt interest reduces taxable income, the government effectively subsidises debt financing. Higher leverage therefore reduces the after-tax WACC — the actual cost of capital to the firm and, in a regulated utility context, to ratepayers. Regulators who set both the allowed ROE and the equity ratio are jointly determining the WACC, not just the equity return.

The black-box problem: settlements in both sectors

A fully litigated rate case is, in principle, a transparent exercise. The utility presents its cost of service, expert witnesses argue for and against specific positions, and the commission issues a written decision explaining its reasoning. You can read the order and understand why the return was set where it was.

A settled case is different. Utilities and intervening parties negotiate a package — often under time pressure — and present the commission with an agreement to approve. Individual components may reflect trade-offs that are never publicly explained. A utility might accept a lower ROE in exchange for favorable rate base treatment. A consumer advocate might concede on the equity ratio in exchange for a lower overall revenue requirement. The commission approves the package without necessarily opining on any individual piece.

This problem is present in both sectors. The wide ROE range in gas distribution settled cases (9.30–10.30%) and the wide equity ratio range (43.2–61.1%) suggest that settlement outcomes are driven as much by negotiating dynamics and jurisdiction-specific factors as by any systematic view of risk and return.

In the electric sector, the Vertically Integrated settled cases show an ROE range of 9.45–11.70% and an equity ratio range of 35.8–59.6% — a spread so wide that the average is almost meaningless as a market signal. The 11.70% outlier almost certainly embeds concessions on rate base or deferred cost recovery that reduce the effective return well below the headline figure.

The uncompensated risk: social programs and the affordability squeeze

There is a structural shift underway in the regulatory environment for distribution utilities — both electric and gas — that is not yet legible in the ROE statistics, but is building in the background.

Across the United States, state legislatures are expanding the social obligations placed on utilities. For electric utilities: low-income discount programs, energy efficiency mandates, weatherisation subsidies, electric vehicle infrastructure requirements, and the complex web of renewable energy incentives and penalties. For gas utilities: low-income assistance programs, energy efficiency requirements, pipeline safety mandates, and — increasingly — pressure from the energy transition as legislators debate the long-term role of gas in a decarbonising grid.

These programs are expensive. And the constituencies they serve are precisely the constituencies that also appear before commissions arguing for lower rates. The same political and legislative forces driving up utility costs are also pressuring commissions to hold down the returns that compensate investors for bearing those costs.

Gas utilities face an additional layer of this pressure. The energy transition debate has introduced a new form of regulatory risk: the possibility that long-lived gas distribution infrastructure will be stranded before the end of its useful life as electrification advances. Some states are already restricting new gas connections. Whether the regulatory compact will fully compensate gas distribution investors for this stranded asset risk — or whether it will be quietly socialized through below-market allowed returns — is an open question that current ROE data cannot answer.

“Gas distribution investors face a risk that electric distribution investors do not: the possibility that the regulatory compact itself will not fully compensate for infrastructure stranded by the energy transition.”

What the most reliable comparisons tell us — and what they cannot

Given the limitations of the data — settlement opacity, carry-forward ROEs in limited rider cases, small samples in some categories, and jurisdiction-specific event risk — the most reliable benchmarks for current regulatory thinking on the cost of equity are:

The gas–electric ROE gap in distribution fully litigated cases (21 bps) is real but partly compositional — it may reflect pipeline replacement risk rather than a clean sector premium. Also, limited rider averages in both sectors are historical artefacts and should not be used as current market benchmarks. The energy transition is introducing a long-term stranded asset risk for gas distribution investors that is not yet visible in allowed returns but warrants close monitoring.

The 224 decisions in this sample offer a rich empirical picture of how US state regulators are currently pricing utility risk. The data broadly validates theory. But the anomalies — the carry-forward distortion, the settlement opacity, the emerging uncompensated risks — are as informative as the averages. Reading the numbers carefully means attending to what they measure, how they were produced, and what they quietly omit.

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Data source. ROE and equity ratio statistics are calculated only for cases where those figures were explicitly determined in the decision or settlement order. The company Docket Tracker was used in this analysis.

This analysis is produced for informational purposes only and does not constitute financial, legal, or investment advice.