The debate – to the extent one ever took place – has apparently been settled.

As policymakers look for sources of capital to fund the charging infrastructure needed to support a broadscale transition to electric vehicles (EVs), the balance sheets of regulated electric utilities are very much on the table. Utilities have emerged as major players in this project, eagerly accepting (or, in many cases, proactively seeking) opportunities to bill their captive ratepayers to finance the exorbitant up-front costs of the EV transition and secure for its shareholders a tidy, riskless return on capital investments. In obscure state regulatory hearings across the country, utility commissioners have approved these de facto taxes on ratepayers, accepting with varying levels of credulity utility arguments that these investments will not only serve the public interest in mitigating greenhouse gas emissions, but ultimately save ratepayer money in the long-term.

However unseemly the process, there appears to be growing (and, in some cases, credible) agreement that the overall benefits of electrifying the transportation sector will indeed justify using the ratemaking process to lift the industry off the ground. But if regulated utilities have a role to play in building out the transportation sector of the future, utility commissions cannot simply rubber-stamp every proposal for EV infrastructure capital expenditure. They must work to mitigate the risks related to ratepayer abuse and equity issues, capital investment rent-seeking, and the competitive advantages conferred to utilities in this fledgling industry, and take seriously the concerns raised by those who object to using the ratemaking process to drive policy agendas.

Background: Bridging the Investment Gap

Transportation is the largest source of greenhouse gas (GHG) emissions in the U.S., accounting for 29% of the country’s carbon pollution.[1] Eliminating emissions from internal combustion engines through the proliferation of EVs has become a pillar of U.S. climate policy, with President Biden setting a goal of “having 50% of all new vehicle sales be electric by 2030,” a part of a broader aim to achieve 100% electrification by 2035.[2] Powering millions of new EVs on U.S. roads will require the construction of nearly 500,000 public EV charging stations, with an estimated total cost exceeding $87 billion.[3]

The high cost of building a national EV charging infrastructure creates an investment gap that private enterprise cannot resolve. The number of EVs on the road, at present, would not produce sufficient demand to make charging stations profitable; in order for the EV market to attract sufficient demand, an adequate number of chargers must be available to new EV buyers.[4] State and federal governments have worked to address this chicken-egg dilemma with spending derived from economic stimulus packages, state budgets, and even the settlement money from Volkswagen’s emissions cheating enforcement case. These funds total an estimated $11.125 billion, the majority of which comes from federal coffers.[5] But these expenditures fall well short of funding need, and it would be unwise to expect Congress to greenlight further multibillion-dollar investments in EV charging infrastructure in the coming years.

In this context, support for utilities adding EV infrastructure spending to the rate base has found its footing, continuing a growing trend of policymakers looking to tap the “potential for policy experimentation and innovation […] in the area of rate-making and rate design,” particularly where decarbonization is concerned.[6] Calls to open utility balance sheets in the EV infrastructure build-out have originated from state legislatures (e.g., Washington, California, and Oregon), public utility commissions (e.g., Maryland, Rhode Island, and New York), state executive branches (e.g., Pennsylvania, Colorado, and North Carolina), and the regulated utilities themselves (e.g., Kentucky, Michigan, and Florida), but in each case the process is the same: utilities propose new spending on EV charging infrastructure, and public utility commissions assess if the costs are reasonable and prudent to pass on to captive customers.

According to a survey of utility EV investment published in early 2022, 34 states and the District of Columbia have approved plans to invest a total of more than $3.1 billion in ratepayer-subsidized funds to build EV chargers over the next ten years.[7] But while these decisions may have released the horses from the proverbial barn, the arguments raised in favor of and against this “policy experimentation” are worth analyzing to assess and understand potential pitfalls, and consider what regulators should do to avoid them.

1. Capital Expenditures and Inflated Returns on Equity

One foundational argument against permitting utilities to “rate base” capital investments on EV chargers is that it provides for-profit utilities another means with which to pad investor margins. Because approved investments are recovered with a guaranteed rate of return, utilities have an incentive to spend as much money as regulators will permit, and to request inflated returns on equity – a practice commonly referred to as “gold-plating.” A 2022 working paper estimated that the current average regulated rate of return is between .5% and 5.5% higher than it would be if it aligned to capital market trends, a disparity that fleeces ratepayers for as much as $20 billion per year – money that is transferred directly from captive customers to shareholders.[8] A similar analysis of 12 years of utility ratemaking decisions concludes that “allowed returns on equity diverge significantly and systematically from predictions of accepted asset pricing methodologies,” and posits that equity decisions are instead motivated by factors such as “political goals, incentive provision, and regulatory capture.”[9] Giving utilities license to make guaranteed-return capital investments in an emerging industry defined by a multibillion-dollar investment gap is a recipe for more shoddy financing, ratepayer abuse, and inefficient energy pricing. Especially in a political climate prone to celebrating every “green” investment – and in which many state regulatory commissions themselves are proponents of utility involvement in the EV space – the capacity for overinvestment and overly permissive returns on equity is vast.

Imposing fair limits on the costs utilities are permitted to recover describes the fundamental purpose of utility regulation, regardless of where the investments are directed. Regulatory mission statements exhort commissioners to approve only costs deemed “reasonable,” “prudent,” “used and useful,” and so on, but commissioners ultimately have a good deal of discretion. Still, with billions of dollars of EV charger and grid modernization projects on the horizon, regulators should consider practices to align regulated rates of return with financial best practices. One potential solution would be to equip all public utility commissions with the financial expertise needed to make competent capital judgments, either through mandatory training or creating new staff positions. A field experiment found that providing commissioners and staff with financial training produced return on equity decisions that were “more aligned with standard asset pricing theory” compared to untreated participants.[10] If ratepayers will be dragooned into fronting the costs of the EV infrastructure revolution, regulators have, at minimum, an obligation to prevent customers from being exploited by the investor class in the bargain.

Utility commissions may also consider reversing the process through which return on equity proposals are considered. Driven by the assumption that utilities are better positioned to project future operational and capital expenses, utilities typically present proposed costs and regulators determine if they are reasonable. These projections include proposed return on equity – one expense category in which utilities have no particular expertise and a manifest conflict of interest. Regulators could excise return on equity costs from the other cost projections and, after conducting an analysis grounded in financial best practices, present proposed cost of equity to the utility, thereby anchoring negotiations at a more reasonable figure.[11]

The other component of protecting ratepayer interests in capital expenditures involves the assessment of whether the investments will actually benefit ratepayers. Where EV infrastructure spending is concerned, this has been the subject of considerable debate.

2. Cost-Benefit: Do EV Chargers Advance the Regulated Utility Mission?

Another core argument against using cost-of-service ratemaking to finance EV infrastructure is that it does not contribute to the regulated utility mission of delivering “least-cost reliable service” – that is, attaining and distributing electricity reliably, efficiently, safely, and equitably. In states where legislatures have given democratic legitimacy to utility involvement, this argument falls flat. In 2015, for instance, California passed a bill specifically enshrining “widespread transportation electrification” as one of the “ratepayer protection objectives,” becoming the first state to commandeer utility ratemaking for the EV cause.[12] But in other states, the question of what direct benefit ratepayers derive from EV infrastructure looms large.

Proponents of using ratepayer funds to finance EV infrastructure may argue that, as environmental consciousness rises and the threats of climate change become ever more salient, the purpose of electric utility regulation has evolved to encompass environmental concerns as well as economic ones. Environmentally minded legal analysis in the early aughts sought to advance the idea that utility commissions had “authority to make decisions with the good of the environment in mind.”[13] Regulator-driven efforts to power the grid with renewable energy sources, modernize rate structures to incentivize conservation, and sunset carbon-producing power generation reflect the institutional foregrounding of these environmental priorities. But such investments are still intrinsic to the mission of transmitting and distributing power to customers. Building electric transportation infrastructure usable only by a small subset of drivers confers no apparent benefit to the majority of ratepayers – aside from a future environmental benefit, the value of which is difficult to quantify.

Ratepayer advocates and utility commissions have also consistently argued that permitting electric utilities to recover costs from EV charging infrastructure will effectively force non-EV owners to subsidize investments that directly benefit EV owners alone.[14] Indeed, California’s ratepayer advocacy group, The Utility Reform Network (TURN), raised this “regressive utility bill taxation” objection in a 2014 proceeding, arguing that low-income communities (who spend a greater quotient of their income on utility bills) will be disproportionally burdened by ratepayer increases while wealthy EV owners reap the benefits at a lower relative cost.[15] Utility regulators may approve cost recovery on EV infrastructure investments in the belief that doing so is in the public interest. But if those costs result in rates that are economically discriminatory, to approve them is to deviate from a core principle of utility regulation – economic equity – outlined in nearly all relevant statutes.

Utilities and policymakers do not shrink from this argument. They insist that the additional revenues captured from EV charging infrastructure will exceed costs, creating downward pressure on all electricity rates and thus passing economic (not merely environmental) benefits to all ratepayers. A 2022 analysis of three utility service territories with the highest EV adoption in the U.S. – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – supports this claim. The study found that, from 2012-2022, revenues from EV drivers surpassed costs by $1.7 billion, creating downward rate pressure across the customer base. The analysis underscores the need to transition to a time-of-use rate structure in order to optimize these gains. Time-of-use rates incentivize EV charging in off-peak hours, enabling utilities to capture additional revenue largely without upgrades to transmission or distribution to support the added peak load of EV charging (upgrades that, of course, would be paid for by ratepayers).[16] From a policy perspective, implementing time-of-use rate structures in tandem with EV charger investments is a best practice. When done correctly, utilities and policymakers can credibly claim that ratepayers derive economic benefits from EV charger investment.

While this is promising, the idea that success stories from territories in California are generalizable to the rest of the country should be met with due skepticism. Utility commissions have an obligation to conduct cost-benefit analyses based on the conditions in their own states and at the time new spending proposals are considered. The preceding analysis details a “ratepayer impact measure” cost-benefit analysis; markets where revenues from EV infrastructure exceed costs have a benefit-cost ratio greater than 1.0, or a “positive RIM.” This is the only form of cost-benefit analysis commonly used in ratemaking proceedings that prioritizes ratepayer impact above all. Regulators should adopt RIM as the standard test to use when considering EV charger investment.[17] Proposed EV infrastructure investments that fail to produce a positive RIM will likely generate unduly discriminatory rates. These investments should not be approved before considering ways to remedy the problem of ratepayer price discrimination.

Examples of utility commissions relying on dubious (or politically convenient) cost-benefit measures to support EV infrastructure investments abound. In 2020, the New York Department of Public Service (NYSDPS) cited analysis from a consulting firm to support its conclusion that projected revenues from a proposed rate base-funded EV infrastructure investment would produce ratepayer benefits in the long run. However, the cited analysis was not even directed at the specific facts of the NYSDPS proposal. The consulting firm had found a niche providing numerous states with EV charger cost-benefit analyses, and NYSDPS drew upon generic facts to support New York’s investment. In another instance of overly permissive regulatory conduct, the Massachusetts Department of Public Utilities determined that its EV charging program need not be subject to the bother of cost-benefit analysis, simply concluding that the program would surely benefit ratepayers, along with the rest of society.[18]

While these are both banal expressions of political regulatory capture – a fundamental problem in utility regulation that predates EV infrastructure proposals – they are worth highlighting. All utility cost-benefit analysis is conjecture, and predicting future use of novel technology is particularly challenging. Predictions that favor EV infrastructure spending assume that EV usage will increase, revenue from charger utilization will be sufficient to cover costs, and utilities would not gain those revenues without, themselves, bankrolling charger infrastructure. A reasonable person may think these are all good bets, but the fact remains that utilities and regulators gamble with ratepayer money. Technological advances, new consumer preferences, and competition in the EV charger market could at any time disrupt the assumptions on which these spending proposals are approved. Regulators who cannot be bothered to conduct timely, market-specific cost-benefit analysis to inform their decisions disregard the risk that they will inflict harm on ratepayers.

On the other hand, several states have attempted to balance the interests of ratepayers with the desire to advance EV infrastructure goals by commissioning low-cost pilot programs.[19] For example, in February 2022, the North Carolina Utilities Commission approved a $600,000, utility-managed pilot program to “[expand] charging infrastructure while allowing the utility to collect data on the impact of this new electric usage on its system.” The program was particularly interested in testing methods to promote optimized, load-friendly charging behavior and expectations for North Carolina customers with residential, in-home EV chargers.[20] The pilot will provide utilities with North Carolina-specific consumer behavior insights they are unlikely to gain from California case studies. Given the many variables involved in EV infrastructure implementation, utilities and regulators who collaborate on deliberative, low-cost pilots like these can protect ratepayer interests as they gather data to inform best practices and future investment proposals.

3. Mitigating Market Power

Generally speaking, utility investment in public charging infrastructure (i.e., everything but single-family home residential chargers) manifests in three different models. The common feature in all three models is utility investment in and ownership of everything “in front of the meter” – the traditional infrastructure that connects the charging station to the grid and provides an “EV Service Connection.” In the aptly named “make-ready” model, a private EV charging company pays the utility to use the EV Service Connection in exchange for the rights to maintain and operate the actual EV charging station. In the “end-to-end” model – the most controversial of the three – the utility invests in and owns everything from the grid infrastructure to the charging station itself. And finally, in the “hybrid” model, utilities are permitted to operate “end-to-end” in designated underserved locations but may only exercise “make-ready” ownership in others.[21]   

“Make-ready” arrangements predominate, but utilities are permitted to operate “end-to-end” in many states. This vertically integrated model has prompted the most backlash. Private EV charger station companies argue that permitting regulated utilities to own and operate charging stations – a potentially competitive downstream market – will create artificial barriers to market entry, stifling innovation, limiting consumer choice, and inhibiting the development of a competitive market.[22] Opponents also argue that if utilities are permitted to “rate base” customer-side charging station equipment, thereby shifting up-front expenses to ratepayers, they will have every opportunity and incentive to undercut competitors on price. Moreover, the competitive edge (for example, in brand recognition and market penetration) utilities gained from decades of operating as government-backed monopolies raises the prospect that they will prevail over new market entrants due to unearned advantages, rather than on the merits.[23]

Utilities, who have every interest in extending their monopoly control to customer-side charging stations, argue that the market has failed to furnish charging stations at a sufficient rate. In a 2022 paper assessing the EV charging infrastructure market, Edison Electric Institute (the association representing investor-owned utilities) noted that regulated utilities are “well-positioned” to address this “charging infrastructure gap” in various ways, including “installing and owning all infrastructure up to, and including, the charging equipment itself.”[24]

One way for policymakers to weigh this debate is to consider if the EV charging station sector would be most efficient under natural monopoly control or in competitive conditions. Given that the high fixed-cost grid infrastructure has already been built, companies that primarily produce customer-side charging station equipment should not face the significant up-front costs that might justify granting a firm market exclusivity. Indeed, one analysis of charging station costs concluded that the market exhibited constant returns to scale and a relatively flat average cost curve. Under these conditions, competition would produce the most efficient market.[25] If the EV charging station market is not fundamentally suited to monopoly control, it follows that the real policymaking appeal of granting regulated utilities incumbent market power in the charging station sector lies in their capacity to extract capital from ratepayers. But even if ratepayer funds are necessary to expediently build out charging stations, regulators should insist on using them to pay for installation rebates or other incentives granted to private EV charging companies. This “make-ready plus rebate” approach, used in several states, balances the pressing need for capital investment with the broader interest in protecting market competition. Inviting charging firms to compete for market share will also likely produce lower costs than would be incurred if utilities simply “rate base” all charging station equipment.[26]

While EV charging station proliferation has not yet reached the critical mass that some expect, firms have displayed encouraging signs of market-driven innovation. In October 2022, ChargePoint debuted a modular charging system that optimizes speed and efficiency based on how much power vehicles are drawing from the charging bay at a given time.[27] In early 2023, Blink Charging released five new products to make its charging technology more user-friendly and expand vehicle compatibility.[28] And ChargePoint also recently announced a partnership with Stem, a battery storage and software firm, to determine ways to integrate battery storage at highway charging stations to lower operating costs and avoid getting charged peak-demand rates.[29] Allowing regulated utilities to enter the customer-side EV charging infrastructure market would signal to private firms that the game is rigged, and would thus have a chilling effect on innovations like these. To maintain a competitive market, regulators must take pains to “quarantine the monopoly” and protect private firms from incumbent market power.

As states continue to look to one another for ideas on how best to regulate the EV infrastructure market, they will hopefully take note of a recent development out of California, which experimented with various forms of EV infrastructure ownership models. After allowing one of its larger utilities to participate in a pilot program testing the “end-to-end” model, the state determined that the “make-ready” program produced equivalent outcomes at a lower price. California officially closed the door on utility ownership of customer-side EV charging infrastructure in November 2022.[30]

Conclusion: Revolutionary Technology, Critical Mission, Familiar Regulatory Challenges

Experts broadly agree that electrifying transportation systems worldwide is one of many critical steps toward avoiding the disastrous impacts of climate change. Over the past decade, a majority of public utility commissions across the U.S. have deemed it prudent to enlist regulated utilities – and the electric bills of millions of U.S. customers – in the cause. These regulators have coalesced around a viewpoint that exploiting the ratemaking process for EV infrastructure can simultaneously advance environmental, energy, and economic goals, and potentially help to avert a global humanitarian crisis to boot. The early returns on this experiment give reason to credit this viewpoint. However, policymakers must also accept the possibility that such a social experiment will fail to deliver on its lofty promises. They should therefore give equal attention to minimizing avoidable harm as they do pursuing desired benefits.  

Implementing social policy agendas through utility ratemaking is lamentably less-than-democratic, governed by processes that are bureaucratic, opaque, and removed from the public spotlight. Nonetheless, public utilities commissions and other policymakers in the utilities space have the resources they need to practice the harm-mitigation principles they must exercise in the EV infrastructure rollout. Investing in critical infrastructure while containing costs and mitigating ratepayer abuse; rooting out discriminatory pricing; determining fair returns on capital investments; considering which market structures maximize social welfare – these are the duties utilities commissions were designed to perform, even if they do not always do so to perfection. The only difference now is that they have assumed responsibility over a greater quotient of public trust. By implementing policies and practices to address observed sources of inefficiency, rent-seeking, complacency, unearned competitive advantage, and regulatory capture, regulators can provide much-needed oversight in the transition to the transportation system of the future.

[1] United States Environmental Protection Agency, “Carbon Pollution from Transportation,” Accessed May 23, 2023.

[2] FACT SHEET: Biden-⁠Harris Administration Announces New Private and Public Sector Investments for Affordable Electric Vehicles, The White House Briefing Room, April 17, 2023.

[3] U.S. Passenger Vehicle Electrification Infrastructure Assessment, Atlas Public Policy, April 2021.

[4] Orford, Adam. 2022. “Rate Base the Charge Space: The Law of Utility EV Infrastructure Investment.” Columbia Journal of Environmental Law 48, 5-6.

[5] Orford, “Rate Base,” 47.; (Totaling estimates of public, non-ratepayer, non-private investment spending.)

[6] William Boyd and Ann E. Carlson, “Accidents of Federalism: Ratemaking and Policy Innovation in Public Utility Law,” 63 UCLA Law Review 810 (2016), 840.

[7] Orford, “Rate Base,” 24-40.

[8] Karle Dunkle Werner and Stephen Jarvis, “Rate of Return Regulation Revisited,” Energy Institute at Haas Working Paper, September 2022, 2.

[9] Shlomit Azgad-Tromer and Eric L. Talley, “The Utility of Finance,” Columbia University School of Law, The Center for Law & Economic Studies Working Paper No. 569, 2017, 3.

[10] Azgad-Tromer and Talley, “Utility of Finance,” 3.

[11] Werner and Jarvis, “Rate of Return Regulation Revisited,” 36.

[12] Kahlert, Kate, "Transportation Electrification: An Examination of the Utility's Role," Mitchell Hamline Law Review, Vol. 46, Issue 1, 2019, 112.

[13] Michael Dworkin, David Farnsworth, and Jason Rich, “The Environmental Duties of Public Utilities Commissions,” 18 Pace Envtl. L. Rev. 325, 2001.

[14] Alexandra B. Klass, “Public Utilities and Transportation Electrification.” Iowa Law Review, Vol. 104: Issue 2, January 2019, 550.

[15] Orford, “Rate Base,” 21.

[16] Tyler Fitch, Jason Frost, and Melissa Whited, “Electric Vehicles Are Driving Electric Rates Down,” Synapse Energy Economics, Inc., October 2022.

[17] Orford, “Rate Base,” 54.

[18] Orford, “Rate Base,” 57.

[19] Orford, “Rate Base,” 57.

[20] Duke Energy Carolinas, LLC’s and Duke Energy Progress, LLC’s Application for Approval of Electric Vehicle Managed Charging Pilots, Docket Nos. E-7, Sub 1266 and E-2, Sub 1291, Feb. 11, 2022.

[21] Klass, “Public Utilities and Transportation Electrification,” 574.

[22] Klass, “Public Utilities and Transportation Electrification,” 550.

[23] Chris Villareal, “The Appropriate Role of Electric Utilities in Transportation Electrification,” R Street Institute, May 23, 2023.

[24] Charles Satterfield and Kellen Schefter. “Electric Vehicle Sales and the Charging Infrastructure Required Through 2030,” Edison Electric Institute, June 2022, 16.

[25] Rob Gramlich, Frank Lacey, Bryan Lee and Zach Zimmerman. “The Benefits of Competitive Electric Vehicle Charging Stations,” Grid Strategies LLC, May 2023.

[26] Orford, “Rate Base,” 48-49.

[27] Jennifer Sensiba, “ChargePoint’s Express Plus DCFC Stations Continue to Improve,” CleanTechnica, October 6, 2022.

[28] Press release, “Blink Charging Unveils Five Next-Generation Electric Vehicle Charging Products at CES 2023, Advancing Electrification Around the World,” January 5, 2023.

[29] Press release, “ChargePoint and Stem to Acclerate Deployment of EV Charging and Battery Storage Solutions,” January 31, 2023.

[30] Public Utilities Commission of the State of California, “Decision on Transportation Electrification Policy and Investment,” Rulemaking 18-1-2-006, November 11, 2022.