Utilities Just Became a Political Stock

What changed

Regulated utilities have historically been a simple investment proposition: a monopoly with a state-approved rate of return, allowed to earn on capital deployed. More capex, more earnings. The AI data centre boom looked like the largest capex opportunity in the sector's history.

Dozens of utilities received data centre requests for at least 700 gigawatts of power connection development in 2025 — more than the 477 GW of electricity the United States consumed in all of 2023. Even accounting for projects that will never be built, the request volume alone drove a ramp-up in generation, transmission and transformer investment.

Then the bills arrived. Residential retail electricity prices rose 7% in 2025, with piped gas up 11%. Federal data showed 94.9 million electric utility customers received final disconnection notices in 2024, with power ultimately cut to 13.4 million households.

The cost allocation fight

The technical dispute is over who pays for infrastructure built to serve data centres, and it plays out across three regulatory layers that do not coordinate.

As of mid-2026, 24 states had approved at least one large-load tariff designed to make data centres cover their own infrastructure costs. These operate at the third layer only. They do not govern the first two.

That distinction has real consequences. PJM's own market monitor documented $13 billion in added costs distributed across regional ratepayers from data centre load additions in its Q1 2026 state of the market report — driven by capacity auction mechanics under FERC-approved tariff rules, not by any state rate case. A separate assessment attributed roughly $23 billion in customer price increases lasting until at least the end of 2028 to expected data centre power demand.

A state can pass a perfect large-load tariff and its residents' bills can still rise, because the cost is arriving through a layer the state does not control.

Why this is now an equity risk

Jefferies' power and utilities analyst Julien Dumoulin-Smith framed the shift precisely: the industry's 2026 narrative is moving from "capex growth at all costs" to "capex growth with a customer permission slip." He added that utilities failing to demonstrate concrete affordability mitigants face reputational risk and may warrant a credibility discount in valuations.

That is a sell-side analyst telling investors the multiple, not just the earnings, is at risk.

The specific mechanisms:

Disallowance risk. Regulators facing angry ratepayers may decline to approve full cost recovery on investments already made. Nearly half the rate hikes requested were still pending going into 2026 — and pending requests are exactly what gets scrutinized in an election year.

Stranded capacity. Utilities building generation for 700 GW of interconnection requests, when most will never be built, risk deploying capital against demand that does not materialize.

Moratorium contagion. New York's statewide moratorium is the first. Politically, first movers on popular policies are rarely the last. Arizona's governor proposed a per-gallon water fee on data centres and removal of the sales tax exemption, describing it as a $38 million corporate handout.

Political scrutiny of returns. Consumer Reports and others have highlighted rising utility profits alongside rising bills — a framing that invites regulatory response to allowed returns on equity.

The bull case, honestly stated

Electricity demand is genuinely growing for the first time in two decades, which is a real structural tailwind after years of flat load. The Electric Power Research Institute found data centres actually put downward pressure on average electricity prices through 2024 by spreading fixed costs across more consumption — the dynamic only reverses when demand outpaces supply.

Large-load tariffs, if they work, protect residential ratepayers and let utilities serve the load profitably. And utilities that lead visibly on affordability may earn regulatory goodwill that translates into better outcomes than peers.

The bear case does not require the growth to be fake. It requires only that the political return on approving cost recovery becomes negative for the people who approve it.

What Canadian investors should know

Canadian investors hold this exposure through U.S. utility ETFs, dividend-focused funds and individual names — often specifically for the income. Two Canadian-specific considerations:

U.S. utility dividends face 15% withholding tax in a non-registered account or TFSA, but are exempt in an RRSP or RRIF under the Canada-U.S. tax treaty. For a sector held primarily for yield, account location is not a detail. Model the difference with our dividend tracker and capital gains calculator.

Ontario and Alberta face structurally similar questions about generation capacity and who funds it, though under different regulatory frameworks.

Bottom line

Utilities are usually the sector you buy when you do not want to think about politics. In 2026 they are the sector where politics determines the return on the largest capital deployment in the industry's history — and the vote is in November.

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