OPINION:
Another day, another claim that greedy electric companies are driving up power bills. Yet facts are stubborn things, and any serious review of rising electricity prices shows that utilities are not the cause.
To understand why power bills are rising, it is important to know that increases in electric bills are not uniform throughout the country, and the causes differ by region.
Higher residential electricity rates have been concentrated largely in California, the Northeast and parts of the mid-Atlantic, according to a study conducted by Charles River Associates.
The study showed that California’s rate increases were driven primarily by wildfire expenses and rooftop solar rules. In the Northeast, the rate increases were associated with the market structure, in which utilities must purchase power through auctions run by independent system operators, as well as with constraints on access to natural gas needed for power plants.
In the mid-Atlantic, the study found that rates were rising because of a combination of increased demand from data centers and market structure. This is similar to the situation in the Northeast, where most utilities may not construct, own or operate power plants but must instead purchase power in auctions run by PJM, the regional transmission organization.
Before the development of regional transmission organizations and independent system operators, utilities built power plants, transmission lines and distribution facilities to serve customers. These utilities were regulated by state public utility commissions, which had to approve infrastructure investments and set the rates the utilities could charge customers.
This system, which still exists in many states, offers transparency and protection to customers.
Yet with the implementation of regional transmission organizations and independent system operators, many utilities are prohibited from building power plants to serve their own customers. Instead, merchant generators now build power plants and sell their power through auctions run by regional transmission organizations and independent system operators with little oversight.
Regional transmission organizations and independent system operators hold locational marginal pricing auctions to set the price of all electricity and, in some cases, the capacity provided by power plants. This means that regardless of how cheaply power can be provided by a particular generation facility, every power plant is paid the price at which the most expensive power plant bids and clears in the auctions. These costs get passed on to customers.
Utilities do not profit from the power they must buy at these auctions, but merchant generators can profit from the power they sell into the auction.
The irony is apparent. Critics call it outrageous that utilities build power plants for their customers and charge them the actual cost of those plants, with a reasonable profit set by state regulators in public hearings.
Meanwhile, merchant generators pocket potentially unlimited profits with little to no oversight, contributing to higher prices for others.
The problems with this market structure have been exacerbated by the demand for electricity coming from new data centers, electrification and various other public policy decisions. Electricity prices are rising, and reliability is under threat.
In the most recent PJM capacity auction this July for the 2028-2029 delivery year, the auction was short 6,800 megawatts of generation capacity. So customers are getting the worst of both worlds: They are paying more for less reliable electricity.
Compare this situation with the states and regions that still use the state-regulated, vertically integrated utility model. In the Southeast, utilities have been building new power plants, supporting new manufacturing facilities and data centers and providing reliable service — and their rates are generally below the national average.
Utilities throughout the country are working with their state regulators to adopt rules that ensure large new customers, such as data centers, pay for new power plants and transmission lines, thereby protecting American families and small businesses from subsidizing economic giants.
The bottom line is that both utilities and merchant generators make a profit from building power plants and selling electricity. The difference is that utilities’ profits are set by state regulators, and those utilities are obligated to serve all customers. Merchant generators can earn profits that are unrelated to their costs and have no obligation to serve customers.
It is time to stop blaming utilities for rising energy costs. The reality is that utilities play a vital role in providing reliable, affordable and abundant electricity.
• Bernard L. McNamee is a former commissioner on the Federal Energy Regulatory Commission.
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