This revenue requirement must be approved by the state’s public utilities commission, which prevents utilities from overcharging customers for electricity. Retail electricity prices in these areas are set based on recovering the utility’s operating and investment costs alongside a “fair” rate of return on those investments (collectively called a revenue requirement). To keep electricity rates reasonable for customers, state regulators oversee how these electric utilities set electricity prices. Utilities in traditionally regulated regions operate as a monopoly in their territories, which means that customers only have the option to buy power from them. Today, only one third of US electricity demand is serviced by these integrated utility markets because many states have abandoned this system in favor of deregulation. Prior to the 1990s, most investor-owned electric utilities were regulated and vertically integrated, which means the utilities owned electricity generators and power lines (distribution and transmission lines).
This explainer discusses the different types of US electricity markets, how they are regulated, and implications for the future given ongoing changes in the electricity sector.įor definitions of bolded terms and other concepts related to the electricity grid and industry, check out “ Electricity 101. These regulatory constructs determine how retail and wholesale electricity prices are set and how power plants are procured. These investor-owned electric utilities can be either regulated and operate as vertically integrated monopolies with oversight from public utility commissions, or they can operate in deregulated markets where electric energy prices are set by the market with some federal oversight of wholesale market operations. While many cities are served by municipally owned utilities and some rural areas are served by customer-owned rural cooperatives, most electricity customers are served by utilities that are owned by investors. In the United States, how electricity is bought and sold varies by region.
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