Based on a new report from the Institute for Local Self-Reliance, John Farrell argues that the monopoly granted to private, investor-owned electric utilities by state governments is preventing the United States from accessing cheaper, cleaner, and more dependable electricity.
The government-granted monopoly of investor-owned electric utilities is jeopardizing the success of the federal government’s largest-ever investment in clean energy: the Inflation Reduction Act. The Act set aside $369 billion for climate and clean energy initiatives, such as tax credits for the manufacturing and purchase of heat pumps and solar panels. The monopoly franchise granted to private, investor-owned electric utilities allows them to underinvest in energy efficiency and clean technologies, prioritize shareholder returns over customer service, sabotage potential competitors, and evade accountability. Electricity production in the United States generates costly negative externalities; these costs are exacerbated by the insensitivity of the monopolist utilities to consumer demands.
And these costs are staggering. The power plants run by utility companies were integral to climate change and still account for 32% of energy-related carbon dioxide emissions each year in the U.S. The costs of this pollution to human health equals the price paid for all electricity sold each year in the U.S.––at least $360 billion––and includes a lifetime sentence of asthma for millions of children. Recently, utilities have hiked electricity prices to record levels in many regions, triggering a debilitating routine of shutoffs for many families. Energy inflation exceeds general inflation, and past reports from the U.S. Energy Information Association have found that investor-owned utilities are less reliable and more expensive than public utilities, which serve 14% of the U.S. population. Investor-owned utilities are able to get away with these costs due to political inertia on the part of policymakers and political connivance on the part of the utilities, including bribery and lies about the impact monopoly utilities have on the environment and society.
How private utilities maintain their monopolies
Unlike many of today’s biggest monopolists, such as Amazon and Live Nation, investor-owned utilities won their monopoly explicitly and directly over a century ago by convincing state legislatures to grant them the exclusive right (or franchise) to serve a given geographical area. At the time, a single distribution grid was more efficient than multiple competing sets of wires strung to each building, and economies of scale meant larger utilities could deliver significantly lower electricity prices with the contemporary technology. Public oversight was necessary to prevent these natural monopolies from subverting the public interest through exorbitant pricing or poor investment.
Today, two-thirds of U.S. states retain vertically integrated investor-owned monopoly utilities that own everything from home meters to transmission lines to the power plant that generates electricity. In the remaining states, utilities don’t own power plants but maintain a monopoly on electricity distribution. Generally, utilities don’t make profits based on the marginal costs of generating and distributing power. Regulators will cap these charges to consumers near the break-even point. Instead, in nearly every case, regulators allow utilities to charge consumers a certain percentage above the break-even price of day-to-day operating expenses profits for investing capital in infrastructure, whether or not it could have been avoided or done more cheaply by their competitors. This encourages utilities to invest in more expensive infrastructure, regardless of whether it is cleaner or more efficient. These profits drive nearly 8% higher returns for utility shareholders than other low-risk investments like government securities—constituting “a sizeable transfer from consumers to investors.”
However, in recent years, technologies like rooftop solar have eroded the public benefits of monopoly in the electricity sector. State oversight––via legislatures and regulatory commissions––has failed to keep pace. Like monopolists in other industries, investor-owned utilities take advantage of their monopoly power and loose public oversight to undermine competition and innovation, and favor their own business. Utilities’ exclusive control over the towers and wires of the electricity distribution grid allows them to block independent producers from connecting to the grid. For example, in Minnesota, Xcel Energy unilaterally reduced available grid capacity by 20% to cut off as many as 200 community solar projects from connecting to the grid.
Utilities also withhold important information from customers and would-be competitors, often leading to project delays. In California, utility PG&E impedes solar projects by refusing to tell prospective solar customers when their project inspections will happen. They then claim that the customer canceled the inspection if no one is available when they arrive unannounced.
Vertically integrated utilities often buy power generation from its upstream components to then sell to consumers, but if there are other competitors in the upstream market it must make this process open. Utilities have been found to rig the bidding processes for power and manipulate contract negotiations to curb competition in power generation. One example is Florida utilities FPL and Duke Energy Florida, which have selected themselves as the winners of almost all of their purportedly competitive procurements going back decades. Similarly, utilities have tried to prevent the construction of new transmission lines that could lower bills for customers and enable more clean energy to connect to the grid. In Louisiana, Entergy built a gas plant to undermine a regional plan for new lines that could have opened the state’s market to lower cost renewable energy.
Investor-owned utilities do not only rely on business strategies to entrench their power and self-preference their own services. They also reinforce their market dominance with a massive political influence machine––regularly engaging in deceptive, unethical, and outright illegal political activity––built on the revenue extracted from captive customers. In Ohio, investor-owned utilities spent $60 million to bribe public officials to pass legislation that diverted billions of dollars into utility pockets. In California, decades of negligence on transmission line maintenance have sparked several record-breaking wildfires, causing widespread destruction and loss of life—with no major consequences from state regulators, some of whom have engaged in documented “revolving door” activity with the utility after leaving office. In Florida, the state’s dominant monopoly utility has intentionally confused voters to defeat reformist legislators by funding “ghost candidates” with names matching those of incumbent politicians. This “ghost candidate” scheme ultimately cost at least one legislator his seat—a stiff punishment from the utility for his proposal of a law to allow landlords to bypass FPL’s monopoly to sell rooftop solar power directly to their tenants. With lobbyists making a mockery of supposed state oversight, monopoly utility shareholders keep pulling the arm on a rigged slot machine, requiring captive customers to pay out the rewards.
What an electricity system should look like
A functional electricity system would look much different than our monopoly one. At its core would be an unbiased, nondiscriminatory operation that opens up the market to competitors to deliver clean, affordable, and reliable electricity to everyone. An independent operator would coordinate the needs of customers and independent producers to provide electricity and grid services in exchange for reasonable compensation. Because independent operators would be much less likely to have shareholders, and thus would lack that strong incentive to overinvest or spend profligately to earn more back from the government, it could choose competitively provided services––everything from rooftop solar to controllable electric vehicle chargers––at lower costs. The independent operator would focus on maximizing the public value of independent operators––by procuring storage to complement rooftop solar, for example––rather than stifling their participation. Instead of monopolies overbuilding utility-owned infrastructure or prioritizing utility-owned power plants, a functional grid operator would seek innovative combinations of private and public resources that could deliver comparable benefits and cleaner energy at lower costs.
Building a functional electricity sector means admitting that the system of “regulated,” for-profit monopolies has failed, and requiring state and federal lawmakers to pursue a three-step restructuring of the electricity sector. First, state legislators must create fair markets in every part of the electricity system ––from power generation to demand response to ancillary services––that isn’t a natural monopoly like electricity distribution. Congress can bolster state reforms by removing antitrust immunity for investor-owned utilities, aiding state efforts to ensure fair access to markets and better outcomes for consumers.
Second, to prevent for-profit monopolies from using control over the grid to inhibit competitors, transmission and distribution infrastructure––the parts of the electricity market that are natural monopolies––should be operated as a commons by non-profit, cooperative, or public entities. These grid operators would not be permitted to participate in competitive upstream and downstream markets, such as power generation or energy efficiency, to further ensure that they have no incentive to favor any market participant, from power plant providers to rooftop solar owners. These commons would be open equally and non-preferentially to independent participants such as power plant providers and rooftop solar owners.
Finally, a grid freed from monopoly gatekeeping must also have rules to ensure the repair of historic harms—from pollution to lack of affordability—imposed upon communities of color and low-income customers. On average, energy as a fraction of income is 43% higher for Black households than white households, and for Native American and Latino households this figure is 45% and 20%. Redlining and a biased lack of access to financing forced and continues to force people of color to live near gas wells or power plants, exposing them to pollutants. Black communities experience premature deaths related to exposure to nitrogen dioxide, one of these pollutants, at a rate that is 47% higher than the national average. These communities should be given greater access to financing and tools that will reduce their disproportionate energy bill and health burdens.
Our hopes for clean, affordable electricity for all will continue to be trampled by private monopoly utilities unless lawmakers act to restructure the system. Independent distribution and transmission––supported by vigorous antitrust oversight––will prevent monopoly gatekeeping even as it supports competitive innovation to deliver clean, affordable power to all. We can affordably meet our climate aims and repair harms to historically marginalized communities, but only if we break up the utility monopoly and clear away their barriers to our success.
Author’s Disclosure: The author works for the Institute for Local Self-Reliance, which receives most of its funding from private foundations, such as Ford Foundation, 11th Hour Project, and Nathan Cummings Foundation. Read ProMarket’s disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
