Electricity prices vary significantly across the country. But a state’s average retail rate alone doesn’t tell you what is driving consumer costs—or how different approaches to power supply affect consumers. 

As electricity affordability receives growing attention, consumers and policymakers are looking for answers on what makes up their electric bill.  

But comparing average electricity prices in competitive states with those that are subject to monopoly utility control of power generation (so-called “regulated” and “deregulated” states) doesn’t tell the whole story.  

Comparisons of average residential electricity prices between states can obscure important differences in what consumers are paying for, how electricity markets work, and who bears investment risk. There is significant evidence that vertical integration does not inherently guarantee lower costs or better outcomes for consumers. Vertical integration does not create or cause either lower costs or more reliability, nor does it protect ratepayers from investment risk. Utilities operating under traditional cost-of-service models still face forecasting uncertainty, construction delays, and cost overruns. Competitive markets, meanwhile, have produced measurable efficiency benefits by pooling resources across broad regions and placing more of the financial risk of generation investment on private investors rather than captive customers.

Here are five facts to know about competitive electricity markets, electricity bills, and consumer costs.  

Five Electricity Facts That Matter 

FACT 1: Competitive electricity markets and competitive power generators are regulated. Calling competitive electricity markets “deregulated” is misleading. 

Competitive power suppliers operate under extensive federal and state oversight. What “deregulated” really means is that state utility regulators were no longer responsible for approving power supply costs based on a monopoly utility’s proposed investments. Instead, competing power suppliers make their own investment decisions and compete in wholesale markets to meet electricity demand and reliability needs. Those companies bear the financial risk of their investments rather than automatically recovering their costs from captive customers, regardless of the success or performance of those investments. 

That does not mean power generation is unregulated. Competitive power suppliers operate under extensive federal and state oversight. 

The Federal Energy Regulatory Commission (FERC) regulates interstate wholesale electricity markets and requires jurisdictional wholesale rates to be “just and reasonable.” The North American Electric Reliability Corporation (NERC) oversees mandatory reliability standards, while the CFTC regulates energy derivatives markets. Power plants are also subject to environmental, permitting, and other federal, state and local requirements. 

In competitive markets, generators compete to sell electricity under federally regulated market rules and market power mitigation. In the traditional utility model, utilities build generation under state-regulated cost-of-service frameworks that provide a guaranteed rate of return (“return on equity”) through monthly electricity bills. 

FACT 2: Your electricity bill is much more than the cost of generating electricity. 

Generation is only one part of what customers pay. That distinction matters when evaluating claims that competitive generation or power supply is solely responsible for high electricity bills. The Energy Information Administration (EIA)’s average retail electricity price includes generation, transmission, distribution, taxes, and fees. EIA also identifies fuel availability and costs, power plant costs, transmission and distribution investment, weather, and regulation among the factors that influence electricity prices. 

Lawrence Berkeley National Laboratory found that investor-owned utility distribution spending has grown 6% annually in real terms since 2014 — four times the rate of the previous 20 years. Increased distribution costs since 2014 account for more than 30% of the increase in the national average retail electricity rate, according to LBNL. 

PowerLines, a nonpartisan consumer education nonprofit organization, similarly found that from 2019 to 2023, utility distribution capital spending increased about 50% and transmission spending about 20%. Among utilities that broke spending out by category—representing about $1 trillion of the $1.4 trillion total—49.3% was slated for transmission and distribution, versus 29.8% for generation. PowerLines points to utility spending on transmission and distribution, rather than generation, as the leading driver of electric bill increases. 

Bottom line: You cannot determine the effect of competitive generation by comparing total retail electricity rates. Those rates include large—and growing—regulated transmission and distribution costs. 

FACT 3: Competitive generation changes who bears investment risk. 

Both utilities and competitive power companies need capital to build power plants. The difference is who bears the risk when an investment doesn’t work out as planned. 

A traditional utility can seek regulatory approval to recover prudent capital investments from customers through rates, generally including financing costs and an authorized return on equity.  

Competitive generators use private capital and must earn their returns through markets or contracts with customers (such as utilities, manufacturers, data centers, and other large energy users). They generally do not have a guaranteed right to recover the cost of an unsuccessful generation investment from captive customers.  

That’s particularly important when projects run over budget, fail to be developed, or fail to  perform when needed. At South Carolina’s V.C. Summer nuclear project, for example, regulators approved nine project-related rate increases before construction was abandoned in 2017. State legislative records reported that those increases added about $27 per month to the average SCANA residential bill. 

Competitive generation	Traditional utility generation
Developers put private capital at risk	Utility seeks regulatory approval for investment
Returns depend on market/contract revenues	Approved investment can be recovered through rates
Investors generally bear development/cost-overrun risk	Customers can bear costs of approved investments
No predetermined regulated ROE	Authorized ROE can be included in customer rates

FACT 4: Utility returns are part of what customers pay. 

Investor-owned utilities are generally allowed an opportunity to earn a regulator-authorized return on equity, or ROE, on the equity portion of approved investments. 

That return helps utilities attract capital, but it also becomes part of the revenue requirement recovered from customers. 

This creates an important incentive to examine as utilities propose increasingly large capital programs: the larger the approved rate base, the larger the pool of investment on which a utility is guaranteed a return. 

Competitive generators also seek reasonable profits that support long term investment. But they generally do not earn a predetermined regulatory ROE on generation investments that captive customers are required to support. 

That means the two models allocate both risk and return differently—a distinction that simple comparisons of state electricity rates miss. 

FACT 5: Competition has produced measurable economic and electric grid benefits. 

Economic research has identified measurable efficiency benefits from competition. 

Research published in the American Economic Review found that generating plants exposed to restructured wholesale electricity markets achieved greater efficiency gains, including reductions in nonfuel operating expenses, than plants that remained under traditional regulatory structures. 

Research by economist Steve Cicala, also published in the American Economic Review, found that organized wholesale electricity markets reduced generation costs by about 5%, or roughly $3–$5 billion annually, by increasing trade between regions and improving the economic dispatch of power plants. 

Competitive regional markets also allow resources across large geographic areas to compete to serve customers. This provides important reliability benefits as resources can be pooled across several states. FERC says wholesale markets facilitate the reliable and efficient allocation of power production and transmission, provide investment and retirement signals, support reliability, facilitate new technologies, and allow resources to compete to provide consumers with the lowest-cost power consistent with system needs.  

So what should we ask about electricity affordability? 

Instead of asking simply whether a state is “regulated” or “deregulated,” ask:  

• What part of the bill is increasing? Generation? Transmission? Distribution? Taxes or policy charges?  

• What’s causing the increase? Fuel costs? New infrastructure? Demand growth? State policies? Supply constraints? 

• Who decides what gets built? 

And critically: 

Who bears the financial risk if an investment is too expensive, arrives too late, or turns out not to be needed? 

That’s a much more complete way to understand what consumers actually pay for electricity. 

The takeaway: As demand grows, who bears the risk matters. 

America needs more power to meet growing demand from data centers, manufacturing, and other large loads. But forecasts are not guarantees. Projects can be delayed, downsized, relocated, or canceled—and someone bears the financial risk if infrastructure is built for demand that does not materialize. 

In vertically integrated states, utilities may build generation based on projected demand and recover approved investments through regulated rates. Depending on state rules and regulatory decisions, captive customers can be exposed to the cost if those forecasts prove too high. 

Competitive generation puts more of that risk on private investors. Developers must decide whether anticipated demand justifies putting their own capital at risk. They pay the upfront costs, bear the consequences of cost overruns, and generally cannot charge captive customers for a project that fails to earn enough revenue. 

Understanding Power Market Price Increases 

Market prices play an important role in that system. When electricity supplies get tight, higher wholesale prices signal the need for additional generation, storage or other resources and can attract private investment. High prices alone therefore do not establish that competition has failed; the underlying need for additional supply—and the cost of meeting it—exists under either market structure. 

Again – the key difference is who bears the investment risk. In competitive markets, generators and their investors generally bear the risk of building new generation, going over budget, or investing for data center demand that falls short of expectations. In the vertically integrated model, much of that risk can ultimately fall on captive utility customers. 

Learn More:

New Utility-Backed Report Contains Serious Flaws

R Street: What 1996 Can Teach Us About Today’s High Electricity Prices