US Electricity Markets 101
An overview of the different types of US electricity markets, how they are regulated, and implications for the future given ongoing changes in the electricity sector.
In the United States, how electricity is bought and sold varies by region. 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. 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. These regulatory constructs determine how retail and wholesale electricity prices are set and how power plants are procured. 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.
Deregulated Markets
Beginning in the 1990s, many US states decided to deregulate their electricity systems to create competition and lower costs. This transition, known as restructuring, required electric utilities to sell their generating assets and led to the creation of independent energy suppliers that owned generators. Because each new independent energy supplier could not cost-effectively create their own power line infrastructure, electric utilities held onto these assets and became transmission and distribution utilities, which continue to be regulated.
The biggest impacts resulting from deregulation were changes to retail and wholesale electricity sales, with the creation of retail customer choice and wholesale markets.
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Retail Deregulation: Customer Choice
​In deregulated areas, electricity customers have the option of selecting an electric supplier (known as customer choice) rather than being required to purchase electricity from their local electric utility. This introduces competition for retail electricity prices. Since many electric suppliers can exist within a region with customer choice, electric retailers offer competitive prices to acquire customers. For customers who choose not to select an independent power supplier, their local utility is still obligated to provide them with electricity that the utility will purchase from generators.For consumers, there are pros and cons to selecting a supplier other than their local utility company. Retail competition can help lower a customer’s electric bill and allow them to tailor their energy use to their preferences, such as by selecting a clean energy supplier. However, independent companies often require customers to sign contracts, which can lock them into a set electricity price for multiple years (Contracts with generation suppliers typically offer the customer a fixed charge—dollars per kilowatt-hour of power—over a certain amount of time). While fixed rates could be beneficial for some customers, they could also negatively impact others if the rate they agree to ends up being more expensive than the rate set by the local utility. Also, it is important to note that customer choice is only applicable for the generation portion of a customer’s utility bill because transmission and distribution services are still provided by the local utility company, since these services are a natural monopoly (as discussed above). Consequently, only a portion of electric rates in these areas are set competitively.