As electricity demand surges amid the expansion of data centers and advanced manufacturing, a free-market think tank convened energy experts Wednesday to debate whether traditional utilities, competitive electricity markets or some combination of the two offer the best path toward delivering reliable, affordable power to Americans.
The American Enterprise Institute’s virtual roundtable examined the advantages and shortcomings of the economic and regulatory models that have delivered the nation’s electricity industry for decades. Panelists explored whether those models remain equipped to meet growing demand or whether a hybrid approach could capitalize on the benefits of both traditional utility regulation and market competition while keeping electricity affordable.
The primary means of delivering electric power in the U.S. for most of the 20th century was a vertically integrated model. Electric companies emerged in the 1880s after Thomas Edison developed the first commercially viable lightbulb. Initially, they generated and distributed electricity locally. Over the following decades, many consolidated into monopolies serving increasingly large territories, as building competing networks of power lines to serve the same areas would have been costly and inefficient. Though they began as private companies, states increasingly began regulating them as public utilities, alongside water and gas companies.
Today, most of Florida’s electricity is supplied by vertically integrated utilities operating under the traditional, state-regulated utility model. Two of Florida’s largest electric utilities, Florida Power & Light and Duke Energy Florida, are vertically integrated, meaning they handle all three stages of electricity service: generation, transmission and distribution. Transmission is the transport of large amounts of electricity through high-voltage lines over long distances, while distribution is the local delivery of electricity from substations to homes and businesses.
In exchange for operating as monopolies within designated service territories, investor-owned utilities are subject to state oversight. In Florida, the Florida Public Service Commission regulates their rates and services.
In the 1990s, however, federal regulators encouraged greater competition in the electricity industry, including the development of regional transmission organizations, or RTOs. These organizations facilitate competitive wholesale electricity markets, where generators sell power to utilities and other suppliers, and coordinate electricity transmission across large geographic regions.
Over time, states and utilities adopted different approaches. Some states restructured their electricity industries, introducing competition in power generation rather than relying exclusively on vertically integrated utilities. Others retained the traditional model, while some vertically integrated utilities joined RTOs without abandoning their existing business structures.
Panelists expressed sharply differing views Wednesday on the merits of the two models.
Devin Hartman, president of the Lighthouse Energy Institute, argued Wednesday that introducing competition in power generation, including through regional electricity markets, addressed shortcomings in the traditional utility model, which he often described as the cost-of-service model.
“Cost of service puts the entity, the utility, in the business essentially of being motivated to build their rate base and maximize the rate of return,” Hartman said. “This model was in place for many decades, but because of those perverse financial incentives and some inadequacies in being able to effectively have regulation that substituted for competition, by the 1980s we saw very high levels of cost accumulation and stranded assets.”
Those issues “necessitated vertical unbundling” of utilities, according to Hartman.
For business customers, Hartman said expanded competition has produced “very clear benefits of having a market model,” but for residential ratepayers, he noted “a lot of mixed evidence in the literature on this.”
Going forward, Hartman advocated for continued movement away from reliance on vertically integrated utilities where possible, particularly by allowing large-load customers like data centers to purchase electricity from competitive suppliers.
But Noel Black, chief regulatory and external affairs officer for Algonquin Power & Utilities Corporation, advocated for the vertically integrated model.
Though he called himself a “capitalist at heart,” he believes the vertically integrated model is successful, sophisticated and allows for the most precise integrated resource planning that’s needed for building out the grid to meet demand. And he believes it’s a mistake to treat electricity like any other commodity and not a public necessity.
“Large parts of our grid are managed by policies that I think are based on a really significant false assumption… that electricity behaves like any other commodity,” Black said. “From my view, an intentionally designed and engineered system, the vertically integrated system… fits together this economic elixir that is electricity.”
He also believes “there’s room for markets” in delivering electricity but questioned whether RTOs and other competitive market arrangements have ultimately produced net benefits for the industry and consumers.
“The RTOs alone cost billions and billions a year to run,” Black said. “[And] FERC spends an enormous amount of its resources engaging in sort of market understanding and management versus vertical integration resources spent… If you pile them all up for the RTO costs and the company’s costs and FERC and other things, that ecosystem is enormous.”
Kevin Blake, legal adviser to FERC’s current chairman, took a more middle-of-the-road approach.
He noted flaws and strengths in both models. State regulators overseeing vertically integrated utilities can approve excessive construction, driving up costs for ratepayers, while RTOs – particularly PJM Interconnection, which operates the power grid across much of the Northeast and Mid-Atlantic – can underplan and underbuild because generation and transmission planning are less centralized.
He also cautioned against viewing RTOs as laissez-faire markets, describing them instead as complex administrative structures.
Particularly for restructured markets with RTOs, good governance is key, according to Blake, because they have to balance the competing interests of utilities, power generators, consumers and regulators across multiple states.
“We have an industry that is moving at a lightning pace right now, and even if some of these RTOs have the culture and the will to to move, which can be a big if, they get stuck in the quicksand of what is the stakeholder process and governance architecture that’s just not designed to allow for vast and decisive and transparent action,” Blake said.
Ultimately, Blake said both models, or variations of them, can be effective, but their success depends on strong governance and implementation.
“Whatever a region chooses in terms of their structure, I think success ultimately depends on how it’s managed and how it’s implemented,” Blake said.
Joy Ditto, former president of the American Public Power Association, like Black, emphasized the importance and success of the vertically integrated model and advocated for its inclusion in any kind of hybrid for its ability to coordinate planning.
“There is no perfect world in this situation, but I think we have to be very honest with ourselves about what has worked and what has not,” she said.
