U.S. Electric Markets, Structure, and Regulations

Since the early 1990s, the U.S. electric utility industry has gone through sweeping changes associated with deregulation, regulations, reregulation, and the rate-making process. Due to the largely sunk capital investment and the well-established presence of economies of scale, economies of scope, and vertical integration, conventional wisdom has held that competition is infeasible (at least in the transmission and distribution segments). This same wisdom holds that price regulation is necessary to ensure that consumers pay a fair price and that producers and shareholders are compensated appropriately for the risk associated with holding the stock of the utility (in the case of investor-owned utilities, which supply approximately two-thirds of the power to end users in the United States). This chapter discusses the electric market structure, how utilities recover their costs, the different recovery mechanisms, federal and state regulations, and how the regulatory process can impact rates.