Washington, D.C. — Amid growing recognition of the need to reform America’s electrical utility system to reduce consumer costs, improve reliability, and accelerate the transition to cleaner energy sources, the American Economic Liberties Project today released a new white paper, with contributors from the Massachusetts Institute of Technology (MIT), outlining policy recommendations to reform investor-owned utilities. The paper, “Reforming the Utility System to Better Serve the American Public,” is the third installment of Economic Liberties’ Industrial Policy and Competition Series.

“Thoughtful reform of investor-owned utilities can cut household costs, strengthen grid reliability, and better incorporate clean energy sources,” said Bharat Ramamurti, Senior Advisor for Economic Strategy at the American Economic Liberties Project and former Deputy Director of the National Economic Council. “Structural reforms at both the federal and state level can help push utilities towards better serving the public interest.”

After reviewing the history of electricity markets and regulation in the US, the paper identifies four core structural issues, and offers reform recommendations for each.

The first issue is distorted incentives stemming from the terms governing how utilities make money. Under the standard “cost-plus” regulatory framework, utilities profit in proportion to their capital expenditures, rather than in relation to their efficiency, resilience, or reliability, incentivizing overbuilding and inefficiency at the expense of captive ratepayers. (Rates of return often exceed utilities’ cost of capital, allowing for fat profits that add billions annually to consumers’ bills.) The paper also notes that the the price of electricity in the market as a whole is set by the price of the last, most expensive, generation technology to meet this demand, further inflating ratepayer costs. Reforms include adopting a “performance-based” regulatory framework to better align incentives with cost, efficiency, and other policy goals.

The second and third issues concern utilities acting to maintain their monopolies at the expense of better service and technological innovation. For example, utilities have been known to oppose the construction of new transmission lines that would save customers money but reduce profits. Utilities also leverage their political and monopoly power to fight the deployment new innovations that would negatively affect their bottom lines, such as rooftop solar panels. The paper calls on FERC to rigorously prevent any further anticompetitive mergers, and lays out additional reform options including legalizing and directly incentivizing consumer uptake of solar panels and other distributed energy resources.

Finally, the paper discusses widespread corruption, fraud, and abuse perpetrated by utilities, which often have cozy relationships with their state regulators. Utilities have been caught using ratepayer funds to lobby against diversified renewable energy sources, making deals with public officials and large industrial customers to pass on rate increases to small businesses and residential consumers, and more. The paper lays out reform options including Congressional or state legislature reinforcement of utility-regulator prohibitions on charging customers to support direct spending on elections.

Read the full paper, “Reforming the Utility System to Better Serve the American Public,” here.

Learn more about Economic Liberties’ Industrial Policy and Competition Series here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; foreign trade arrangements support domestic security and democracy; and wealth is broadly distributed to support equitable political power.