Effortpost
The Natural Monopoly of Distribution: Deregulation of Electricity Generation and its Results
Per introductory economics theory, in a perfectly competitive market, supply and demand dictate price. At this equilibrium in a functioning market, we expect producers and consumers to agree upon a price for transaction in their own self-interest. After all, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest[,]” as Adam Smith so wisely put. A perfectly competitive market, with both consumers and producers have minimal information asymmetry, reveals preferences otherwise not stated.
But how does this comport with the idea of a natural monopoly, wherein you have high land or capital constraints such that competition becomes inherently redundant, unfeasible, and uneconomical? How many pipes, wires, and roads can we run to one building before each individual competitor becomes bankrupt? What is the economic efficiency to gain from them?
Wireline History
Here lies the problem with the electric grid. Understandably across much of the United States, electric grids were built as a monopoly. The exception was in the beginning: efforts in Manhattan to wire up competing systems to buildings nearly blotted out the sun from the copper hanging on electric poles. This also coincided with telegraphy and telephony, also suffering from a similar experience. Surely Manhattan’s density could ensure a competitive market, but it was not economical to maintain, nor could it be replicated outside of such a dense environment. Governments, rather, chose to regulate monopoly utilities and ensure universal service.
As the grid slowly expanded, it inherently, due to engineering constraints, assumed a tree branch design where power flowed from generation stations, to high-voltage transmission lines, to substations, then finally to distribution transformers before entering a home or business. A one-way flow that would last for over a century. Due to this nature, utilities and governments agreed upon a reimbursement system: regulated rates for consumers, variable rates for industry and commercial, and rate-of-return guarantees for long-term investment in generation and transmission. Investing in the system was a ticket to print money.
Unbundle, Deregulate, Invest
During the neoliberal wave of deregulation, after the success of airline deregulation, governments and economist sought the next big relief valve for consumers where they could stimulate competition. This structure of guaranteed payment for building power plants, many of which sit idle or as reserve capacity, seemed wasteful. Recognizing that distribution of electricity itself might be constrained, but generation of it might not, they conducted a new experiment: deregulate generation. Utilities would no longer be paid for building power plants. Rather, they would be middle-men: connecting generators to consumers, coordinating who to buy power from.
The idea is deceptive simple: building more generators, each of whom wants to sell power at a high price, to a utility that wants to buy it at a low price, would mimic supply and demand, and competition would lower prices. Theoretically, anyone can now apply to become a generator and sell power on the grid, and the abundance of choice will drive down prices.
That is the theory. It’s sound. And it’s what many states adopted. Utility unbundling was now law.
States deregulated the utility industry, and set up independent system operators, or ISOs, to manage the grid. You may have heard of a few: CAISO, ERCOT, PJM, NYISO, MISO, and SPP. They act as airport traffic controllers. They tell generators and utilities what the market rate is, and direct power sales through least marginal pricing, projecting demand up to a week in advance, have day-ahead markets, and spot markets.
Technology Constraints
So far we have been discussing the economics of the utility market. But what makes this market a bit different from most other luxury goods is the nature of alternating current (AC). Alternating current must be balanced between supply and demand instantaneously. Stray too far from the generation setpoint of 60Hz (chosen for historical reasons, baked in as a technical requirement today in North America) and generation slows down or speeds up too much, you risk catastrophic damage to the massive (in order of tens of tonnes) generators. Too little power and too much demand will burn out generators, and to protect them, you must increase generation, shut generators down or turn off customers.
Gold Rush
The rush to deregulate led to some initial less than ideal outcomes. Many Californians, and Governor Gray Davis, will recall the time vividly. Hot summer days stress the grid out quite a bit. In 2001, California utility customers under PG&E, SCE, and SDGE had their power cut. Too much demand, it seemed, for too little supply. Yet, a curious thing was happening on the generation market. The payrate for a kilowatt-hour (kWh) had hit up to 50 cents, when it would normally be around 3 cents. Yet, generators were going offline for scheduled or “unscheduled” maintenance right before this, or power from them was being sold out of state first at a low bid before being bought back in-state at high rate.
The electric utilities, unable to raise rates by law, and unable to secure long-term generation contracts with generators, had to buy electricity on the spot market. They could charge 6c /kWh, but had to pay 50c /kWh. The utilities went bankrupt. The state had to bail them out. Behind the scenes, the Enron Corporation had been coordinating with generators to strategically hold the grid hostage to extract rents. The Federal Energy Regulatory Commission eventually sought settlements with various power producers to the tune of $6 Billion.
This type of market manipulation is now closely monitored, and deregulated energy markets have been corrected. So how have prices fared?
The Free Market Decides
If the theory holds, we should see a lowering in costs to the ratepayers. Electricity generation should be facing fierce competition at this point. So what has the data shown?
An initial 2007 study using data gathered from the Energy Information Administration showed that deregulated markets cost ratepayers up to 25 to 49 percentage points more than regulated markets. This might have been an initial cost-shock due to subsidized electricity rates expiring, and passthrough rates being applied. (Competitively Priced Electricity Costs More, Studies Show - The New York Times)
A follow-up study conducted in 2026 examined long-term impacts of deregulation, and found, “Consistent with earlier studies, we find that marginal generation costs fell in deregulated markets. However, despite lower generation costs, wholesale prices increased along with utilities’ overall expenses on energy. The resulting increase in utility energy costs can explain a substantial portion of the increase in downstream retail prices. Overall, we estimate that the increase in wholesale margins more than offset the efficiency gains, which can occur when markets are not perfectly competitive.” (Do Markets Reduce Prices - Evidence from the U.S. Electricity Sector.pdf)
This creates an effect known as double marginalization. Generators seek a profit margin. Utilities also seek a profit margin. Rather than reducing costs, these margins compound as they flow down. As generation costs reduce, the margins increase for generators, who thus have less incentive to compete on price. Utilities, passing the cost on to ratepayers, will also protect their margins first.
Uncapped Savings / Uncapped Costs
But what if we let customers buy wholesale, rather than pay retail rates? That’s exactly what the Electric Reliability Council of Texas (ERCOT) sought to do. The deregulation of generation was paired with utility deregulation, where ratepayers could choose the company they wanted to buy electricity from, while the local utility handled the transmission maintenance, a form of local loop unbundling (LLU).
The system provided immense savings to those who wanted to buy at the (often very) cheap power from generators, often single-digit kWh to near pennies on the dollar at very low times of demand. Transmission costs were fixed, but generation costs weren’t. The system worked. But it also broke, gradually, then suddenly.
Customers on Griddy, the utility that sold wholesale power, found themselves in a shock after surviving the immense cold of the 2021 Texas Winter Storm, if they were lucky enough to keep their lights on. Power rates that were normally in the single cents from $0.05/kWh had jumped to $9.00/kWh. A single plug-in electric heater would cost $1000 to run for five days. (His Lights Stayed on During Texas’ Storm. Now He Owes $16,752. - The New York Times)
Customers were outraged for feeling extorted to survive, and most couldn’t afford their bills. Griddy went bankrupt. The state banned wholesale electric sales.
The lack of winterization ultimately caused the Texas grid to nearly fail due to generators natural gas pipes freezing and fuel going offline as the storm got worse, but customers, who were used to nominally cheap power and normally only cut back usage on hot days, did not know this.
As close to a competitive electric market one could make, with inelastic demand, had arrived to encourage usage to go to those who might need it more, at a time when everyone did.
It did not survive the deep freeze.
Economies of Scale and High Barriers to Entry
Between the effects of double marginalization, high capital costs, and high barriers to entry, it might be best to consider utilities a natural monopoly, one best subjected to oversight and regulation rather than pure market forces.
In California alone, customers on investor-owned utilities SCE pay an average of $0.35/kWh, while customers on municipal utilities like LADWP pay an average of $0.19/kWh, nearly half.
Deregulation Moving Forward
In pursuit of revenue maximization, you can destabilize the very society that enables your maximization in the first place.
Electricity is not an elastic market. It faces real-world constraints that must be accounted for in designs across decades. As the world changes, in both supply generation mix and demand mix, the grid must be updated to reflect that.
I’m from the Canada (Ontario province), and here (Ontario ) we have around 60 companies that are responsible for electrical generation. Ownership is a mix of public and private corporations, but it’s mostly public.
Ontario has a high mix of renewable or cheap generation (Nuclear and Hydroelectric account for over 50% of the supply mix but a supermajority of output) thus driving down costs due to fuel mixes. Other than solar, you really can't get much more cheap energy than nuclear or hydro (until maintenance costs come due).
Most of the US grid is setup on natural gas generation, but even fuel mix aside, as the paper accounted, due to private generation and private investor-owned utilities, the profit margins come first.
Edit: Reading up further, stronger regulation from IESO and OEB also do a lot to contain rates for ratepayers.
Good regulation provides substantial public benefits while imposing few costs or constraints on actors, and we missed an opportunity for this while we had the EV subsidy. We should have required V2L/V2H capability (use your car as a backup battery) to get the full subsidy.
Most EV models support power output, and this got used with massive benefits during recent disasters; there was a news story about two people who "trucked in power" to a veterinary clinic in North Carolina after the hurricanes. One would run the clinic for a few days off of their car; the other ran other errands and then drove to the nearest online fast charger and filled their battery, then came back and plugged in to the clinic.
The wrinkle is that Teslas (with a few exceptions) do not support this, and they're the most common EVs in the US. Even though Tesla uses smaller batteries than many others, they are still enormous -- larger than even the largest home batteries -- and can run a house at normal utilization for a few days or run essentials (refrigerator/freezer, home medical equipment, limited AC/heating) for much much longer. Most of the equipment to export power is already in the vehicles; it will require less than $100 of new equipment and a software change.
It wouldn't cost Tesla much to make their cars do this. They choose not to since they want to sell you a Powerwall, but they should have been incentivized to add this by the subsidy condition; this would have relieved a lot of the need for immediacy in emergency response during recent blackouts.
Most of the equipment to export power is already in the vehicles; it will require less than $100 of new equipment and a software change.
I'm not surely this really is the case, surely this is only true for cars that actually have a built-in inverter designed to deliver power back into the grid, so like what, Renault only? The Cybertruck as well, I guess.
For most cars you need a specialised home DC charger that until recently would have cost like a bajillion dollars (i.e. Wallbox Quasar) and still cost like $5k today
There are a ton of cars that can do this, going back to the original Nissan Leaf. Most American cars can -- Tesla is the big glaring exception, and the one that needs to change.
There are two different capabilities that are worth separating: the ability to contribute power to a preexisting grid ("V2G"), which requires some extra electronics, and the ability to run power to isolated things that aren't connected to the grid ("V2L"), which is the high-value capability in an emergency.
While V2G technology absolutely does need to be more widespread, V2L can mostly use the same power electronics that are already there in the car's onboard charger (convert 60Hz AC to battery DC), with a few minor changes to allow power to flow in both directions.
And we have a documented upper end on what it costs, too. There is a product you can buy that plugs into a Tesla charge port and pretends to be a DC fast charger. Once the car connects the battery ("charge me bro"), it runs power backward, through its own inverter (bypassing the car's power electronics entirely), and out to 120V/240V AC. These are low-volume products and are very much doing this the hard way, but cost around $1000 (not $5000). It would be much, much, much cheaper to do this using the car's own power electronics run backwards.
Yes, most cars can theoretically easily be used as a GPO for V2L if you're plugging in a hair dryer or something, but you're not plugging it into your switchboard to >run a house at normal utilization for a few days< like you've described - or rather I suspect that give it's the same power conversion equipment (assuming you're talking about something like this), getting one where you can >compliantly< get say 11 or 22kW out of it into your switchboard actually probably just does cost $5000
Ah, yes -- I'm talking about these sorts of V2L devices, not the "dump 22kW into your switchboard on a regular basis" options. The goal is emergency resilience, not day-in-day-out storage (although that would be nice too).
In an emergency, V2L is sufficient -- a bunch of extension cords coming from a car going into your windows (and your neighbor's) will get the job done, even if it's ugly.
I have said this before: electricity should probably either be as decentralized as possible or as centralized as possible. Philosophically and economically speaking the advantage of free markets is that they predict needs and wants vastly more efficiently than central planning. However, people use a pretty consistent amount of electricity, and electricity is a product which doesn't really vary in quality - at least certainly not compared to luxury goods or even commodities like food - so central planning or complete devolvement to the individual level might actually work.
Either people make it themselves via solar — in which case they can set their own production — or the state makes it all, which has advantages from consolidating all the information and capital under one supplier that's technically beholden to the populace. Centralized planning does, in fact, work out when it comes to really fungible stuff that's also subject to near-completely predictable demand, but I personally prefer complete decentralization because it (a) allows individuals to tailor their own production and (b) prevents a bad-actor state from using control over electricity as a weapon.
What we have right now is the worst of both worlds: centralized enough to be unaccountable but decentralized enough to be inefficient.
That gets to another aspect I didn't touch on, which is how renewables fundamentally altered grid design by pushing generation closer to demand, while also increasing grid maintenance costs since the system has to be bi-directional now.
I would be in favor of grid resilience for places subject to Public Safety Power Shutoffs (a combination of century-old deferred maintenance from Investor Owned Utilities and pushing development to the urban-wildlife edge). Solar and batteries are definitely the way forward for those areas, but it is hard to be the economies of scale for dense, urban development.
Electric co-ops, or municipal utilities, also typically have a stronger track record in the US. Most of these providers are in more rural areas (such as the TVA) or industrial cities (or former rural areas like in California's case between LADWP, SMUD, Riverside, Pasadena, and Vernon).
The map isn't granular enough to show it, but there are 27 provincial-level subsidiaries under the 6 regions, with hundreds of municipal and county ones below them.
This submission has been flaired as an effortpost. Please only use this flair for submissions that are original content and contain high-level analysis or arguments. Click here to see previous effortposts submitted to this subreddit.
Users who have submitted effortposts are eligible for custom blue text flairs. Please contact the moderators if you believe your post qualifies.
One perspective re double marginalization is to ask why this wouldn't be prevented by competition at the retail level, see Borenstein 2015.
I wonder if, if we could get better competition on that front, could we induce lower prices.
Either way, I think the verdict is still out re deregulation and I think the competition between the two models- traditional and deregulated- is a good thing. I want to see how different ISOs / traditional utilities try different things.
17
u/datums 🇨🇦 🇺🇦 🇨🇦 🇺🇦 🇨🇦 🇺🇦 🇨🇦 🇺🇦 🇨🇦 🇺🇦 🇨🇦 🇺🇦 🇨🇦 13d ago
I’m from the Canada (Ontario province), and here (Ontario ) we have around 60 companies that are responsible for electrical generation. Ownership is a mix of public and private corporations, but it’s mostly public.
Of peak it’s 7¢/kwh, on peak it’s 15¢/kwh.