When consumers get their utility bills every month, it’s not always clear why energy costs as much as it does — and there’s usually no other options to choose from.
Since the pandemic, prices have risen quickly and stayed high. On average, a dollar today buys as much as 80 cents did in 2020 – that’s 25 percent inflation in just five years. Last year, inflation averaged out to about 3%, including for electricity.
Utilities across the country, including those in Missouri, have been raising their prices to recoup costs of energy investments and the price of fuel. For the most part, customers don’t want to pay more.
When customers dislike the price of groceries or a streaming service, they can shop around for a better option. But for electricity, there’s usually just one provider available.
That’s because electric companies are monopolies — a single business that’s the only source of a service in a certain area. Richard Hirsh is a professor at Virginia Tech, and he said the system was set up that way from the beginning.
“In 1882 Thomas Edison built the first electric power plant that provided a large number of customers electricity in New York City,” Hirsh said.
For a long time, that system worked. From the turn of the century until World War II, Americans consumed more and more electricity, and due to technological advances utilities could provide it at relatively reasonable prices, Hirsh said.
“The economies of scale in the utility industry enabled companies to produce cheaper and cheaper electricity and charge lower and lower rates in a way that would not occur in a competitive system. So here is the justification for natural monopoly status,” he said.
There are also mechanical reasons it's easier for just one company to make or deliver electricity to a town — power lines.
“If somebody is already running wires down your street, it's both economically inefficient and just a bad business idea to say we're going to spend a lot of money to do exactly what they're doing already,” said Severin Borenstein, a professor of economics at UC Berkeley.
Borenstein said “natural” monopolies occur in industries that require large upfront investments and have other barriers to entry.
“This is how the phone system worked for years, until they created a system where they didn't need the wires and they could do it over the air,” he said. “We haven't figured that out with electricity yet.”
But monopolies generally have a bad reputation because without competition, companies can set high prices without worrying that customers will switch.
“The solution in most cases, was to create these state regulatory bodies that would monitor the utility companies,” said Hirsh.
State government agencies, often called public service commissions, keep watch over this system. Since the companies are subject to government oversight, these “natural” monopolies are also, in most cases, “regulated” monopolies.
Utility regulators in each state are tasked with ensuring companies provide safe, reliable and affordable electricity. But when the 1970s energy crisis hit, the public started asking whether this type of regulation was really working.
“There was a lot of public opposition to the fact that electricity rates increased in tandem with other energy costs during the 1970s, during the energy crisis,” Hirsh said of the time when global oil availability dropped, causing shortages and price hikes in the energy sector — most infamously spurring long lines of cars hoping to buy gasoline.
Up to this point, utility markets were mostly vertically integrated. That means the same companies often owned the generation, transmission and distribution of energy — every rung on the ladder.
After the energy crisis, the industry saw a push for more competition. The idea was that an energy market could lower costs, like what happens in other industries. But so-called “deregulation” had its own tradeoffs.
“There was a lot of sort of happy talk about how markets will lower our costs, mostly by people who didn't understand how markets actually work,” Borenstein said.
In places that tried it — such as Pennsylvania and California — prices didn’t go down, for a number of reasons. Some companies artificially lowered supply to charge higher prices.
Since then, the push for competition has mostly slowed down — meaning residential customers usually don’t get to choose who powers their home.
Borenstein said despite the public’s frustration with the increasing price of electricity, a free market for energy isn’t likely anytime soon.
“We need wires that go to everybody's house or company, and as long as that's the case, we're going to have monopoly utilities,” he said.
