28 May 2025 9 min read Big Dystopia

The surprising, infuriating way electric utilities make money

It sounds ridiculous, but most electric utility companies don't make money selling you electricity. In fact, many of them don't even produce their own electricity. So what do they do? And how do they end up making millions of dollars in profits every year?

Illustrations by Dr. Aarati Asundi (@sykommer)

Today we're taking a medium-deep dive into the polluted waters of everyone's de facto favorite state-sanctioned monopoly: the Investor-Owned Utility (IOU) company.

Hold your nose and dive in!

1. What do electric utilities actually do?

Electric utilities have three functions, though only some of them are allowed to do all three.

Build generation

Generation refers to things that produce electricity like natural gas power plants, nuclear reactors, wind turbines, and solar farms.

Manage transmission

Transmission refers to sending that electricity along high-voltage power lines from wherever it was produced to a substation near its ultimate destination.

Manage distribution

Once the electricity arrives at the substation, it gets stepped down, i.e. made less powerful, and is distributed locally via lower-voltage power lines. In some densely populated places like New York City, most of these power lines are buried underground.

But not every utility is allowed to generate electricity. The biggest IOUs in the U.S., serving 70% of the population, are legally prohibited from owning any form of power generation—they're only allowed to "manage the wires", i.e. build and maintain transmission and distribution (T&D) infrastructure. The rules are different depending on state regulations and who owns the utility.

This wasn't always the case. Historically, all the utilities could own and operate every step of the electricity generation and distribution process. Some still can: these are known as vertically integrated utilities. But during the late 80s and 90s, many utilities (alongside other industries like airlines and telecom) were legally deregulated during a period called restructuring. The idea was to make the utilities less powerful and keep customer costs down by introducing market competition from Independent Power Producers (IPPs).

Unfortunately, deregulation is almost always horseshit and, in fact, has led to higher power bills.

2. Who owns the utilities?

Electric utilities can be publicly owned and run as not-for-profit, but the vast majority are privately owned and run as very-much-for-profit.

Publicly owned utilities (POUs)

Owners can be a local cooperative, a municipality, or a statewide governing body. Cooperatives are more commonly found in rural parts of the country, but recently there have been some exciting developments related to communities opting out of their investor-owned utilities and instead procuring their own power. The other way to do it is to municipalize your existing IOU, i.e. take over a private utility and run it as a public company, which more and more communities (including our comrades up in the Hudson Valley) are beginning to do.

Investor-owned utilities (IOUs)

Investor-owned utilities serve about 70% of Americans. They are state-sanctioned monopolies that exist to make as much money as possible for their shareholders.

In the Southeast and Northwest, most IOUs are considered regulated monopolies, meaning they can build power generation and manage transmission and distribution. This is the vertically integrated model—the utilities are allowed to control all aspects of the energy process.

Elsewhere, including in New York, Texas, and Illinois, IOUs operate in a restructured market, which means they're legally prohibited from building power generation: they can only build and maintain the physical infrastructure of the T&D networks, i.e. gas pipelines, power lines, substations, transformers, etc.

What this means is that if you live in New York City and your distribution utility is Con Ed, you're not actually getting electricity made by Con Ed directly. Rather, Con Ed buys electricity on your behalf from a competitive wholesale market and then sells it to you at cost, i.e. for no profit.

3. How do IOUs make money?

Here's where things get interesting. Investor-owned utilities cannot make a profit from selling you electricity. Legally, they can only generate a profit by building new shit.

Here's how it works: every time a utility builds something, they earn a fixed percentage of the total cost of the project. This is called a guaranteed rate of return, or a Return on Equity (ROE). It's a fixed percentage that's locked in by the state regulators... and we—the duly named ratepayers—have to pay for all of it.

Here's an example. Let's say your electric utility's guaranteed rate of return is 10%. They get approved by their state regulators to build a new $10 million gas pipeline. Because of their 10% ROE, the utility is guaranteed a million dollar payout on top of the $10 million they're already getting to build the project. And, yes, we ratepayers foot the bill for all $11 million. The $11 million debt we incur gets spread out over the useful lifetime of the project—so a portion of our monthly energy bill will pay for that pipeline for the next ~40 years.

FYI, the average rate of return for IOUs in 2023 was 9.6%.

4. Wait, so utilities can only make money by building shit? Isn't that, like, kind of dumb?

Indeed. This business model made more sense 100 years ago, back when America needed to rapidly build out our energy grid for the first time.

Not so much today. The problem with getting paid a fixed percentage of a project's total cost is that it heavily incentivizes you to build lots of expensive projects.

One common tactic IOUs like Con Ed use to take advantage of their guaranteed rate of return is to fully replace leaky (or even just old) gas pipelines, instead of making any attempt to repair them. Con Ed doesn't profit from making repairs! So even though repairs are almost always cheaper and smarter, the utilities by default fully replace equipment whenever they can. Not only is this more expensive, but in the case of gas pipelines—which utilities love to build because they cost a ton of money—it also resets the lifecycle of our gas infrastructure, thereby locking us into another 50 years of natural gas dependency.

Is replacing gas pipelines vs. repairing them really that big a deal? Well, the issue is the scale at which they operate. Con Ed's reported revenue in 2024 was $15.26 billion. That's a lot of pipes we're paying for.

And trust that we are paying: 21% of New Yorkers' monthly utility bill goes directly to Con Ed's profits. Is that enough for them? Not under capitalism, baby! Con Ed just raised our rates again by nearly 10% over a three-year period.

5. Perverse incentives

If you only profit from building new shit, your incentives might not align with what's best for the general public. There's a term for this: perverse incentives. Here are two ways the IOU business model ends up hurting the rest of us:

Even if IOUs can't build power generation, they still have an obvious interest in making sure we all continue to use lots and lots of electricity. Why? Because it justifies their existence and the building of more infrastructure. This makes utilities a natural enemy of anything that reduces energy use, such as heat pumps, home insulation, and energy efficiency programs.
IOUs are likewise opposed to any form of decentralized energy procurement and storage, because this also reduces the need for them to build large-scale infrastructure projects. If you haven't heard the phrase Distributed Energy Resources (DERs) yet, I wrote a three-part series on why the future of energy will (hopefully) be way more spread out than it is today.

6. How do IOUs fight clean energy and DERs?

One simple trick they employ is to spend ratepayer money on lobbying politicians not to pass climate bills.

Con Ed spent $640,000 in 2024 on federal lobbying, an undisclosed amount of which came from ratepayers. Con Ed is also a member of trade associations like the conspicuously named Edison Electric Institute (EEI), which spent $779,400 in 2023 on "advocacy".

Con Ed's also got their own Political Action Committee (PAC), funded by employees and shareholders, so they can make donations to specific candidates and campaigns. For instance, they sent $67,000 to good old Governor Hochul (including $10,000 in contributions from CEO Tim Cawley).

I should note that Con Ed is by no means alone in lobbying for their own interests. Electric utilities nationally donated $115 million to state-level candidates and political parties during the 2018 cycle.

7. Who approves new projects?

Since IOUs are state-granted monopolies, they're regulated by the state. At least, in theory.

Every state in the U.S. has what's called a Public Utility Commission (PUC), a regulatory body with the power to approve or deny proposed utility projects. In most states, PUC commissioners are appointed by the governor, although in 10 states, commissioners publicly elected.

PUCs are arguably the most powerful, least known regulatory bodies in the country. There are just 200 PUC commissioners who collectively oversee $200 billion in utility spending every year. If my math is right, that's a billion dollars per person. But it's not a high-paying job: some of these commissioners are only making $60k a year.

To put it mildly, this creates ideal conditions for corruption, which in this context is called regulatory capture. It is not at all uncommon for PUCs to be staffed by former utility company employees—or for commissioners to be hired by the same utility companies they regulate in high-paying roles the second their terms are over. For a great read on just how shady this whole regulatory business in, dive into this essay:

Nascent efforts are being made to elect and appoint climate champions and utility reformers to state PUCs. An organization called PowerLines is doing important work on this front: they have a PUC jobs board, so if you've got any engineering, economist, or lawyer friends with incorruptible backbones, consider advising them to make a real impact on how our money gets spent.

Read part 2 of this series!