The surprising, infuriating way electric utilities make money
Today we're diving into the stagnant waters of everyone's least-favorite state-sanctioned monopoly: the Investor-Owned Utility (IOU) company.
Hold your nose and dive in!
What do electric utilities actually do?
Electric utilities have three core functions, though only some are allowed to do all three.
1. Generation
Generation is infrastructure that makes electricity, like gas, coal, and nuclear power plants, wind turbines, and solar farms. Only some US states allow their privately owned utilities to build and own generation. We'll get into that in the next section.
2. Transmission
Transmission is how electricity travels from where it's made (the generation) to nearby where it's needed. Power lines, in other words.
Why just "nearby" and not all the way? Because as electricity travels, a little bit of it burns off as heat. Those losses add up over long distances, so when we need to send electricity hundreds of miles from, say, a power plant in the suburbs to a big city center, we use high-voltage transmission lines to minimize our losses. (I won't get into what voltage is in this article; you can read up on that here).
But our homes and businesses can't handle high-voltage electricity. So we need to turn down the voltage first.
3. Distribution
Transmission lines bring electricity to substations, often located just outside outside of town. There's where the voltage gets stepped down before an army of smaller distribution power lines bring the electricity to its end destination.
In densely populated places like New York City, the local power lines are often buried underground.
Why can't some utilities build and own generation?
It's counter-intuitive, but the biggest IOUs in the US, serving 70% of the total population, are legally prohibited from building and owning any form of power generation. They can only build and operate the poles and wires, i.e. transmission and distribution infrastructure. The rules for IOUs vary by state.
This wasn't always the case. Historically, utilities were vertically integrated, meaning they owned and operated every piece of the energy system. That changed in the 90s during a period of sweeping Neoliberal deregulation. The idea was that if private businesses were allowed to generate electricity, it would bring down the cost of power, because competition always lowers costs (theoretically). So now many states get electricity from Independent Power Producers (IPPs), who sell their power to the utilities, who then sell it to us.
Unfortunately, deregulation has led to higher power bills. One reason why is that when these restructuring laws passed, utilities were forced to shut down their power plants, leaving them with expensive, useless assets. And guess who still has to pay for those? Yup, the humble ratepayer.
Who owns the utilities?
The vast majority of utilities are privately owned, for-profit businesses, either held privately or publicly traded on the stock market. But don't confuse those with legitimately publicly owned utilities, of which there are around 2,000 throughout the US.
Publicly owned utilities (POUs)
Owners of public utilities can be a local cooperative, a municipality, several counties, or a statewide governing body. Cooperatives are typically found in rural parts of the country, though more and more communities are taking over their investor-owned utilities and building public power. There are a couple ways to do this. One is to municipalize your existing IOU and run it as a public company. The other is to create a power authority and force your IOU to sell its assets to you, which is currently happening just outside NYC is New York's Hudson Valley.
For more on this, read our article: How to take over your utility.
Investor-owned utilities (IOUs)
Investor-owned utilities serve about 70% of Americans. They are granted exclusive service territories by their states, which is why the only way to switch electric utilities (besides taking them over) is to move.
For example, here in New York City and in neighboring Westchester, our utility is Con Edison. No other utility is allowed to operate in ConEd's geographic boundary. That's why we can fairly say that IOUs have state-granted monopolies.
As their name suggests, IOUs are owned by investors. In the case of Con Edison, a publicly traded company, their three biggest shareholders are the massive investment firms BlackRock, Vanguard, and State Street, which collectively own over 30% of the business.
BlackRock doesn't own a huge stake in ConEd for the thrill of it. They buy their stock because ConEd made over $2 billion in profits for their shareholders in 2025.
How do IOUs make money?
Regardless of whether an IOU is allowed to make electricity, no private utility is allowed to profit from the sale of electricity.
To understand why that is, you should read our story on the terrible decision this country made to keep our utilities privatized way back in the early 1900s.
Jon
The TL;DR version is that one privately owned utility CEO struck a sneaky deal with his local government, and the model spread like wildfire.
The deal was this: in order to remain a private monopoly, the utility vowed to never profit directly from the sale of electricity, because it would be all too easy for a monopoly to extort their customers. Instead, they would only be allowed to make a profit by building new infrastructure, for which they would receive a guaranteed rate of return. The utility also consented to be regulated by the state, so that only approved projects netted them a profit.
That original model, called the cost-of-service model, is the same one we use today. Here's how it works: let's say an IOU builds a new $100 million substation. First, they ask their state regulator for permission in a process called a rate case. The regulator says yes; they basically always do. If the utility's guaranteed rate of return is 10%, they will get paid one hundred and ten million dollars. That's $100 million for the project, plus $10 million on top of that, theirs to keep as profit.
Guess who pays for every penny, profits and all? We do, the humble ratepayers. The $110 million debt we incur gets spread out over the useful lifetime of the project—so a portion of our collective monthly energy bills will go towards paying off that substation for the next ~50 years.
The average national guaranteed rate of return for utilities is most recently around 9.7%... and rising. ConEd, whose rate of return in 2026 is 9.4%, has raised their rates every year for the past 20 years.
Wait, utilities can only make a profit by building new stuff?
That's what I'm saying. This 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 utilities to build lots of expensive projects.
Building new stuff can be necessary, of course. But far too often, a better option might be to repair existing equipment. A leaky gas pipeline, for instance, which is far cheaper to patch up than to fully replace.
But ConEd and the other IOUs favor a full replacement, because they cannot legally profit from making repairs. They can only profit by building new stuff.
Not only is replacing gas pipelines in particular more expensive, it also resets the lifecycle of natural gas infrastructure, locking us into another 50 years of fossil fuel dependency.
The IOUs preference for building vs. repairing is just one example of what's known as perverse incentives.
Perverse incentives
If you can only profit by building new stuff, your incentives as a business may not align with what's best for the general public. Here are some more ways the cost-of-service model ends up costing the rest of us:
- IOUs want us to use lots of electricity, even though they don't profit from selling it directly. Why? Because the more power we use, the more need there is to build grid infrastructure, like expensive substations. This makes IOUs 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 generation and storage, such as solar panels and batteries, because they reduce customer dependence on centralized grid operators. If you haven't heard the phrase Distributed Energy Resources (DERs) yet, we wrote a three-part series on why the future of energy will (hopefully) be way more spread out than it is today. Here in NYC, ConEd is actively obstructing the buildout of grid batteries, even though the state says they'd save us billions of dollars.
- Many IOUs don't just deliver electricity—they supply natural gas to homes and businesses for heating. ConEd has over a million gas customers in New York City. That's a pretty good reason for them to keep us hooked on fossil gas, despite the fact that methane leaks are over 80 times worse for climate change in the short-term than regular old carbon dioxide.
Jon
How do IOUs fight clean energy and DERs?
How do the IOUs perverse incentives result in less clean energy getting built?
One trick they employ is to spend ratepayer money on lobbying politicians not to pass climate bills. ConEd spent $640,000 in 2024 on federal lobbying, an undisclosed amount of which came from ratepayers. ConEd is also a member of pro-fossil fuel trade associations like the conspicuously named Edison Electric Institute (EEI), which spent $779,400 in 2023 on "advocacy".
ConEd'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 New York Governor Kathy Hochul (including $10,000 in contributions from CEO Tim Cawley).
ConEd 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.
Aren't they supposed to be regulated?
In exchange for their state-granted monopolies, IOUs are regulated by the state. At least in theory.
Every state has its own Public Utility Commission (PUC), a regulatory body with the power to approve or deny proposed utility projects. In most states, PUC commissioners are directly appointed by the governor, although in 10 states, commissioners are publicly elected.
PUCs are among the most powerful, least known regulatory bodies in the country. Just 200 PUC commissioners collectively oversee $200 billion in utility spending every year. I believe that works out to a billion dollars per commissioner. But being commissioner isn't a particularly high-paying job: some are only making $60k a year.
To put it mildly, this creates ideal conditions for corruption. In this context, the name for that 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 they've been regulating after their term is up. For a great read on just how shady this whole regulatory business in, dive into this essay:
Nick Bowlin
What can we do about all this?
Efforts are being made to elect and appoint climate champions and utility reformers to helm their state PUCs. An organization called PowerLines is doing good work on this front.
On the other hand, good commissioners interested in IOU reform have been forced out of a job, like in the case of Connecticut PUC commissioner Marissa Gillett, who resigned after "frequent criticism by opponents and pushback against her efforts to implement regulatory reforms had become unbearable".
Other groups are advocating to change the IOU business model to one that rewards good performance instead of new construction. This is called performance-based regulation, and there's some progress being made in states like Hawaii.
But for our money, the best approach is to strip our nation's utilities from the paws of private ownership and deliver them into public hands. Public power is what's needed at the local, state, and federal levels if we ever intend to build an energy grid that thrives in the 21st century. To accommodate the broad electrification of our society, we will need massive transmission lines, grid-enhancing technologies, distributed batteries, giant solar and wind farms, and thousands of meshed microgrids. Everything working in concert, everything done as cheaply and efficiently as possible. Such an effort will require central planning from a competent government. A hundred profit-driven utilities stuck in their 1900s mindset will never deliver us the grid we desperately need. Only public power can do that.
So go ahead and take control of your local IOU. We'll show you how.
Jon
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