The electric grid in the United States is sold to us as the backbone of modern life. Lights, phones, hospitals, trains, data centers all depend on it. Yet customers see the opposite of what they are promised. Bills keep going up, blackouts and extreme weather shutoffs are more common, and disaster after disaster is traced back to utility equipment.
We are told this is the price we pay for aging infrastructure and climate resilience. That story is not complete. The deeper problem is how we designed the rules that govern investor owned utilities. In most states, utilities earn more when they build more big infrastructure, not when they keep the system safe, affordable, and resilient.
Put simply, fragility has become part of the business model. Reliability is a slogan. This article explains how that happened, how it shows up on your bill and in your community, and what a different system could look like.
Most investor owned utilities in the United States are still regulated under a model called “cost of service” or “rate of return” regulation. The idea sounds reasonable. Regulators allow a utility to recover its costs and earn a fair return so it can stay solvent and keep investing in the grid.
In practice, this model rewards utilities for one thing above all: capital spending. The more they spend on long transmission lines, substations, transformers, poles, and big power plants, the larger their “rate base” becomes. Regulators then let them earn a percentage return on that rate base. The return on equity is often in the range of 8 to 12 percent.
Paul Joskow and Richard Schmalensee, two well known energy economists, have shown how this works in detail. They describe how commissions set allowed revenues and how utilities respond by leaning toward capital intensive projects because that is where profit comes from, not from careful operations or day to day maintenance.
This is not just theory. The basic incentive problem has been documented since the 1960s in what economists call the “Averch Johnson effect.” When you pay a regulated monopoly a guaranteed return on its capital, it has a natural tendency to over invest in projects that go into the rate base and under invest in cheaper alternatives and maintenance.
Maintenance, tree trimming, inspections, and smart demand side programs do not expand the asset base. They may be necessary for safety, but they do not grow profits in the same way. So they are often delayed, scaled back, or only done after a disaster.
The same incentive problem shows up in the way utilities think about the shape of the grid itself. When a utility executive says “we need more infrastructure for reliability,” what they usually mean is “we need more big assets we own.” That often leads to more centralization instead of more resilience.
A big transmission line is a perfect example. It costs a lot to build, so it grows the rate base and allowed profit. But it also becomes a single point of failure and a tempting target for wind, ice, wildfire, and storms. If it goes down, entire regions can lose power.
Research from the University of Texas Energy Institute looked at decades of data for investor owned utilities and found that total transmission, distribution, and administration costs are strongly tied to the number of customers and that those costs have climbed over time. The study also showed that utilities have steadily increased capital spending on these systems, even as cheaper options like demand response and distributed energy became available.
At the same time, new work by researchers at Stanford has tracked how utility costs in California have risen. They find that the bulk of recent cost growth for the big investor owned utilities comes from transmission and distribution spending and wildfire related work. Much of this is framed as “resilience,” but it sits on top of years of under investment in maintenance and a system that depends heavily on long lines crossing high risk areas.
There is a pattern here. When utilities face a problem, they tend to reach for a large capital project. When communities ask for cheaper options like rooftop solar, community batteries, or targeted undergrounding in the highest risk areas, those ideas often face delays, pilots, or death by paperwork.
Nowhere is this clearer than in fire prone states. In California, utility power lines have been linked to major wildfires that killed people, destroyed whole towns, and caused tens of billions of dollars in damage. Internal investigations and court cases have exposed long records of deferred maintenance, old equipment, and ignored warnings.
After these disasters, regulators and lawmakers faced a choice. They could punish utilities and force deep changes in the business model, or they could keep the basic structure and try to bolt on wildfire funds, new oversight, and safety plans. In most cases, they chose the second path.
The California Public Utilities Commission published a major white paper in 2021 called “Utility Costs and Affordability of the Grid of the Future.” It documents how utility costs and rates have risen and highlights wildfire costs, grid hardening, and new capital investments as key drivers. It also shows that these costs are, in large part, passed on to customers.
Instead of a sharp break from the old model, the state created wildfire funds and allowed utilities to issue bonds and recover wildfire related costs in rates. In plain language, ratepayers and the public have been told to pay for both the past neglect and the new investments.
The same story repeats elsewhere. In other states utilities have struggled with major winter storms, hurricanes, and heat waves. In each case, many of the failures tie back to lack of preparation, aging equipment, or a stubborn reliance on central plants and fuel systems that were not designed for the new climate. Yet the financial hit usually lands on customers, while the incentive to keep building remains.
If your electricity bill feels like it has a mind of its own, here are some of the main forces behind it.
Across the country, investor owned utilities are in the middle of a new spending wave on transmission lines, substation upgrades, grid “modernization,” and in some cases new gas plants or “hydrogen ready” turbines. Each dollar of capital spending adds to the rate base and earns a return.
A recent paper from the American Economic Liberties Project explains how this works in practice. It argues that many regulators have allowed returns that are higher than the true cost of capital, which turns these investments into a very safe and profitable business, even when they may not be the cheapest way to meet customer needs.
Delivery costs are not just a small add on to your bill. Studies from the Texas Energy Institute and others show that transmission, distribution, and administration costs together can be more expensive than generation costs in many systems. These costs have grown as utilities expand networks, add wildfire mitigation projects, and create new control systems.
The Stanford work on California utilities reaches a similar conclusion. It finds that increases in delivery related costs, combined with wildfire work and policy programs, have driven large rate increases, especially for investor owned utilities.
The CPUC white paper and later legislative reports in California warn that wildfire prevention, insurance, and liability costs are adding significant pressure to rates. Climate adaptation projects, such as moving or hardening lines in flood or
fire zones, do the same.
These projects are real and in many cases necessary. The problem is that they arrive on top of a system that already encouraged over building and under maintenance. So instead of a controlled transition, customers are hit with multiple waves of cost at the same time.
On top of this, utilities are paying dividends and executive bonuses while asking regulators for rate increases. The Economic Liberties paper calls out how rate of return rules have allowed utilities to overcharge customers and protect investor payouts even as rates rise faster than inflation.
None of this is hidden. It shows up in financial filings and commission decisions. It is simply normalized as the cost of doing business under the current rules.
Whenever people begin to question these patterns, utilities often lean on one word: reliability. They point to blackouts, storms, and wildfires and say the remedy is more investment in large scale infrastructure. More high voltage lines. More “flexible” gas plants for backup. In some cases, more experimental ideas like hydrogen blending or carbon capture on old plants.
That sounds reassuring, but it hides an important fact. The same utility that caused yesterday’s disaster is the main architect of tomorrow’s solution. And the solution almost always involves assets they own on a large scale.
Meanwhile, options that could reduce the need for these projects are pushed to the sidelines. Neighborhood batteries, rooftop solar combined with storage, virtual power plants that coordinate thousands of homes and businesses, and community microgrids are often treated as “nice add ons” instead of core infrastructure.
A Deloitte analysis of the power sector warns that under the cost of service model, utilities may under invest in energy efficiency, demand side management, and distributed generation because they do not provide the same capital growth as traditional projects. In other words, the system is not neutral. It leans away from the cheaper, smarter ideas.
Some people respond to these problems by asking a big question: should we replace investor owned utilities with public ones. Recent research from UCLA’s Emmett Institute compares public and private utilities in California and finds an important pattern. Municipal utilities tend to charge lower rates on average than investor owned ones, in part because they do not have to pay shareholder dividends and can access cheaper public financing.
The same work also shows that there is no magic in either model. Public utilities still need good governance and resources. Investor owned utilities can in theory deliver clean and reliable power, but only if regulators are strong and allowed returns are properly controlled.
A separate UCLA report that looks at Los Angeles County compares the big municipal utility, LADWP, with Southern California Edison, a major investor owned utility. It finds that investor owned utility residential rates are substantially higher than municipal rates on average, and that rising costs for wildfire mitigation and other pressures are squeezing households.
So the question of ownership is tied to deeper questions. Who is the utility accountable to. Who keeps an eye on the books. Who decides whether to invest in a neighborhood microgrid or a distant gas peaker.
If the core problem is a business model that rewards centralization and spending over safety and affordability, then the main solutions point in a different direction.
Rooftop solar on homes, businesses, schools, and warehouses, paired with batteries, can take stress off the grid, reduce the need for new long lines, and keep power flowing during local outages. This is not theory. Many communities already rely on solar plus storage during wildfire shutoffs and storms.
When thousands of batteries, smart thermostats, water heaters, and EV chargers are coordinated, they can provide the same services as a large power plant. This is what people mean by “virtual power plant.” It shifts energy use away from peak times and supplies power back to the grid when needed.
In a system that valued performance instead of capital, utilities would race to enroll customers in these programs. Instead, they are often slow walked or limited because they reduce the case for new concrete and steel.
Microgrids powered by local solar and batteries can keep critical facilities running during outages: clinics, cooling centers, grocery stores, shelters, water systems, and communication hubs. They are especially important for frontline communities that suffer most during heat waves and blackouts.
When communities own or co own these systems, they also gain more control over their energy future. That shifts power away from a single monopoly and toward many local decision makers.
None of this will scale as fast as it needs to without changes to regulation. Some key ideas that many experts and advocates now support include:
The U.S. grid is facing real stress from climate change, aging infrastructure, and new demands like electric vehicles and building electrification. But the constant crises and spiraling bills are not just the product of those forces. They are the
predictable result of a regulatory model that pays utilities to build more and more in the old way, while sidelining cheaper, smarter, community centered solutions.
We do not have to accept this as normal. We can choose to change the rules so utilities are rewarded for the outcomes people actually care about: safe lines, fewer fires, smaller bills, and reliable power in every neighborhood, not just in wealthy ones.
The technology is here. The studies and reports already show what works. What is missing is the political will to stop subsidizing fragility and to start investing in true resilience at the edges of the grid, where people live.
The next time a utility asks you to pay more for “reliability,” it is worth asking a simple question: reliability for whom,
and on whose terms.
References and further reading