Electric utilities 101: A breakdown of the basics on US power providers

This article is part of our special series Power by the People: Clean Energy from the Grassroots.

You don’t have to be a senator negotiating a revolutionary climate bill in secret to boost clean energy. Engaged community members also have the power to encourage wind, solar and battery deployment, as Canary Media’s Power by the People series has set out to document. One underappreciated approach is engaging with electric utilities.

But for all the importance of utilities in our daily lives, they can be as opaque as an egg. This article cracks them open — and breaks down what they are, how they’re governed and how regular people can influence them.

Let’s start by defining an electric utility in general, and then we’ll get into definitions of the different types of utilities and related entities.

💡Electric utility

Not all electric utilities are the same, but at their core, they’re all organizations that deliver electricity to customers. This service has three components:

1) Utilities secure power from generation resources such as coal- and gas-fired power plants, hydroelectric dams, nuclear power plants, wind farms and large solar arrays. In some cases, the utilities own the plants. In areas where the electricity sector has been restructured (or, as it’s sometimes misleadingly called, ​“deregulated”), utilities buy power from independent power producers that compete in the wholesale electricity market.

2) Utilities distribute electric power. They generally own and operate the long-distance transmission lines, local distribution lines, transformers and utility poles that make up the grid.

3) Utilities sell that power to customers. Under the traditional utility model, customers had no choice about whom they could buy electricity from — if you lived in a utility’s service territory, that utility was your supplier. But in many states today, this ​“retail” part of the utility business has been opened up to competition from other companies.

In the U.S., there are three kinds of utilities: investor-owned utilities, publicly owned utilities, and member-owned or cooperative utilities. Data from the U.S. Energy Information Administration shows that as of 2017, investor-owned utilities served 72 percent of all utility customers.

💰Investor-owned utility

An investor-owned utility (IOU) is a for-profit company that provides electricity to customers. 

Examples:

• Pacific Gas & Electric (in California)
• Consolidated Edison (in New York)
• Florida Power & Light

Because there are economies of scale that can be achieved by building out grid equipment in a given area, it’s generally considered to be more efficient for one company to build the wires in your neighborhood rather than have 20 different companies create competing networks. So the government grants a local monopoly to an IOU under the oversight of a regulatory body — a public utility commission — to ensure the IOU doesn’t overcharge customers. Citizens can engage with utility decisions at commission hearings — more on that in the public utility commission definition below.

Typically, the rates an IOU charges its customers must be approved by public utility commissioners in a process known as a ​“rate case,” which restricts an IOU’s freedom to misuse its monopoly to gouge customers. The rates encompass not just the cost of electricity but also the cost of building and maintaining the power sources and grid infrastructure to produce and deliver that electricity — and the spending on infrastructure, also known as capital expenses, is where the IOUs generate most of their earnings. They are allowed to make a guaranteed rate of return on investments in infrastructure, typically set in the 8 to 10 percent range, an arrangement intended to allow IOUs to attract shareholders to invest their money in the enterprise and minimize the utility’s need to take on debt (and assume risk) for these projects.

But this financial incentive to build more power lines and power plants can run counter to the goal of cutting greenhouse gas emissions. Steps that make good sense from a climate change perspective — reducing customer demand for power (e.g., via demand-response programs and energy-efficiency initiatives) or buying energy from distributed energy resources such as rooftop solar — mean reducing the need for an IOU to build more profit-generating infrastructure.

To correct this design flaw, multiple states are trying out incentive structures that reward utilities for how well they perform at tasks such as reducing emissions and improving reliability instead of for how much stuff they build. For example, in Minnesota environmental and consumer advocates have worked with utilities to overhaul incentives through the e21 initiative.

More on investor-owned utilities:

• Utilities for dummies: How they work and why that needs to change, by David Roberts in Grist
• The simple reason most power utilities suck, by David Roberts in Vox
• Utilities need to keep up with the distributed energy revolution, by David Roberts in Vox 
• How do utilities make money? from the Natural Resources Defense Council

⚖️ Public utility commission

A public utility commission (PUC) is a state-level entity that regulates investor-owned utilities. They can have other names, including public service commission, commerce commission or corporation commission. Commissioners are usually appointed by governors (or, in rare cases, by state legislatures) to terms of four to six years, but in 10 states, they’re elected by voters.

Examples:

• Arizona Corporation Commission (elected)
• California Public Utilities Commission (appointed)

When an investor-owned utility proposes a new plan for how it will provide electricity to customers, including costs for building infrastructure or contracting for power — a process sometimes called resource planning — the public utility commission reviews the plan to judge whether it’s prudent (i.e., the lowest-cost way of providing reliable power). In this way, the PUC strives to keep electricity rates affordable to customers, who are known as ​“ratepayers” in utility parlance. A PUC also works to ensure a utility’s resource plan aligns with laws passed by the state legislature, including clean energy and efficiency targets. If the commission is so inclined and it’s permitted under state law, a PUC is even capable of adopting a goal of 100 percent carbon-free power, as the Arizona Corporation Commission did last year.

Grassroots organizations and the general public are able to influence PUC decisions by engaging in PUC proceedings. They can do this formally as ​“intervenors” or informally by showing up to hearings and providing comments and testimony — for example, to express their support for clean energy and push commissioners and investor-owned utilities toward faster decarbonization. Citizens can also help shape PUC actions by voting directly for PUC commissioners in states where they’re on the ballot, or by voting for the governors or legislators who will appoint PUC commissioners. (Learn more about how people can influence PUCs in this guide by Canary’s Julian Spector.)

More on public utility commissions:

• An overview of PUCs, from the U.S. Environmental Protection Agency

🤝 Publicly owned utility

A publicly owned utility is a not-for-profit entity owned by taxpayers and run as a division of government (city, state or federal) or an independent public utility district. When run by city governments, publicly owned utilities are called ​“municipal utilities,” or ​“munis” for short.

Examples:

• Tennessee Valley Authority (federal)
• Los Angeles Department of Water and Power (in California)
• Omaha Public Power District (in Nebraska)
• Puerto Rico Electric Power Authority (territorial government)

While investor-owned utilities are regulated by public utility commissions, publicly owned utilities are managed by governing boards or councils.

Because publicly owned utilities by definition aren’t trying to turn a profit for shareholders, they should be able to better prioritize the public interest and take more ambitious action on the climate crisis than investor-owned utilities (IOUs), according to advocates. A handful of municipalities across the country have sought to create publicly owned utilities and get out from under the control of IOUs over the past few decades. The city of Boulder, Colorado spent 10 years attempting to gain ownership of the electric and gas system operated by IOU Xcel Energy with the goal of decarbonizing more quickly, a process known as ​“municipalization.” But Boulder voters opted to end that effort in 2020, instead reaching a settlement with Xcel to meet emissions-cut targets.

Voters can influence the membership of publicly owned utility governing boards, which are publicly elected or appointed by elected officials. 

More on publicly owned utilities:

• FAQs on publicly owned electric utilities, from the California Municipal Utilities Association
• Where is public power? from the American Public Power Association

🚜 Cooperative utility 

A cooperative utility, also known as an electric co-op, is a private, not-for-profit provider of power owned by the people it serves. 

Examples:

• Great River Energy (Minnesota)
• Kit Carson Electric Cooperative (New Mexico)

Electric co-ops were first created with the passage of the Rural Electrification Act in 1936, when only a tenth of rural homes in the U.S. had electricity. The law gave federal loans to co-ops run by farmers so they could bring electricity to rural communities.

Today, co-ops still tend to serve rural areas, whereas investor-owned utilities serve urban centers. Co-ops are governed by elected boards.

Their small size, an average of 24,500 customers in 2017, can make co-ops, like publicly owned utilities, good test beds for innovative ways of managing grid power.

More on cooperative utilities:

• Electric co-op facts and figures, from the National Rural Electric Cooperative Association

🎯 Community choice aggregator

A community choice aggregator (CCA) is a not-for-profit local government entity that takes over an investor-owned utility’s responsibility for buying wholesale power from generators. By aggregating the electricity demand of a number of residents, CCAs can purchase their own power through contracts with suppliers, usually leading to cost savings. But they still rely on the utility’s infrastructure and systems for power transmission, distribution and billing. CCAs go by a number of names: municipal energy aggregations, community choice energy, energy aggregators and governmental aggregations.

Examples:

• MCE, formerly Marin Clean Energy (in Contra Costa, Marin, Napa and Solano counties in California)
• Northeast Ohio Public Energy Council (in 240+ Ohio communities)

CCAs can allow communities to procure cheaper and/​or cleaner power than that offered by their investor-owned utility. CCA customers may pay prices that are 15 to 20 percent lower than the rates for power provided by investor-owned utilities, which might have locked in costs when renewable power was more expensive. A number of CCAs offer 100 percent renewable energy options, including ones in Lowell, Massachusetts; Cleveland, Ohio; and Westchester County, New York. In 2020, CCAs served areas populated by approximately 30 million people.

State-level legislation is needed before CCAs can be formed. Advocates won passage of one of the first such laws in 1997 in Massachusetts, and similar laws have passed in nine other states. In eight of those states, CCAs are permitted to serve as the default electricity provider, using an opt-out structure that enrolls customers automatically, thus securing more buying power than they would have if enrollment were on an opt-in basis.

CCAs are managed by local government officials and overseen by elected and appointed boards of directors. Because they’re government entities, CCAs are subject to stricter laws and norms of transparency and accountability than investor-owned utilities.

More on community choice aggregators:

• The history and promise of community choice aggregation, on David Roberts’ Volts podcast 
• Community choice aggregation and renewable energy, from the National Renewable Energy Laboratory

Stay tuned for more clean energy concepts demystified. And in case you missed them, check out our previous pieces in the series: 

• What is net metering? And other solar terms explained
• The power grid explained — plus demand response, virtual power plants and more

Be sure to check back every day this week for our Power by the People special coverage. And sign up here to watch our live panel event Wednesday with three changemakers who are on the front lines of bringing clean energy to their communities.