How Are Electricity Rates Set? Regulated vs. Competitive
At the Alliance for Competitive Power (ACP), we think every stakeholder-whether you’re a business owner, a city official, or a curious homeowner-deserves to know who (and what) determines every dollar you spend on electricity.
As of 2026, the US energy landscape is at a major turning point, with demand reaching record levels. Let’s cut through the static and take you inside the world of regulated and competitive electricity markets in the U.S.
Why Should You Care About How Rates Are Set?
Electricity pulls the strings behind all our modern comforts. Because of its importance, how rates are designed in each state carries real weight for families and companies. As we enter the mid-2020s, the national average residential price has climbed to approximately 18 cents per kWh-a nearly 37% jump from 2020 levels.
The country follows two main paths: regulated markets and competitive (restructured) markets. These models shape not just your bill, but your ability to choose a cleaner, more affordable energy future.
Regulated Markets: The Traditional Utility Model
In traditionally regulated regions (largely in the Southeast and West), a single company-your utility-runs the show. They are "vertically integrated," meaning they own everything from the power plants to the wires.
Oversight: Every fee and charge must be approved by state regulators before it lands on your bill.
Profit: Prices are set to cover a utility's operating and investment costs plus a "fair" rate of return (profit), typically around 10–12%.
Stability: Rates tend to change slowly and predictably, which can be a comfort to some but often masks a lack of efficiency or innovation.
While stable, the "cost-plus" model means utilities actually have a financial incentive to spend more on infrastructure, as they earn a profit on every dollar invested. This can lead to "gold-plating" the grid at your expense.
Competitive Markets: Opening the Doors to Choice
In competitive markets (found in 17 states like Texas, Pennsylvania, and Ohio, plus Washington D.C.), the "poles and wires" are still managed by the local utility, but you get to pick the company that actually generates and sells you the electricity.
Consumer Choice: You can shop for plans that fit your priorities-whether that's 100% renewable energy, fixed-price security, or smart home bundles.
Market-Based Pricing: Instead of regulators setting a profit, prices are determined by supply and demand. This forces providers to be efficient and innovative to win your business.
Performance: Competitive states like Texas have seen average residential rates remain significantly more competitive than highly regulated peers, despite historic demand growth.
However, choice brings complexity. In 2026, as AI data centers surge across the grid, competitive markets are better at shifting the financial risk of new power projects from you (the ratepayer) to private investors (shareholders).
What Does the Data Say in 2026?
The verdict is in. While electricity prices are rising nationally due to inflation and infrastructure needs, the ACP’s latest FTI Study Results tell a compelling story. Since the 1990s, competitive states have:
Lowered Rate Creep: Experienced smaller percentage increases in electricity rates compared to monopoly states.
Slashed Emissions: Reduced carbon emissions roughly 35% since 2005, outpacing the 27% reduction in monopoly states.
Boosted Reliability: Competitive regions often see fewer power interruptions because market signals incentivize the build-out of "firm" capacity like battery storage and advanced gas plants.
Policy Choices & Your Role as a Stakeholder
Regulated or competitive, the debate is about more than economics. Traditional utilities keep things stable, but competitive models light a fire under innovation and consumer choice. As of 2026, how we set rates shapes what’s possible for your business or your family.
The Regulated Model (Monopoly)
Number of Suppliers: One (No choice).
Price Determination: Set by regulatory approval based on utility costs.
Financial Risk: Ratepayers (you) often pay for budget overruns or failed projects.
Innovation: Generally slower; dependent on the utility’s own timeline and regulatory cycles.
Bottom Line: Single supplier, steady pricing, but limited options for customization.
The Competitive Model (Choice)
Number of Suppliers: Many (Retail choice).
Price Determination: Determined by market competition and supply/demand.
Financial Risk: Investors and shareholders bear the cost of bad investments, not you.
Innovation: Fast-paced; driven by the need to win customers with new tech and services.
Bottom Line: Menu of options, greater chances to save or "go green," but requires more active consumer participation.
Regardless of where you live, understanding these systems best arms you to take charge of your energy dollars. We’re rooting for reforms that put the power in your hands. To see what this looks like in real life, check out stories from across the country in our ACP Video Library.
Frequently Asked Questions
How do regulated utilities set their rates? State boards scrutinize every dollar spent, then sign off on a rate that covers expenses and a guaranteed profit. This often rewards spending over saving.
What does energy competition mean for me? It unlocks the ability to pick from different providers. You might choose based on price, cleaner power, or better customer service.
Are prices lower everywhere that’s competitive? Not always-market conditions vary. However, competition ensures that prices are driven by efficiency rather than a utility's guaranteed profit. Check the ACP News section to see how your state is shifting.
Wrap-Up: Help Shape the Future
Energy rate structures ripple through your budget and guide our national stride toward greener, more reliable power. At ACP, we’re dedicated to helping you navigate this evolving landscape.
