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| Image courtesy lydiashiningbrightly |
If you answered, “THE FREE MARKET!” you would be wrong!
The process for setting electric rates varies from state to state. Generally speaking, privately owned electric companies are highly regulated by the Federal Energy Regulatory Commission and state regulatory commissions.
In a case about whether the state of Illinois could regulate grain elevator rates, the Supreme Court held in 1876 that the government can regulate businesses involving “the public interest.”
Many of the state electric regulatory commissions grew out of railroad commissions founded in the 19th century. Private electric utilities initially resisted regulation, but they changed their tune when municipal electric utilities started to spring up. By 1917, there were commissions regulating electricity in 33 states.
Today, utility ratemaking occurs in rate cases before the public utilities commission. The utility submits its financial information to the commission. The commission then analyzes how much revenue the utility company needs, then determines what a reasonable rate will be for the utility to charge consumers. A rate case is similar to a court case, with evidentiary hearings, records, and a written report and order.
For more:
- Munn v. Illinois, 94 U. S. 113, 126 (1876) (“Property does become clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he in effect grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. He may withdraw his grant by discontinuing the use; but, so long as he maintains the use, he must submit to the control.”)
- Molly Peterson, 89.3 KPCC, AB 327 poised to change how California sets electricity rates (Sept. 10, 2013).
- Michael S. Payne, Innovative Manufacturers’ Center, Energy Insights Part 1: What determines electricity prices?
- Laylan Copelin, American-Statesman, Texas utility commission sets floor price for wholesale electricity reserves (Oct. 27, 2011)
- Minnesota.gov – Rate Cases
- Michigan Public Service Commission
- Public Utility Commission of Texas
- California Public Utilities Commission
- Virginia State Corporation Commission – How are Electric Rates Set in Virginia? and Staff Investigation on the Restructuring of the Electric Industry
- Pennsylvania Public Utilities Commission (if you wanna go extra nerdy, their 70th anniversary history booklet)
- National Association of Regulatory Utility Commissioners (list of links to all 50 states’, DC, and territories’, regulatory commissions)
- Missouri Public Service Commission – Ratemaking Process
The Law in Life 