As retail electricity prices rise above historical averages in parts of the country and are projected to continue climbing in some regions, many consumers are left wondering who is responsible for the higher monthly bills. Who decides what households pay, and why do those numbers change?
Retail electricity prices are not set casually. In fact, electricity prices in the U.S. are one of the last places where rates are set by regulators and are designed to reflect the costs of providing all customers service. They reflect how utilities pass through fuel costs, finance long-term infrastructure, and recover the expenses required to provide safe and reliable electric service. For energy strategist Emily Sanford Fisher, understanding how retail electricity rates are set is essential to understanding why they change. “The drivers of recent increases in retail electricity prices are actually quite varied,” Fisher has noted. “Fuel costs, inflation, supply chain pressures, demand growth, and critical grid investments all play a role because all of these factors into how prices are set.”
In most states, investor-owned utilities operate under the oversight of a Public Utility Commission or Public Service Commission. These independent economic regulators review utility spending and determine what companies are permitted to charge customers to recover the costs of providing service. Utilities cannot raise retail electricity rates on their own. They must file a formal rate case, provide detailed financial documentation, and justify why the requested revenue is necessary to provide safe and reliable service.
Municipal utilities and electric cooperatives follow a similar principle through local governance structures. Rates are approved by city councils or member-elected boards. At the federal level, the Federal Energy Regulatory Commission oversees interstate transmission and wholesale markets, which influence underlying system costs.
The governing standard across these models is that rates must be just and reasonable. The objective is to ensure reliability, protect consumers, and allow utilities to attract capital for long-lived infrastructure. “The electric industry is the most capital-intensive in the U.S. This “just and reasonable” approach balances the needs of customers with the needs of utilities, which need to attract investment to support building and maintaining critical infrastructure,” said Sanford Fisher.
Emily Sanford Fisher explains that most regulated states use a cost-of-service framework. “This can feel foreign in a world when other prices are set by markets,” said Sanford Fisher. “As part of this approach, utilities are required to provide service to all customers in their service territory. In exchange, electricity rates have to be set to allow them to recover their prudently incurred costs and receive a return on their capital investments in expensive infrastructure, like generating plants and transmission lines,” continued Sanford Fisher.
What does this mean? Under this model, utilities are permitted to recover:
Together, these elements form the utility’s revenue requirement. Regulators then allocate that requirement across residential, commercial, and industrial customers. “This means that each of the different kinds of electricity customers contribute to the recovery of the utilities costs,” said Sanford Fisher.
Fuel is handled differently from capital investments. In regulated markets, fuel costs are generally passed directly through to customers. Utilities do not earn a return on fuel. When natural gas prices increase, those higher costs flow through retail electricity prices in areas where gas is a significant part of the generation mix.
Because natural gas has grown from less than 20 percent of U.S. electricity generation in the early 2000s to roughly 40 percent in recent years, retail electricity prices are more sensitive to changes in gas prices than they were two decades ago. “In addition, states that restructured in the 1990s – those that required the local utility to divest its generation and instead buy power from wholesale markets to serve customers – are more exposed to natural gas prices,” said Sanford Fisher.
A residential retail electricity bill typically includes three core components: generation, transmission, and distribution.
Generation charges reflect the cost of producing or purchasing electricity. Transmission charges cover the high voltage lines that move power across regions. Distribution charges fund the local poles, wires, transformers, and substations that deliver electricity directly to homes.
Many bills also include fuel adjustment mechanisms. These allow utilities to update charges periodically to reflect changes in fuel and purchased power costs without filing a full rate case. Again, utilities do not profit from these fuel adjustments. They are direct pass-through costs.
Other line items may include state-approved riders for energy efficiency programs, grid upgrades, or storm hardening efforts. Some utilities include a fixed monthly customer charge, while others offer time-of-use rates that vary by hour.
“This process can seem very complicated to customers, but it is designed to help keep prices manageable for customers, both now and in the future. State regulators are always trying to balance keeping costs low with ensuring we have enough investment to ensure reliable service for all customers,” said Sanford Fisher.
Recent increases in retail electricity prices reflect several drivers working at once. Higher natural gas prices, inflation, and supply chain constraints have raised the cost of materials, equipment, and labor needed to build and maintain the grid. At the same time, utilities are making state-approved, critical modernization investments to replace aging infrastructure and strengthen systems against severe weather, and growing demand from data centers and broader electrification is also requiring new generation and expanded transmission, adding further upward pressure on retail electricity prices.
“When retail electricity prices rise, the “cause” may be found in one or more of these components,” said Sanford Fisher. “But, it can be tricky to pinpoint one particular driver. Certainly, today’s price increases reflect the confluence of a lot of different events, but growing demand is definitely a factor.”
“In the long-term, however, increased demand should help put downward pressure on rates,” continued Sanford Fisher. “If there are more customers, each customer actually needs to pay less in order to ensure that the utility’s costs are recovered.”
Retail electricity prices are shaped by a regulated system designed to balance affordability, reliability, and long-term investment. Rising bills can be frustrating for households, but they are rarely the result of a single policy decision or market event.
Understanding this can bring clarity to the conversation. Utilities operate within a structured regulatory framework, do not profit from fuel costs, and must justify major investments before recovering them in rates. As Emily Sanford Fisher has emphasized, multiple forces are working through the system at once. Recognizing that complexity is essential for policymakers, business leaders, and consumers seeking to navigate the evolving energy landscape while keeping affordability and reliability at the forefront.
Emily Sanford Fisher is the Founder of Enodia Energy, where she advises utilities, regulators, industry groups, and nonprofits on electricity market design, regulatory policy, transmission expansion, and clean energy strategy. Fisher previously served as Chief Strategy Officer at the Smart Electric Power Alliance and as Executive Vice President, Clean Energy, and General Counsel at the Edison Electric Institute.
