Why Regulated Utilities Lose More on Uneconomic Power Plants

Why It Matters

The misaligned incentives force ratepayers to subsidize uneconomic generation, inflating electricity bills and distorting market efficiency. Aligning utility incentives with market signals could lower costs and accelerate the transition to lower‑cost, cleaner resources.

Key Takeaways

• Rate‑regulated utilities own 78% of coal capacity, cause 96% losses
• Merchant owners hold 22% of coal capacity but only 4% losses
• Fuel‑cost recovery clauses shift operating risk from shareholders to ratepayers
• Self‑commitment practices let utilities run uneconomic units despite market signals
• Regulators can curb losses by tightening fuel docket scrutiny and allowing de‑commitment

Pulse Analysis

Across U.S. wholesale power markets, a stark divergence has emerged between regulated utilities and merchant generators. While utilities can recover fuel and operating expenses through rate adjustments, they continue to dispatch coal and gas plants even when market revenues fall short. RMI’s analysis quantifies this behavior, showing that regulated owners generate $23 billion in gross losses since 2015—far outpacing merchant owners who face direct financial exposure and therefore scale back uneconomic output. The data reveal that ownership structure, not plant technology, drives the inefficiency.

The root cause lies in the regulatory framework that creates a moral hazard. Fuel‑adjustment clauses let utilities shift the cost of operating losses onto captive customers, diluting the price‑signal feedback that would otherwise prompt unit de‑commitment or retirement. Self‑commitment practices compound the problem, as utilities lock in generation based on internal forecasts rather than real‑time market prices. This risk transfer inflates consumer bills and hampers the market’s ability to prioritize lower‑cost, cleaner resources, undermining both affordability and decarbonization goals.

Policymakers have tools to correct the misalignment. State commissions can tighten scrutiny of fuel cost recovery petitions, disallowing expenses that lack economic justification. Market operators, such as MISO, can adopt rules that permit economic de‑commitment of uneconomic units, reinforcing market discipline. Emerging markets can embed mandatory economic dispatch from the outset, preventing entrenched self‑commitment habits. By realigning incentives, regulators can reduce unnecessary customer costs, promote efficient dispatch, and support a smoother transition to a lower‑cost, cleaner energy mix.