The Unfinished Revolution
America’s Half-Built Electricity Market
Two wildly different species of electrical system currently operate on the same continent. One represents the old world of vertical integration, where a single utility plans the power plants, owns the transmission lines, sends the bill, and answers to a state commission that grants a guaranteed return on investment. The other is the world of organized wholesale markets, where dispatch is handled by a neutral regional operator, prices are set by physical constraints, and money is made or lost in transparent auctions. These two models sit side by side, creating a strange stalemate—an overhaul that began with real promise, faltered amid political backlash and California’s spectacular crash, and was quietly abandoned halfway through.
The restructuring effort was, and remains, the correct move.
Wherever the job was actually finished—through centralized dispatch, locational prices, and genuine operator independence—the grid became leaner and investment grew smarter. Where we hesitated, we retained a collection of expensive habits, maintaining a regulatory framework that expects 1935 statutes to manage the realities of 2025.
The traditional utility model originally solved a specific twentieth-century problem. When generation plants were massive and grew cheaper with size, and long-distance transmission was negligible, the deal was straightforward: a utility built everything to keep the lights on, and the state allowed cost recovery plus a reasonable profit. For decades, this delivered universal electrification. Incentives, however, tend to calcify. When profit depends on the amount of capital in the rate base, companies learn to favor expensive infrastructure over efficiency. Big substations look better on the books than clever software fixes, and building new gas turbines is more profitable than squeezing performance out of the existing fleet. Anything that reduces capital spending—such as efficiency programs or customer-owned generation—becomes a threat to earnings.
Furthermore, depreciation creates its own distortions. Under original-cost regulation, a brand-new plant carries a high price tag, while a fifty-year-old coal unit appears cheap on paper because it is mostly paid off, even if it burns fuel inefficiently and requires constant repair. This accounting quirk encourages utilities to keep antiques running while treating modern upgrades as “rate shock.” When the same company owns the wires and the power generation, quieter conflicts also emerge, such as slow-walking competitor interconnections and opaque transfer pricing between affiliates. This friction was tolerable when technology changed slowly, but became unsustainable once physics and finance accelerated.
The economic logic of the old model collapsed due to two major shifts. First, the arrival of combined-cycle gas turbines meant that generation was no longer a natural monopoly; modest, efficient plants could be built quickly by private capital. Second, unintended experiments with independent power producers proved that the grid could absorb outside generation and that bureaucratic planning was often a poor substitute for market signals. The intellectual case for restructuring followed naturally: keep the wires as a regulated monopoly, open them to all comers, and price electricity where it actually lands. This design allows investment to follow real physical constraints rather than committee guesswork.
Where this design was implemented properly, the results have been boringly effective. A regional operator runs security-constrained economic dispatch, meaning the cheapest available megawatt runs next, regardless of ownership. Prices reflect location; congested areas see higher prices, while open areas see prices converge. This acknowledges the physical reality that delivering power across a bottleneck costs more. Congestion becomes a visible revenue stream that can be hedged or invested against, placing new plants or lines exactly where the constraint bites. PJM, the giant market covering thirteen states, offers the best advertisement for this approach. It posts nodal prices like clockwork and that has resulted in lower heat rates, shared reserves, and legible congestion without dramatic scandals.
Conversely, California at the turn of the millennium offers a cautionary tale of half-measures. The state built a market that ignored internal constraints, capped retail prices while letting wholesale prices float, and forbade retailers from hedging properly. Traders exploited these gaps, retailers went bankrupt, and blackouts followed. The crisis did not prove that markets were impossible; it proved that poor design is lethal. Unfortunately, California’s meltdown provided political cover for regions in the Southeast and West to reject change entirely. They argued that their rates were low—thanks mostly to fully depreciated coal plants—and that federal rules infringed on state sovereignty. The result is a balkanized grid characterized by stacked transmission charges across borders and stranded power, as neighbors fail to agree on the rules.
Even in regions that implemented markets successfully, a “missing money” problem persists. In a pure energy market, prices must be allowed to spike during rare hours of scarcity to cover the fixed costs of plants that sit idle most of the year. Because regulators fear the optics of price spikes, they often impose caps, which prevents plants from recovering their costs. We have attempted to patch this with capacity markets—separate auctions paying for future availability—but a cleaner fix is to allow energy prices to rise smoothly as reserves dwindle. This turns scarcity into a paycheck for readiness rather than a political crisis. However, this only works if demand is responsive. Shielding retail customers from real-time prices removes the best brake on market power. If customers have automated tools like smart thermostats and EV chargers, high prices lose their terror and simply trigger efficiency.
The final major hurdle is legal. The Federal Power Act of 1935 drew a sharp line between federal authority over wholesale sales and state authority over retail and siting. Today, however, a wind farm in Iowa might serve a data center in Virginia, yet the transmission line connecting them can be blocked by a single county. We have effectively handed local officials a veto over national infrastructure. If interstate gas pipelines merit federal preemption, the high-voltage grid required for decarbonization and reliability deserves the same.
Finishing this job does not require brilliance, but consistency. We must replace hard price caps with reserve-based pricing so energy markets can fund reliability, and we must phase out fixed retail rates in favor of dynamic pricing that automated systems can leverage. Interstate transmission must be treated as a federal concern, granting siting authority for lines that deliver national benefits. We need to standardize core rules—independent dispatch and locational pricing—across the continent to eliminate the “seams” where inefficiencies hide. If specific communities or industries need support, it should come through transparent subsidies rather than by distorting the price signal.
Ultimately, electricity markets are simply an agreement to let physics set the bill and pay whoever can lower it. The revolution was interrupted rather than mistaken. We can continue with the current patchwork of hidden cross-subsidies and heroic after-the-fact fixes, or we can finish the design we already know works. The goal is a system that is refreshingly dull: lower costs, less waste, and a legal framework that matches the continental scale of the network. The tools are sitting on the workbench; all that is missing is the resolve to pick them up.