When a large industrial plant wants electricity, it often does not pay the same price a household pays. It can negotiate special contracts, accept interruptible or curtailable service in exchange for lower rates, or take service under tariffs designed for high-load-factor customers. It frequently pays rates closer to wholesale costs.
Households and small businesses typically face average retail rates that include distribution costs, riders, and surcharges, with no opportunity for negotiation. Industrial rates nationally run roughly half of residential rates, not solely because of volume discounts, but because it genuinely costs less to serve large, steady loads at higher voltages.
The problem arises when the discount or the infrastructure built for a new large customer exceeds the savings or benefits that customer brings, and the difference is spread across everyone else, raising our electricity bills.
That cost-shift dynamic is the quiet center of much current debate over electricity pricing. Large users with leverage often secure terms nearer the true incremental cost of power and delivery. Smaller users absorb a larger share of fixed system costs. The system does not always price service according to cost causation.
It should work the other way. Buying in bulk earns a discount in every market, because bulk buyers are cheaper to serve. That part is fine. The problem is not that large users get a volume price. It is that the discount they get is often larger than the savings they bring, and the gap gets socialized to everyone else.
In a competitive market such as gasoline, posted prices constrain favoritism — a station that systematically undercharges one class of customer and overcharges another loses business. Electricity distribution remains a regulated monopoly in most of the country.
Customers cannot easily switch providers. When regulators approve special contracts or economic-development rates for a plant or data center, sometimes to keep jobs or investment in the state, the shortfall or the cost of new lines and substations can be recovered from the broader rate base. That is the captive customer’s problem.
Electricity has no such discipline. Your utility has a captive territory. You cannot leave. So when a large customer negotiates a below-cost rate to keep a plant from leaving the state, the regulator often approves it, and the shortfall is spread across everyone who cannot negotiate. That is you.
This pressure is intensifying because electricity demand is growing faster than many grids were planned for. Data centers, manufacturing expansions, and other large loads are arriving quickly. Utilities and states compete to attract them. Contracts and terms are frequently confidential. The transmission lines, substations, and generation needed to serve them are often recovered through rates paid by all customers. When the projected jobs, taxes, or system benefits fall short of promises, households and small businesses remain on the hook for the wires and capacity.
The deals are frequently confidential. The infrastructure they require — new lines, new substations, new generation — often gets paid for through rates everyone shares. When the promised jobs and tax revenue fall short, the household is still on the hook for the wires.
Meanwhile, the wholesale markets that set the underlying cost of power use uniform clearing-price auctions in most organized regions: The highest accepted bid sets the price paid to every dispatched generator. Low-cost units, including those receiving production or investment tax credits, collect the same clearing price.
Defenders of the design say the resulting inframarginal rents help recover fixed costs and promote efficiency. Critics argue the mechanism systematically overpays lower-cost and subsidized resources relative to their actual operating costs, and that those higher wholesale prices flow into retail rates.
Small customers, therefore, face pressure from two directions: wholesale prices that can embed rents above some generators’ true costs, and retail rate designs that allocate a disproportionate share of system costs to those least able to negotiate special terms.
A better approach is straightforward and pro-market: align retail rates more closely with the actual cost of serving each customer class, and require large users to bear the incremental cost of infrastructure built primarily for them.
That is the long-standing regulatory principle of cost causation, or “beneficiary pays.” If a large customer triggers a new transmission line or substation that primarily serves its load, that customer should pay for it — not a household that draws no power from the upgrade. On the generation side, requiring bids that more fully reflect net costs after subsidies would reduce artificial price suppression by subsidized resources and the corresponding clearing-price rents. Wholesale prices would move closer to real resource costs, giving retail rates a more honest foundation.
On the generation side, require net true-cost bidding, so generators bid what their power actually costs after subtracting every subsidy and outside payment they already collect. The clearing price windfall disappears. Wholesale prices fall toward real cost. And retail rates, for the first time, have an honest number underneath them.
None of this requires large customers to pay more than their fair share. It requires them to pay their fair share, and it requires utilities and wholesale markets to make clear who is subsidizing whom.
Defenders of the status quo will argue that special deals are necessary to attract investment and keep industry from leaving. Sometimes that is true, and economic development considerations are legitimate.
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But a system that routinely lands large customers by shifting unrecovered costs onto captive small customers is not a free market. It is a regulated allocation of costs.
Unlike a competitive gas station, most households cannot simply pull across the street. They stay on the system and pay the rates that result. They have been carrying a disproportionate share of the fixed costs for long enough.
Frank Lasee is president of Truth in Energy and Climate.