Imagine if your annual income tax liability was based on your single largest paycheck instead of your total income. Those who earn commissions or employees who earn annual bonuses would owe far more than someone with the same annual income but who earned it from a steady weekly paycheck. And we would logically expect companies and employees to seek out compensation structures as a reaction to this illogical tax structure.
In most states, that is not far from how the costs of the power grid are allocated. Many traditional methods divide generation costs among residential, commercial, and industrial customers based largely on how much electricity each group uses during a tiny number of peak hours. Residential customers have more variable demand than commercial and industrial customers. This means that residential customer rates are set to recover a larger share of generation costs than annual residential energy use would suggest.
On average, residential electricity rates across the United States are, in fact, higher than those of commercial customers, as shown in the exhibit below. According to US Energy Information Administration, rates for residential customers were already nearly twice as high as those for industrial customers in 2019. And while rates for all customer classes have increased in the subsequent years, families continue to pay nearly twice as much as industrial customers.
Some of that gap reflects real differences in the cost of serving each customer class: residential customers are generally smaller, more dispersed, and often more reliant on local distribution infrastructure. But current allocation methods widen the gap because they do not fully account for how each class uses the system over time.
Cost allocation is the step in a ratemaking process where regulators decide how a utility’s approved costs are divided among customer classes. And getting it right is even more urgent now.
Electricity affordability is becoming a front-line issue for regulators, consumer advocates, and utilities. In the first half of 2026 alone, states took 362 separate actions on energy affordability, most commonly to prevent large-load cost shifts or to help lower-income customers. At the same time, the grid is changing quickly. Data centers and other large customers are driving new demand in some states, while wind, solar, storage, and demand flexibility are changing when electricity is produced and when the system is most stressed.
While there is broad support for concepts like the Ratepayer Protection Pledge, it is unlikely that these commitments to prevent large-load cost shifts can be met using many existing cost allocation practices. When the same few peak hours are used to allocate costs across customer classes, they can obscure important differences between customers with variable demand and large load customers who use electricity consistently throughout the year, potentially assigning costs in ways that do not fully reflect how each class uses the system over time.
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Published RMI on 9/25/26 By Becky Xilu Li, John Wilson (Grid Strategies), and Jacob Becker
