Power Surge

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A major catalyst in recent rate spikes is surging demand. Americans now tend to own bigger houses and more electronic gizmos: Some of the larger flat-screen TVs use three times the electricity of older models. Rapid economic growth is increasing demand overseas, spurring yet more competition for coal and natural gas.

Industry watchdogs say utilities need to build more plants to keep pace. But because of rising construction costs, the building boom in the U.S. has slowed. Last year only 13 gigawatts of new plants were added, down from 57 gw in 2002. With natural gas prices high, such plants are less attractive to build. And coal plants are a tough sell to the public because of environmental concerns. The result is a system that's stretched and increasingly prone to blackouts, even as it charges more. "We're operating the grid closer to the edge than ever before," says Richard P. Sergel, president and chief executive of North American Electric Reliability, the quasi-governmental entity charged with monitoring the nation's electric system.

In Texas, rising gas costs have driven five power distributors out of business since May. Kristi Holcomb, a real estate agent in Sugar Land, was among those transferred to a new provider. Her rate has jumped from 12 cents per kwh to 20 cents, a move that could add $250 to her monthly bill this summer. "It's very frustrating," she says. "This is not a cell phone where you can choose to have one or not. This is a basic necessity."

While consumers may be feeling pain, utilities that operate plants in states with minimal regulation are making handsome profits. Chicago-based Exelon (EXC) and Baltimore's Constellation Energy Group (CEG), among others, have tripled their profits over the past five years. One reason: They're running nuclear plants that cost much less to run than natural-gas-fired facilities. Yet they can charge the same prices as rivals with higher operating costs.

Politicians are taking action to stop further hikes. In Maryland, regulators hope to motivate utilities to build more plants by offering longer-term contracts. Some Pennsylvania politicians are considering extending rate caps and creating an $850 million fund to develop more renewable energy sources. The incentives of going green are clear. In Hull, Mass., two municipal-owned windmills have kept rates flat while prices in other parts of the state are up by over 50%.

Critics charge that producers have been taking advantage of consumers, and utilities are coming under greater scrutiny. In Illinois, a subsidiary of Edison International (EIX) acknowledged that it was continually offering bids to sell electricity just below the state's $1,000 per megawatt-hour price cap—10 times the market price. In May, Federal regulators obtained a $9 million settlement from the company for deliberately destroying documents, but critics want an investigation into possible overcharges. The company maintained that its activities did not affect the prices that consumers had to pay.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Aston is Energy & Environment editor for BusinessWeek in New York .