Existing Electric Market Structures in USA

The structure of electric markets in the US varies from state to state. This is
the result of variation in how each states public utility commission regulates
electric utilities that operate in the state. Variability is also the result of the degree
to which the state PUC has adopted FERC recommendations on industry
restructuring or even forged ahead with its own restructuring measures. Despite
this variability, state electric market structures can generally be grouped into one of
four types. All of which lie along a spectrum of structures. At one end of this
spectrum is the classic vertically integrated and regulated utility, which
monopolizes its market. This is the utility that owns and controls every aspect of
the electricity supply tree from generation to transmission, to distribution and the
utility in this case is the sole provider of electricity to customers in its market. The
prices that the utility charges for electricity are set by the state PUC in return for a
monopoly on the market and a reasonable rate of return on the utility sales of
electricity. The utility may buy electricity from or sell electricity to other utilities.
So is to minimize supply costs and, or enhance system reliability. But the utility
still owns everything and still serves everyone within its own operation territory.

Figure 1 - Existing Electric Market Structures in USA

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 In this type of market structure, the utility makes money by selling more
electricity and building more electric infrastructure both of which are entitled to
reasonable rates of return. Hence, this market structure does not promote
operational efficiency or minimize electricity prices. Instead, the structure
emphasizes reliability often through excess capacity and, or redundancy. The cost
of which gets passed on in the form of higher electricity prices.
In theory, the traditional electric market structure could still exist in the US.
But as a result of PURPA (Public Utility Regulatory Policies Act) and other
regulations since 1978, the electric market structure in most regulated states
includes independent power producers. In this structure, the utility still maintains a
monopoly on transmission, distribution and retail. But it buys the lowest cost
generation, either from its own generating assets or from available independent
power producers which compete with one another for sales on the basis of price. In
this case, the generation is procured and scheduled by a system operator who is
part of or works on behalf of the utility and chooses generation on the basis of
reliability of supply and cost. This more open market structure allows for
competition among generators and typically requires utilities to factor in the
availability of independent power producers in planning for future electricity
demand.
However, in these regulated markets, the independent power producers are
not guaranteed a reasonable rate of return. Limiting the degree to which they could
complete with the utilities own generators.
As a result, this type of market structure still tends to incentivize utilities to
sell more electricity and build more infrastructure in pursuit of increased revenues
at the expense of operational efficiency and minimizing price.
A much more competitive market structure has emerged in a number of
states following FERC order 888. In this structure, utilities have divested
themselves of their generation assets or created separate companies from them
such that all generation in the market is now provided by independent power
producers and no generator is guaranteed a reasonable rate of return.
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 The utilities still maintain control of transmission and distribution, and sell
electricity to residential, and small commercial customers. However, the utilities
now buy electricity on the wholesale market which is managed by an independent
system operator that not only schedules generation based on competitive pricing,
but also schedules the utilities transmission and distribution to ensure fair access to
the market by the independent power producers.
This type of market may also include wholesale energy marketers who
facilitate the buying of electricity for independent power producers and the selling
of it onto utilities in large commercial, and industrial customers. In this case, the
independent system operator still manages the generation and transmission market.
It's just that energy marketers now become a buyer and seller of electricity along
with the independent power producers, and utilities, and in the process of helping
the latter two players connect may end up reducing transaction costs. All in all, the
greater competition among generators and sellers of electricity in this type of
market structure has led to an improvement in industry efficiency and lowered the
price of electricity in real terms after inflation has been accounted for.
The final market structure lies at the other end of the spectrum from the
vertically integrated utility monopoly. This final structure represents not only
complete competition among generation in the wholesale market, but also
complete competition among final sales of electricity in the retail market.
In this market structure, wholesale energy marketers are joined by retail
energy marketers who buy and sell electricity from the wholesale market and sell it
to residential and small commercial customers. The utility is reduced ownership of
transmission and distribution, but these infrastructures are managed by the
independent system operator, so as to provide open access to all electricity
suppliers and buyers.
Thus, in this market structure, competition is maximized and changes in the
size of the electric market drive changes in the infrastructure investments and
industry innovation to capitalize on these changes. Without, theoretically, requiring
incentives such as reasonable rates of return.
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 References:

1. Existing Electric Market Structures. Markets [Course “Electric Industry

Operations and Markets]. URL:
https://www.coursera.org/learn/electricity/lecture/8RDD4/existing-electric-market-
structures