How do utility companies make money?
First, note that I’m focusing here mostly on investor-owned utilities (IOUs), which serve about 70 percent of America’s customers. These are the old-school, for-profit, regulated-monopoly utilities, with a captive customer base and profits guaranteed by law. IOUs are the main (though not exclusive) force pushing back against distributed solar.
Here’s how IOUs make money: 1) they estimate how much power their customers will need; 2) they estimate the investments they’ll need to make in power plants, fuel, transmission lines, etc. in order to meet that demand; 3) they estimate what rate they need to charge customers to cover those investments and offer a reasonable “rate of return” to their investors; 4) they go to the state public utility commission (PUC) to make a “rate case” justifying the rate; 5) if the PUC signs off, the IOU charges that rate until time to make their next rate case. See http://grist.org/climate-energy/utilities-vs-rooftop-solar-what-the-fight-is-about/
Anyway, that’s the rate residential customers pay: the PUC-approved “retail rate.” Typically, the retail rate bundles all the utility’s costs into a single package, not just the “variable costs” of fuel and electricity but also the “fixed costs” of investment in transmission lines, transformers, power plants, and the like.