NEW YORK, Aug 29 (Reuters) - Ohio Governor Ted Strickland said on Wednesday that electric rates in the state should be set by regulators until an efficient, open and competitive market develops there.

Ohio is scheduled to move to market-based electricity rates by the end of 2008. Its utilities currently operate under a stabilization plan designed to ease the state's transition from regulated to competitive rates.

Instead of creating a competitive market in the state and lowering prices, Strickland said Ohio's deregulation gave utilities there a monopoly and pushed rates higher.

"There must be a sensible balance between regulation and competition," Strickland said in a speech to state legislators and representatives of utilities, consumer groups, and heavy users of electricity such as big businesses.

"We must develop a market that serves the needs of Ohio, not a system that offers utilities both the benefits of deregulation and the protections of regulation."

He said the Public Utilities Commission of Ohio (PUCO) should determine rates based on the cost of generating and delivering electricity.

Strickland also said regulators should factor in the costs of environmental innovations and new power plants as well as the investment Ohio ratepayers have made in utilities' capital assets.

His plan also requires at least 25 percent of electricity sold in Ohio to be generated by advanced energy technology by 2025. He supported using carbon sequestration to reduce the greenhouse impact of coal emissions.

"We would not support a hybrid approach or a return to cost of service because it discourages investment in generation," said Pat Hemlepp, a spokesman for American Electric Power Co Inc <AEP.N>, Ohio's second-largest utility with about 1.4 million customers.

Both AEP and Ohio's largest utility, FirstEnergy Corp <FE.N>, have backed the move to competitive rates. They support a plan that would allow regulators to phase in rate hikes if residential customers' costs rise too much.

However, Duke Energy Corp <DUK.N>, which serves 680,000 customers in Ohio, said they favor the hybrid model.

Strickland's proposal to shift the state's electricity model would require legislative action.

"We look forward to receiving the proposal in bill form and evaluating its ramifications on all stakeholders and on our continued efforts to create jobs and revitalize the economy in Ohio," Senate President Bill Harris and House Speaker Jon Husted said in a joint statement.

FirstEnergy could not be immediately reached for comment. (Reporting by Lisa Lee)

AlertNet news is provided by