Industry 101 | Participants and Roles in the Electric Market: Electricity Retailing
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2.4 ELECTRICITY RETAILING
Electricity retailing is the final component of the electricity delivery process, after generation, transmission, and distribution. It is the final sale of electricity from a provider to the end-use consumer.
The following diagram gives a higher level view of the energy market and how the physical and financial components of the energy sector mesh with one another. As shown above, a consumer, either residential or commercial, buys electricity from a retailer. In turn, the retailer buys electricity in bulk from the wholesale market. Hence, electricity is treated like any other commodity which is bought and sold before being consumed. These transactions are considered “sales for re-sale” and make up the wholesale electricity market.
When electricity is purchased from a utility company or a retail electricity provider, this is called retail electricity. Consumers and business are offered a variety of service plans by competitive retail suppliers. These service plans give consumers and businesses flexible energy purchase choices. More choices for alternative energy resources and newer energy efficiency projects may also be offered to help protect against fluctuations in cost. These opportunities allow consumers and businesses to choose the services that best meet their needs.
2.4.1 RESIDENTIAL VS COMMERCIAL
The chart below, from the US Energy Information Administration, is divided by class and represents the average monthly electric usage for American consumers in 2015.
|Average Monthly Consumption (kWh)||Average Monthly Bill ($)|
The chart demonstrates that the average monthly consumption for commercial and industrial customers is considerably higher than for residential customers, and, therefore, more lucrative.
Since commercial and industrial customers often need to buy electricity in bulk, electric companies offer different tariffs to them. These tariffs consider variables that are not relevant when supplying electricity for residential usage. With commercial electricity tariffs, business owners can purchase electricity at a lower rate because the large volume they must consume guarantees that electric companies will recuperate their costs.
Some U.S. states offer competitive rates with customer choice programs. Different states have different programs. For example, the Public Utilities Commission of Ohio lets consumers shop for energy options from a diverse group of competitive suppliers.
Regulations and guidelines for energy deregulation or customer choice programs can differ between countries. For example, Europe has created a deregulated energy market with a seamlessly integrated grid. The original 15 EU members all have deregulated energy markets. Once the EU put energy deregulation into place, it started to change the electricity market. European electricity consumers could choose their electricity supplier and create individual supply agreements.
The EU was divided into several different energy regions prior to energy deregulation. This division drove the cost of electricity up for consumers. Now, participating countries have improved their electricity and natural gas grids and have created fully integrated systems across Europe.
Regardless of the consumers’ choices, residential customers tend to be adequately protected by the federal government, even in deregulated markets. For example, Texas, which has retail competition as a result of a deregulated market, received federal funds to help low-income customers. One organization that helps the elderly, disabled, families with young children, and households with the highest energy costs and lowest incomes is the federally-funded Comprehensive Energy Assistance Program (CEAP), which is federally-funded.
Regardless of whether states allow retail competition, supply for end-use customers is obtained either in the open, competitive wholesale market or from utility-owned, rate-based (cost-plus) generation; sometimes it is obtained from a combination of the two.
Utility rates for consumers are primarily based on:
- The base costs of utility service that incorporate the pipes and wires through which service is delivered and the costs of owning and operating power plants.
- The costs for fuel and purchased power for electric service (power supply) or gas commodity costs.
Utilities offer several rate structures based on the needs of the consumer. A residential retail structure may differ based on the type of residence, whereas a commercial retail structure might vary with type of business, e.g. small, seasonal, heavy duty, etc.
Example 1 – Residential: Time-of-use rate structures determine the price of electricity based on what time it is used. Residential tariffs tend to be straightforward and are simply divided by season and time. These prices are lower for people who qualify as low income or have special medical needs.
Example 2 Commercial/Industrial: Commercial and industrial customers have a more complicated rate structure, which includes service fees on their usage and also takes demand into account to calculate electric bills along with other factors like production and transmission charges, distribution charges, substation cost, reactive power charges, line transformer costs, etc.
The above rates and plans can vary from state to state and one of the biggest differentiators is if a state is regulated or deregulated.
Regulation or Regulated State: All processes involved in providing energy, including pricing, are overseen by a regulatory or government body. Only the local utility can sell directly to consumers. The utility or government sets the prices for natural gas and electricity supply, along with the associated transportation and distribution costs associated with those commodities. Consumers are not able to choose their energy provider in a regulated state.
Deregulation: Energy prices are not regulated in these areas and consumers are not forced to receive supply from an assigned utility. In deregulated markets, consumers can choose their energy supplier, similar to other common household service providers. In most states providing retail competition, a service called “provider of last resort” (POLR) provides customers who don’t choose a supplier service through their incumbent utility. This is sometimes referred to as standard offer service or SOS. Deregulated electric utilities are currently allowed in twenty-four states including Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Arizona, Arkansas, and California.
The governing bodies which oversee the retail structure and policies in regulated and deregulated markets are described below.
2.4.2 INDEPENDENT SYSTEM OPERATOR (ISO)
ISOs are formed at the direction or recommendation of the Federal Energy Regulatory Commission (FERC). These organizations coordinate, control, and monitor electrical power system operations and usually operate within a single U.S. state, although they sometimes encompass multiple states. ISOs serve as a marketplace operator in wholesale power. The majority are set up as nonprofit corporations and use governance models approved by FERC and/or regional or local commissions.
ISOs give fair transmission access to allow competition for the benefit of consumers. Also, ISOs provide transaction support and engage in regional planning to make sure the correct infrastructure gets built in the correct place at the correct time.
Seven ISOs currently operate within North America, as shown in the map to the right:
The North American Electric Reliability Corporation (NERC) is a not-for-profit international regulatory authority that supports the reliability of the bulk power system. NERC has many functions including the development and enforcement of reliability standards, the yearly assessment of seasonal and long‐term reliability, monitoring the bulk power system through system awareness, and educating, training, and certifying industry personnel. NERC’s scope of service includes the continental United States, Canada, and the northern portion of Baja California, Mexico. Users, owners, and operators of the bulk power system, which serves more than 334 million people, are under the jurisdiction of NERC.
The regulation of the interstate transmission of electricity, natural gas, and oil is overseen by the Federal Energy Regulatory Commission (FERC.) The independent agency has many responsibilities within the electric retail market including:
- Regulating the transmission and wholesale sales of electricity in interstate commerce.
- Reviewing specific mergers, acquisitions and corporate transactions by electricity companies.
- Monitoring and investigating energy markets.
One important distinction is that FERC does not regulate the retail electricity sales to consumers; that onus is left on regulatory bodies at the state level.
Public utilities commissions or public service commissions are governing bodies that regulate public utilities’ rates and services. These commissions regulate a distribution utility’s costs and rate of return for both the use and upkeep of the distribution system in every state.
In retail choice states, the commissions cannot serve customers until they approve any alternative competitive supplier. The commissions also oversee a POLR or SOS utility’s power procurement and approve the results of the process if it was completed fairly.
In states that do not offer retail competition, commissions regulate the monopoly utilities’ expenditures by allowing a rate of return on most costs.
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